“Help Destroy China’s ‘Internet Army'”

Sniffing out the "Triple Your Gains" Teaser from Bill Patalon's Private Briefing

By Travis Johnson, Stock Gumshoe, June 17, 2013

“Yesterday, I sent you an urgent briefing regarding China’s dangerous “Internet Army.” This situation is already moving fast.

“The small tech company critical to crushing China’s attacks just won another contract for an undisclosed “data center”… its third multimillion-dollar contract in less than a month.

“This is quickly turning into exactly the kind of win-win situation I expected. And I don’t want you to miss anything. So please read on to get my report… How You Can Help Destroy China’s “Internet Army”… And Make 300% In The Process… for free.”

That’s how the latest tease from Money Morning’s Private Briefing service launches — providing a nice feeling of momentum, secrecy and profits to those whose hearts are warmed by the copywriter’s art.

Private Briefing is one of those “best of the best” sampler newsletters — it features stocks that have been picked by other Money Map Press/Money Morning services and newsletters, not unlike the “stock of the month” services from Cabot or StreetAuthority. And it’s relatively inexpensive (though $7.99/month does add up after a while) and introduces people to picks from more expensive letters, so presumably it’s a nice marketing and “lead generation” tool for the publishers.

And as you can imagine, picking your favorite idea among several newsletters each month does not guarantee perfection — the last time I wrote about this service was last Fall, I think, when they were teasing Delcath Systems (DCTH) on an expected FDA approval and an anticipated 300% gain in the very short term, and that one certainly didn’t work out. But we won’t judge based on just one idea — so what’s the stock they’re pitching this time around?

It’s a small cap company that’s apparently involved in defense contracting , here’s a bit from the ad to get you excited:

“The company I’m so excited about is a small and highly specialized technology company trading for under $10 that already has its hooks very deep into the Pentagon.

“The folks in Arlington have awarded this small-cap leader a steady stream of contracts now worth about $1.1 billion.

“These projects are ongoing… and well spread out. It’s like they just keep knocking on more Pentagon doors and find piles of cash behind each one.

“I’m talking about guaranteed contracts from the Army, Air Force, Navy, NASA, the Defense Logistics Agency and the Department of Homeland Security, just to name a few.

“In fact, in the last few weeks alone, this company has received three multimillion-dollar deals: One to provide specialized equipment in support of a certain ‘radar-related’ National Security program. A second for electronic products for a ‘critical U.S. electronic attack platform.’ And the third for equipment in support of an undisclosed ‘data center.'”

Their biggest specialty, we’re told, is “Electronic warfare surveillance systems… including gear for electronic attack” — which places them in a strong position as the continuing hacking battle for data escalates between the US and China. And the ad letter, from their editor Bill Patalon, tells us that this kind of contracting is unlikely to get cut even in the face of ongoing sequester-related and other military budget cuts … partly because the contracts have cancellation clauses that cost more than the work itself.

So they’re looking for 300% gains as this company helps to “destroy China’s ‘internet army'” — but what company is it?

Well, we feed those details into the hungry Thinkolator, and after a wee bit of chewing we learn that the stock they’re teasing is … Kratos Defense & Security Solutions (KTOS).

Sound familiar? Yes, Michael Robinson has touted this one several times over the years — he’s the tech guy over at Money Map Press these days, and he teased KTOS pretty aggressively both in 2009 and last Fall, when he called it a “politics-proof” defense play. It’s been a very volatile stock, so if you bought it the first time he touted it at $8 or so back in 2009 you’d call him a fool, if you bought it back in November at $4 and change and saw a 50% rise to today you’d call him prescient.

Kratos is a small specialty defense technology contractor, with key areas of focus in drone aircraft and target drones, satellite communications, electronic warfare equipment, surveillance and infrastructure security, among others that I really don’t understand particularly well.

KTOS has been a gyrating stock and has obviously made money for some people, but they’ve been undergoing pretty massive changes in their focus, reorganizing and looking for new government contracts in key areas. That has also meant several acquisitions along the way, lots of debt, and lots of share sales to fund acquisitions and operations. So they’ve more than doubled revenue over the last couple years (from 2010-2012), going from $409 million in 2010 to $969 million last year … but they’ve also almost tripled their share count (from 17 million shares outstanding to 47 million), and they’ve tripled their interest expense even with crazy low interest rates (to $66 million last year), so shareholders don’t have much to show for all that revenue growth. Profits have not shown up yet, though they do usually manage to generate operating income in quarters when they don’t have a special “other” cost on the books (meaning, there’s some money left over after they account for the cost of revenue, their R&D expenses and their regular operating expenses (selling, general and administrative costs, usually called SG&A) — but interest and taxes (they don’t pay much in income taxes, not surprising given the lack of income) usually eats that operating profit up and then some.

So if you just browse through the filings, you don’t see much that makes you want to own this company — losing money, diluting shareholders, heavy debt burdening their balance sheet, no sign of scaleability as the costs rise as quickly as the revenues. What, then, is there to like?

No, really, I’m asking you.

OK, fine — there are some positive signs, beyond the fact that the stock has risen 50% since the trough last Fall.

Analysts expect them to book a profit next year … though we should temper that by saying that the analysts have been ridiculously over-optimistic at guessing at their earnings over the past four quarters.

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