...[I]t is worth considering that if congress approves the recently proposed defense spending plan, which calls for tens of billions of increased spending, it should spread massive amounts of dollars to small/medium businesses whose multiplier effect could go a long way in avoiding a recession. This is another reason we have been unwaveringly bullish on government IT, defense, and the homeland security complex for the past number of years.
Most recently, we have turned constructive on the shares of Strong Buy-rated Cogent (COGT-OLD). With more than 500,000 aliens entering the U.S. every year the authorities need a 99.9% accurate fingerprint reading in less than 30 seconds, which is one of the products Cogent manufactures.
The company’s $5.00 per share in cash implies that we are buying the rest of the company for $4.19 a share. If our analysis is correct, Cogent should earn $0.55 per share in 2009, meaning we are buying the shares at less than 10 times forward earnings (ex-cash per share). Since 2008 is a great product pipeline year, as well as a potentially favorable contract “win” year, we think the risk/reward ratio is right for investors.
To be sure, we continue to like the Government IT and Homeland Security themes. Still, the government service stocks have tumbled ~ 8% in January due to the broad market decline and in-line with the seasonal trading patterns seen in the group. Due to the sell-off, our sense is the group looks more attractive than it has in quite some time.
Moreover, we think investors are beginning to look for investments that are acyclical to the broader market concerns surrounding the consumer, energy prices, subprime exposure, and housing problems. Given the current valuation, fundamentals, and lack of a fundamental correlation to the overall market, we believe the government services group can outperform the broader markets in 2008. In addition to Cogent, we see value in Stanley (SXE) and NCI (NASDAQ:NCIT).
The call for this week: Last week Treasury Secretary Paulson, when referring to the potential economic stimulus plan, averred, “This is not an emergency. There is an urgent need.” To which we ask, “If this is NOT an emergency, then why is it urgent?!” Clearly the politicos are worried about a recession and are pulling out all the “stops” to prevent the normal business cycle, which can be seen in the nearby charts from our friends at www.thechartstore.com. While we don’t think the recession question will be answered for months, we do think the selling stampede is coming to an end and suggest getting your “buy list” together for at least a trade and maybe something more.
And lo and behold, in a surprise move the Fed panicked Tuesday morning and cut the Fed Funds target interest rate by 75 bp to 3.5%. With that the pre-opening S&P 500 futures have firmed, but still indicate a 3.4% lower opening. It will be interesting to see if, like us, the street interrupts the Fed move as “panic.” Whatever the outcome, we think a change for the better is approaching and are busy readying accounts accordingly. And that’s the way it is on day 17! So get ready, get set . . .