“Penny Defense Stocks” teased by The Casey Report

Which smaller contractors are being hinted at by E.B. Tucker as the foundation for the next wave of giant military contractors?

“These 4 “Penny Defense Stocks” Are Primed to Soar on… The Pentagon’s Trillion-Dollar Spending Jackpot”

That’s the promise made by the new ads for E.B. Tucker’s Casey Report, which is pitching the stocks that they think will become the “new ‘Military Industrial Complex'” as they grow from small-cap size to compete with the megacaps like Lockheed Martin and Boeing.

So what are the stocks? Well, the temptation to riches that they dangle is intended to get you to subscribe to their newsletter, at $149 a year. Maybe you’ll like it, maybe you won’t… but let’s go through the clues they drop, see if we can ID those stocks for you, and then you can make a decision about the newsletter (and about those stocks) without the lure of mystery and secrecy swaying your thoughts.

The basic idea is that some of these little stocks will soar because of massive increases in military spending, creating returns like the crazy 55,000% returns that early investors made in Electric Boat (now General Dynamics) during World War II. I don’t know what specific time frame they’re using, but the giant defense contractors have generally all done quite well in the more recent past, too — General Dynamics is again among the best, with a 1,700% gain since the mid-90s, but even relative slowpoke Raytheon is up 400% during that time period, roughly matching the S&P 500, and Boeing and Lockheed both beat the market handily over those 20+ years.

Here’s how Tucker puts it:

“… they’re on the cusp of becoming the new “Military Industrial Complex.”

“The future Boeings, Raytheons, and Lockheeds.

“… we’re on the verge of major explosive military developments, including…

“Catalyst #1: NATO’s $100 Billion Spending Boom

“Catalyst #2: The $500 Billion Global Space Wars

“Catalyst #3: America’s Trillion-Dollar Nuclear Upgrade

“Catalyst #4: The Thousand-Ship Naval Fleet Buildup”

A lot of that is based on expectations for what President Trump will do to the defense budget, since he has come out of the gate with a big push to increase defense spending — I have no idea how that will play once Congress starts looking at the budget, but presumably there will be winners and losers.

What, then, are the small cap stocks that Tucker thinks will be winners?

Well, before we get there, probably the most interesting point made in the ad is that the Feds are being pushed to use smaller contractors with more efficient high-tech products over the traditional over-engineered or high-cost products from the big defense contractors — and that this is being pushed because of a legal ruling last Fall. Here’s how he hints at that:

“You see, just one week before the election, a federal court passed a historic ruling.

“A legal ruling that could put BILLIONS in cash into the accounts of very small military tech companies…

“And enrich investors who scoop up their shares before the Pentagon budget deadline, on June 30.”

And then he goes into more detail — apparently Palantir, the big data firm cofounded by Silicon Valley billionaire VC guy (and Trump advisor) Peter Thiel, lost out to a more expensive and lower quality product from Boeing when it came to some kind of Army contract, and that led to a legal fight. Here’s more from Tucker:

“… the Army never gave Palantir the time of day, cutting it out of the bidding race. And went with Boeing instead.

“The outraged Theil went to war in what Fortune called “a crazy battle to clean up the military procurement swamp.”

“The billionaire saw an even bigger opportunity, much like when he sided with the Trump campaign:

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“An opportunity to open the doors for innovative tech to disrupt the military.

“And get this: He won….

“The federal court ruled in Palantir’s favor using an obscure law called the FASA Act…

“Which states that in contract bids the government should favor commercial firms…

“Innovative companies that get the job done cheaper and more efficiently….

“Never before has this ruling been applied to the military, where the big defense giants almost always win.

“As Bloomberg reports, ‘it could change the way federal agencies do business, widening the base of eligible contractors.'”

I hadn’t followed this story, so that’s interesting to see — that Bloomberg article is here, if you’re curious about following up, and the more recent Fortune article, which goes much deeper into the story, is here. Both are worth a read.

So what are those four stocks? We’ll try to run through them quickly, assuming the Thinkolator is up to the task… here are our first clues:

“One of these produces the shuttle boosters for space rockets, including Elon Musk’s famous ‘Space X.’

“In fact, without this technology, the entire project would literally not ‘get off the ground.'”

Space X is still private, of course (as is Jeff Bezos’ Blue Origin — you know you’ve really arrived as a billionaire when you can start your own space program), but there are subcontractors, apparently, that everyone space project needs.

More clues:

“It already designs and manufacturers propulsion systems for the government, including the…

Army
Navy
Air Force
NASA
Missile Defense Agency

“These systems are necessary to launch any rocket into space. Without it, nothing would reach past the stratosphere.”

This must be little Aerojet Rocketdyne Holdings (AJRD) — a fairly small company, with a market cap of $1.5 billion or so, but not one that has been shut out of military procurement as far as I can tell. They’ve been making propulsion systems for jets, missiles and rockets since WWII, and have been a part of every mission in the US space program since Apollo 11 reached the moon. They’ve been through a few transactions and name changes over the years, but what remains is really just the scaled-down propulsion systems from Aerojet and Rocketdyne that both used to be hidden inside large conglomerates (GenCorp and United Technologies).

I don’t know specifically how they’ll do, but analysts are predicting about 85 cents in earnings per share this year, rising to $1.04 in 2018 and $1.25 in 2019, so that’s a decent amount of growth and the stock, at 24X current-year earnings, is fairly expensive to reflect that growth. I don’t know a lot about the company otherwise, they have a decent balance sheet for an industrial company, with manageable debt, and the consolidation of Aerojet and Rocketdyne seems to have helped them to keep revenue growth going.

Next?

“Another is a little-known company that just invented the most advanced unmanned aerial system in the world. One that’s capable of traveling nearly at the speed of sound!

“At $3 million apiece, orders for this cutting-edge technology are already rolling in. All told, $1 billion in orders this year is in the cards, something that will launch this $7 stock to explosive new heights.”

Sounds interesting. How about some more details?

“My research suggests the biggest winner will be one tiny $7-a-share company now known as “the rising star of the Third Offset.”

“Because it’s building top-secret weapons capable of maintaining a tech advantage over Russia and China.

“One of these is now recognized by defense experts as…

“The World’s Most Advanced Drone… Made in America” ….

“It travels at near Mach speed – over 690 miles per hour….

“It can also:

“Approximate a fighter jet’s capability to conduct high-g-force maneuvers.

“Fly 1,500 nautical miles in a combat radius.

“Launch and land without runways.

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