This article first ran on October 8, 2014. The ad is running heavily again as of early March, and remains more or less unchanged… the article below is unchanged as well. The stock teased has returned about 14% since the article first ran, roughly twice the gain of the S&P 500.

Our headline today is from Dr. Kent Moors, who is pitching his series of special reports/recommendations that he calls the “Great Game”, essentially a series of ideas based on the big “chess game” going on around the world between China, Russia, the U.S. and others for “global supremacy,” largely in control of resources.

They’re bundling up these special reports in order to get you to subscribe to Energy Advantage, which is Moors’ “entry level” energy-focused newsletter ($249, “on sale” for $49.50 … or $99 if you get all the “special reports”). We’ve written about ideas he has pitched many times over the years, Moors touts himself as a “facilitator” and “advisor to governments and oil companies” worldwide, and I have no reason to believe he’s not being truthful — and also no reason to believe that his consulting work (he’s a political science professor at Duquesne in his day job) makes him particularly gifted at picking stocks.

But we’ve seen some interesting ideas out of him in the past, regardless of how ridiculously hyped such ideas have been once they work their way through the newsletter marketing copywriters, and folks are asking about this “graphene desalination” pitch he’s making in his latest ads … so let’s at least solve that one for you, shall we?

(We may get to the others in the future, there are a half dozen or so “Great Game” stocks pitched… but the ad is overwhelmingly focused on this graphene pitch.)

Let’s get started … this is how the tease is introduced:

“The Zero Line….

“Two Nations With a Combined 230 Nuclear Warheads Under Their Control… May Be On the Brink of War….

“Even Though These Nations Control Enough Nuclear Weaponry to Level the Entire Planet

“All it Takes is One Warhead to Unleash Global Bedlam.

“Well, in one of these countries…

“At Least 8 Radical, Islamic Factions, Including Al-Qaeda and the Taliban… Are Dangerously Close to These Nuclear Warheads.”

So that’s how he sets the scene — I won’t lay it on as thick as he does, but to sum up: Moors says that the Kashmir dispute between India and Pakistan, by far the most volatile border dispute among countries with nuclear arsenals, is flaring up again. And that we can’t rely on 20th Century notions like “Mutually Assured Destruction” to keep them from launching nukes, since Pakistan has a “first strike” policy with regards to some Indian actions and is close to being completely controlled by jihadists.

He further distills the dispute to one major factor: The Indus River, which is the most important natural resource to Pakistan and flows through India and Kashmir before it reaches Pakistan. This river is divvied up by a major treaty that allows India to use it for hydropower and agriculture, and with India growing the demands on the river are far higher… which means less is making its way to Pakistan, exacerbating tensions (except during monsoon season, like now, when way too much water crosses the border — not that India controls monsoons). Neither country can do without the Indus, and no one is in a conciliatory frame of mind.

So what will happen? Nuclear war that spreads? Other huge conflict? The disputed border area is fully militarized, so actual shooting does flare up from time to time, but could it get much worse?

Moors says that working to settle that dispute is a major priority of Western diplomats, with lots of aid money and effort being expended to bring Kashmir down to a low simmer. Which I suppose is also probably quite true.

And then he gets into somewhat wilder speculation… along the lines of, “if we could solve this water fight over the Indus, then things would get much better” … here’s some more from the ad:

“In 1960, When Pakistan Signed the Indus Waters Treaty, They Had a Population of 45 Million People. Today, They Have 178 Million.

“When India Signed That Treaty, They Had a Population of 448 Million People. Today, They Have 1.2 Billion….

“At its core – this situation – isn’t about a nuclear war….

“No, it’s a story about a resource war.

“Water and energy in Pakistan and India….

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“I can say with firsthand knowledge that a lot of money is being allocated through backchannels by our government to solving it.

“We’ve already funneled $27 billion to Pakistan…

“And billions to India as well.

“So we’ve tried the diplomatic route.

“We have a strong naval presence in the Arabian Sea – we have tens of thousands of troops stationed in the region.

“Our special forces have been on the ground.

“So we’ve tried peaceful, yet serious military tactics….

… now we’re taking a new approach – a private sector solution.

“It’s coming from a defense contractor I know quite well.

“I believe it can stop this Zero Line Crisis from escalating into a nuclear war.”

OK, so that’s the backstory. What is this defense contractor, and why can they keep the Kashmir dispute from escalating into nuclear war? Here are our clues:

“The Smarter Defense Contractors Have Realized That They Have to Diversify Out of Pure Warfare Technologies… And into Solving Problems Before They Lead to Conflict….

“… one under-the-radar player in the defense sector has the solution to this Zero Line Crisis and many future conflicts….”

