| Four
Industries for the Next Four Years -- Implications of a Continued
Bush Presidency |
Published: November 10, 2004
President Calvin Coolidge once
remarked that the "business of America is business." President
Coolidge, himself a career politician, would have found it no surprise
that politics and business are inextricably linked.
The simple fact is that the
federal government’s annual budget topped $2.1 trillion dollars in
2003. Given that total U.S. Gross Domestic Product (GDP) stands at a
little over $10.8 trillion, that figure represents a sizeable 20% chunk
of the economy.
And that’s just direct
federal government spending. The government also acts as a regulator for
many types of commerce. Environmental regulation, for example, has
profound effects on businesses like mining and agriculture. Meanwhile,
other businesses are regulated even more directly -- financial services
are regulated by the Securities and Exchange Commission (SEC), drugs by
the Food and Drug Administration (FDA) and telecom services by the
Federal Communications Commission (FCC). Even more importantly, the
President himself has the power to appoint the heads of many of these
regulatory bodies.
The bottom line is that whether
by direct Presidential appointment or spending via Congress, political
administrations have a profound impact on the economy and, by extension,
the stock market. In today's article, my staff and I will look at four
industries that stand to benefit tremendously from President Bush’s
second term. Within each industry we’ll also examine several
individual stocks that are well positioned to take advantage of the
upcoming political climate.
Defense and Homeland
Security
Defense and Homeland Security spending increased dramatically in
Bush’s first term. As you can see in the chart below, federal defense
outlays were roughly flat throughout the 1990s before jumping sharply
after Bush took office in 2001.
It’s
clear that some of that spending is a direct result of the 2001 terror
attacks and would have occurred under any administration. However,
historically defense spending has increased faster under Republican
administrations than under Democratic control.
What’s more, polls suggest
that Iraq and homeland defense were important winning issues for
President Bush. According to an October poll published by Rasmussen
Reports, President Bush was preferred by voters 51% to 44% on issues
concerning national defense and the War on Terror. Even more
importantly, Republicans picked up about 4 seats in the Senate -- all of
these seats are now occupied by strong defense hawks. That represents a
strong mandate from the electorate in favor of continued spending on
defense and the War on Terror.
This is clearly a positive for
defense and security stocks, as these firms will likely see strong
spending from the government on their products. Even better, that
spending should remain strong even if the economy slows, as government
defense spending is not correlated to economic growth. Here are a few of
our favorite plays in the Defense industry:
Ceradyne (CRDN)
Ceradyne manufactures lightweight, advanced ceramic materials used to
make both body armor and missile nose cones. Ceramic is an ideal
material for body armor because it’s extremely light, yet very
effective at stopping incoming projectiles.
Troops stationed in Iraq and
Afghanistan, especially those stationed in urban settings, are
constantly vulnerable to enemy attack. As such, this armor is a key
first line of defense. Not surprisingly, the military has been buying
body armor as quickly as it can be manufactured. In fact, Ceradyne’s
backlog of orders now exceeds $122 million, up over $20 million from
just one quarter ago and nearly double the backlog the company saw in
the third quarter of 2003. When you consider that CRDN is only a $700
million company by market capitalization, that’s a huge backlog of
orders.
Two new markets are also
promising for CRDN. The company makes ceramic armor for military and
civilian vehicles -- a market where CRDN has fewer direct competitors
than in ceramic body armor. In addition, the company makes ceramic
missile nose cones. Given that President Bush has made missile defense a
top priority, CRDN’s missile nose cone business could get a real
boost.
DHB Industries (DHB)
Like Ceradyne, DHB manufactures body armor. In October alone, orders for
the firm's new line of body armor topped $75 million. In fact, when DHB
reported second-quarter earnings back in early August, the company’s
backlog stood at nearly $400 million. My staff and I expect that number
will be a lot higher when the firm releases its third-quarter earnings
in a few weeks. That backlog is almost equal to DHB’s entire market
capitalization of a little over $600 million.
New product lines are also
seeing increased interest from military customers. The company’s new
line of armor, which it has dubbed Dorsal Auxiliary Protection System
(DAPS), is designed to protect the underarm and shoulders -- areas that
are often left unprotected by most conventional body armor vests. The
DAPS system received the largest contract ever awarded for body armor, a
near $300 million order from the U.S. Army.
And it’s not just the
military that’s buying. DHB also supplies armor to domestic law
enforcement agencies like the California Highway Patrol and the Federal
Bureau of Investigation (FBI).
Mine Safety Appliances (MSA)
This company manufactures a range of health and safety equipment for the
commercial, emergency services, military and consumer markets. MSA's
major product lines include respiratory equipment, air quality
monitoring devices and thermal imaging cameras that firefighters use to
find victims when their view is obscured by smoke.
MSA should benefit from two
major sources of increased government funding. The first is increased
spending on so-called first responder units -- the firefighters,
policemen and emergency ambulance service crews that arrive first on the
scene of an accident or terror attack.
It’s clear that first
responders need the latest in protection equipment, including gas masks
and suits to protect against extreme heat and chemical agents. Congress
has already earmarked about $2.4 billion in additional spending on this
area, but as of now, only 14% of that total has been dispensed. MSA is
one of the nation’s largest suppliers of such equipment.
The second major boost for MSA
is likely to come from combat helmets. The military has ordered the
replacement of many helmets with a new lighter and stronger model. MSA
manufactures these Advanced Combat Helmets (ACH) at two factories in the
U.S. Clearly, any increase in government spending on the military and
homeland security should continue to benefit MSA.
Important Note: To
view the remainder of this article, in which Paul Tracy and his staff
discuss three additional industries -- as well as a host of individual
stocks -- that are poised to benefit from a continued Bush presidency,
you'll need to subscribe to our premium Market Advisor
newsletter. Please visit one of the following links to continue...
|
Please Note: The above article was merely a
small excerpt from an issue of our premium, long-term-oriented investing
newsletter -- the Market Advisor. To receive your copy of
our most recent Market Advisor newsletter, as well as other
guidance similar to this every other week, you'll need to subscribe to this
publication. To learn more, please visit the following link: https://www.StreetAuthority.com/subscribe-ma.asp |
Special
Deal for Our Web Site Visitors
