by Melvin Pasternak
As my colleague Tom Hutchinson recently pointed out, defense sector spending may be under threat of budget cuts, but make no mistake: demand will always be robust. That makes the defense sector not only a safe place for investors to be, but it also ensures a solid growth path.
How do I know? Well, unfortunately, there will always be wars, for one thing. And nation states, particularly the United States, will always need companies that can deliver the latest weapons, equipment and technology to defend their interests.
That last component -- technology -- is especially important for investors to take note, because it is an area that should be less prone to budget cuts. That's because technology, and information technology (IT) in particular, is all about efficiency. And in this new global era of austerity, anything that can provide efficiency and save money is key.
My pick for today plays on this important theme. It is attractively valued, shows growth potential and appears technically strong. You should consider going long on this stock if certain conditions are met and I'll give you the details for how I would trade this stock later.
But for starters, I'll tell you a little about the stock...
CACI International (NYSE: CACI), an IT infrastructure company, specializes in providing intelligence and financial analysis solutions for government organizations like the Department of Defense and Homeland Security.
Despite concerns that economic weakness could result in reduced government defense spending, CACI was recently awarded a number of multi-million dollar government contracts. Demand for the company's services remains robust because, in many cases, government IT infrastructure is outdated.
Technically, CACI appears to be moving up rapidly.
The stock is in a major uptrend and is attempting to bullishly complete an ascending triangle pattern.
The ascending triangle is formed by the accelerated uptrend line, formed off the stock's August 2010 $40.15 low and nearby resistance at $54.11 -- the recent two-year high.
Since October 2010, the sharply rising 10-week moving average has run parallel to the accelerated uptrend line. During the first trading week of January, CACI tested the 10-week moving average and looked as if it was close to dropping below the accelerated uptrend line, which currently intersects around $51.
However, this past trading week, the stock quickly reversed course, moving back up above the 10-week moving average.
CACI is currently re-approaching $54.11 resistance. If the stock can break resistance and pierce the upper Bollinger band -- which currently interests near $57 -- the measuring principle for an ascending triangle projects a price target of $68.07 ($54.11 -$40.15 = $13.96; $13.96 +$54.11 = $68.07). This is close to the stock's all-time 2004 high of $69.18.
If the stock were to lose ground, historical support, dating from October 2009, is nearby at the round-number $50 level.
The rising 20-week moving average, indicated by the middle Bollinger band, intersects just below, marking additional support, near $49. Further below, the rising 30-week moving average has just bullishly crossed above the upward curling 40-week moving average.
The indicators are bullish.
Relative Strength Index (RSI) has been in an uptrend since July. In the mid-$60s and rising, RSI is venturing toward overbought territory, but has not hit it yet.
MACD has been on a strong, sustained buy signal since September. The MACD histogram remains in positive territory.
Stochastics and Williams %R, although overbought, are on buy signals.
Fundamentally, the government IT company should see sustained growth.
In late October 2010, CACI reported better-than-expected fiscal first-quarter results and raised its outlook for the fiscal 2011 full year. A number of new contracts caused revenue to increase 12.8% to $834 million, from $739.5 million in the year-ago period. Analysts expected revenue of $810.8 million.
On Feb. 2, CACI will report fiscal second-quarter 2011 results. Analysts' project revenue will increase 11.5% to $865.7 million, from $776.7 million in the year-ago quarter.
The company also has a bullish outlook for the full fiscal 2011 year. CACI expects revenue to rise at least 9.4% to the range of $3.5-$3.6 billion, from initial estimates of $3.3-$3.4 billion. Revenue was $3.2 billion in the previous year. By fiscal 2012, analysts' project revenue will increase a further 5.8% to $3.7 billion.
The earnings outlook is equally strong.
According to Thomson Reuters, analysts expected fiscal first-quarter earnings to be $0.88. Instead, earnings were $0.92, an 18% rise from the $0.78 earned in the year-ago period.
With continued government defense spending, analysts project fiscal second-quarter earnings will increase 15.3% to $0.98, from $0.85 in the year-earlier period. The company expects this growth will continue throughout the full year.
Therefore, CACI recently raised its full-year fiscal 2011 earnings guidance to $3.90-$4.10 from earlier forecasts of $3.70-$3.90. This represents at least 12.4% growth from fiscal 2010 earnings of $3.47. By fiscal 2012, analysts expect earnings will rise an additional 9.7% to $4.28.
In addition to growth potential, the company is also attractively valued on several metrics.
CACI has a trailing price-to-earnings (P/E) ratio of roughly 15. By comparison, competitor SRA International (NYSE: SRX) has a trailing P/E of nearly 80.
The company also has a low price-to-sales (P/S) ratio of 0.5. By comparison, SRX has a P/S of 0.9.
Given that CACI is attractively valued, shows growth potential and appears technically strong, the stock is a good bet to go long on if it breaks above nearby resistance at $54.11.
You may want to do this by placing a buy-on-stop order at $54.28. This means if CACI does not hit or go above $54.28, you will not enter the position. A good stop-loss would be at $49.83, just below historical support. As calculated by the measuring principle, your target should be $68.07, which means you could net a tidy 25% profit if all goes according to plan.
Disclosure: Neither Melvin Pasternak nor StreetAuthority, LLC hold positions in any securities mentioned in this article.