Which is, of course, the stock he’s teasing. What has this “under-the-radar player” done to develop a solution? Moors says they have developed a new filter for desalination. Desalination plants are huge investments, sucking up a tremendous amount of energy as they remove the salt from seawater, and one reason for the huge energy cost is that conventional plants have to push water through thick filters to remove salt. Graphene, we’re told, can solve that problem:

“the desalination filter this defense contractor has developed.

“Besides being ultra-thin, this desalination filter is…

• 1,000 times stronger than existing technologies.
• It can convert saltwater to freshwater 100 times faster.
• And it uses 1/100th – that’s 1% – of the energy it previously took.

“Desalination now becomes economically viable in even the poorest countries.”

So that would obviously be awesome, even for places like California and Saudi Arabia, let alone the ability this kind of technology might have to dramatically increase fresh water supplies in the Indian subcontinent and, therefore, perhaps ease tensions over the Indus river. Lots of moving parts in that sequence of possibilities, of course, but the possible positive outcome would certainly be nice.

So what is this defense company, and what is this graphene technology they’ve apparently developed? From Moors:

“This defense contractor was one of the early innovators with graphene.

“I was sent their internal memo that reveals this desalination breakthrough.

“Originally they had been working with graphene in what they called their ‘core markets, including aircraft and spacecraft.’

“Then they discovered that they could use it to: ‘Revolutionize the process of desalination by making it far more efficient and less expensive.'”

And then the chain of possibilities and coincidences gets extended a little further…

“Coincidentally, around the same time this technology was first presented, India committed to building 500 desalination plants by 2017….

“India is now allocating $92.1 billion a year – that’s a year – towards solving this water crisis.

“And coincidentally again – I know for a fact – the Indian government is going to cut big checks… we’re talking checks totaling many billions of dollars…

“They are being quietly directed to the company that controls this incredible filter.

“The contracts are signed.

“Here’s another coincidence…

“This company has already set up shop in India.

“They now have an office in New Delhi….

“Now here’s another coincidence…

“This same company, with this miraculous desalination technology…

“It has already secured very large contracts with Pakistan as well.”

Gosh, a defense contractor that is already dealing with two of the world’s largest defense spenders? That is a coincidence! Insert snarky little sarcasm emoticon here.

(OK, to be fair, India and Pakistan are not the largest defense spenders — both spend about 2.5% of GDP on defense, in dollar terms India spends about as much as Germany or Japan, Pakistan about as much as Mexico, neither is even in the running on “defense spending per capita” because they have massive populations — they spend about $30 per person on defense, far less than Australia, Brazil or even South Korea… the US spends about $2,000 to lead the pack, naturally).

So what will this be worth? Why are we jumping over tables to rush to the front of the class so we can buy the special report from Dr. Moors? Here’s his projection:

“Factoring in just the most conservative growth rates for this technology, it could propel this defense contractor’s share price up 464%.

“… that’s a conservative estimate.

“This contractor has big plans for taking what they’ve learned from this graphene breakthrough.”

Those “big plans” are the same stuff other graphene folks are talking about — using graphene in biopharma, electronics, oil and gas, etc. Which is kind of like saying, at this point, that I have big plans for the house that I’m going to sell in 2025 — I haven’t drawn up the plans yet, but my vision is so compelling and my knowledge of real estate so powerful that once I do start building it in 2019, it’s going to use the best techniques and technologies and will be awesome, and by the time I sell it in 2025 it will have risen so much that it will fund my lavish retirement.

Yep, it might happen — but I don’t enter that in the ol’ financial planning spreadsheet when I figure out how my retirement plan is going. We are REALLY early in the graphene story — wonder though it may be, it’s going to take a while, and many of the ideas for graphene applications aren’t going to work out… hundreds of scholars and scientists and companies are filing thousands of graphene patents a year now as the intellectual property landscape is staked out, so if you think you’ve got a handle on which patents or processes or applications are going to be most useful or profitable or valuable, well, you’re far wiser or more prescient than I am.

But anyway, what is this graphene desalination company being teased by Dr. Kent Moors?

Thinkolator sez this must be… Lockheed Martin (LMT).

So yes, we don’t usually like to see profanity in these parts… but you will be forgiven for saying, “under the radar, my ass.”

It’s silly to project 468% gains for LMT because of graphene desalination filter technology. They have developed such a technology to at least some degree, it’s now called the Perforene filter and they announced it (with some premature excitement, I’d argue, even though their engineer said he had been working on it for six years by then) about a year and a half ago. They also now feature it as one of their “emerging technologies” on their website, if you’d like to read their PR material.

They don’t say anything about what they’re spending on this project, or what the timeline for development might be — they did say, in the initial announcement in March 2013, that they were looking for a partner to help with commercialization in the 2014-2015 time frame, but as far as I can tell nothing has been announced since then.

And yes, Lockheed Martin has been in India for a long time, and has recently made some deals there — particularly their large deal to sell India C-130J Hercules planes used mostly by their special forces, though they also sell a lot of other weapons to India (among probably 20-40 other active customer countries).

And they have also sold weapons to Pakistan (or to the US government to be given to Pakistan) for years — in fact, a few years ago they apparently had to reassure India that, yes, the fighters they were selling to India were more capable than the F-16s they had already sold to Pakistan.

So I don’t know if you want to lay a lot of hope on the fact that Lockheed Martin is going to get rich by easing the Kashmir conflict — they’ve definitely made money supplying the military forces on both sides of that conflict in recent years, and those earnings must dwarf the possibility that their in-house R&D project for graphene filters will become a viable business over the next several years.

If you think Lockheed Martin is going to see its shares rise by 468%, then you think the world is going to be more violent and the US government and its allies are going to order a lot of F-16s and C-130s and C-5s and, more importantly, next-generation higher-margin F-35 fighters in addition to lots of drones and missile systems. Lockheed Martin is the largest defense contractor in the world, by most measures, with annual sales of better than $40 billion (and a market cap of more than $50 billion), so it’s going to take a lot to move the needle.

If the company grows by 468%, that will mean that Lockheed is a $300 billion company — if the stock rises 468%, that would be close to a $1,000 stock price (though presumably they’d split before then). I suppose that’s possible if they have a strong several years, it has happened before — LMT was at a low in the teens about 15 years ago so it has gained more than 1,000% over more than a decade, and more recently it has doubled in just about a year and a half as the reality of their near-term funding overwhelmed the fears of the US sequester defense cuts. But it gets harder with a larger company, and it’s not going to come in the blink of an eye… and I’ll wager that any such growth is not going to come because of desalination.

And frankly, Lockheed getting a lot bigger might become an issue for the government when it comes to dependence on any one company — Lockheed Martin is already, as of 2013 and according to the Top 100 Contractors Report from the Feds, getting almost 10% of the Federal Government contract allocations (twice as much as Boeing, three times as much as Raytheon or General Dynamics).

Desalination and water treatment in general is interesting both as a global priority and as an investment opportunity — but it’s not a great reason to buy Lockheed Martin, in my book. Check out the assessment from the folks at Desalination.com here when Lockheed announced this discovery of Perforene, and a year later when they checked in on progress. Lockheed is not the only company or entity researching graphene filters, and filter membranes, while critically important, are but one part of the cost structure and efficiency of desalination plants. If they can make these filters commercially in a couple years, God bless ’em and that could make a substantial difference to the efficiency of desalination plants … but billions are being spent on desalination plants with or without Lockheed Martin, so place your bets on that defense contractor based on whether you think they’ll make money selling warplanes and other services to, yes, India and Pakistan, but more importantly to the United States.

LMT is a very well-run company, they’re levered to some big-ticket items like the F-35 Fighter program but also somewhat diversified in defense spending (they’re also the largest IT contractor for the US government), and above all they are levered to US government spending… which has worked out pretty well for decades. They have a fantastic record of dividend growth over the last decade, a great balance sheet with little debt, and a decent valuation of about 15X next year’s anticipated earnings (trailing PE is about 18), so it’s not a terrible idea — it’s just that you have to have a comfort level with their growth prospects — revenue and earnings are about where they were five years ago, so the boost in the stock has not been from better performance but instead from investors liking it more.

What does that mean? LMT had a PE below 10 five years ago, it has a PE of 18 today — the revenue and earnings are about the same, it’s just that investors think those earnings are more valuable or have a higher opinion of the future prospects than they did in 2009 (or 2010, or 2011, or 2012). That’s more or less the same re-rating by investors that most of their defense contractor peers have seen, though LMT has performed better than most of them. Analysts are expecting 10% earnings growth out several years into the future (though it will be lower than that next year, we’re told, more like 7%), so they’re priced for growth over the next several years that’s substantially better than what they have achieved over the last several years.

Which means there’s not necessarily a huge margin of safety on this one at this price, despite the high quality of the company, the solid dividend and good balance sheet that might provide ballast if they choose. They can easily buy back shares, as they have been, or even borrow to raise the dividend if supporting the stock is a high management priority, but that doesn’t mean investors will keep paying a high multiple on earnings if they don’t grow earnings.

And, of course, there’s the little graphene research project among dozens of smaller projects and programs (materials science, new cybersecurity ventures, drones, robots, etc.) that could provide positive surprises someday — but if graphene membrane sales play a measurable role in Lockheed Martin’s stock rising by 468% over the next five years, then I completely misunderstand the company.

Sound like your kind of stock? Have any other ideas in graphene or desalination that you’d like to discuss? Let us know with a comment below.