Washington, D.C. – This week, we have updated the list of companies that make up the Forbes Beltway Index. To reflect new government contracting information, we have removed certain companies from the index, and added others. At least one of the newcomers, noted below, looks like an interesting investment prospect.
Washington, D.C. – Companies that sell technology to the U.S. government are more attractive to investors if their products have commercial applications as well. Examples we’ve cited recently: Ceradyne and Flir Systems.
Dulles, Va.’s GeoEye is another one in this category and its shares look modestly priced. But be careful–one technical glitch and this satellite imagery stock could fall out of orbit.
GeoEye captures, manages and sells high-resolution satellite imagery, the kind found on Yahoo! Maps or Microsoft’s Virtual Earth. The company has $158 million in trailing 12 month sales, a fleet of two satellites and two airplanes, and an archive of imagery covering 300 million square kilometers.
Its next satellite, GeoEye-1, is scheduled to launch sometime later this year. The 4,310-pound spacecraft will make 12 to 13 orbits per day, collecting daily up to 350,000 square kilometers (the size of Texas) worth of color imagery at a 16-inch or 0.41-meters ground resolution. Translated to English, that means that in the images you can see the lines on a parking lot. (No, the satellite can’t parallel park for you.)
But the upcoming launch is a high-stakes event for GeoEye, which only gets one shot to do it right. “After ‘3-2-1-liftoff,’ there’s no chance to go back and fix anything,” says Mark Brender, a GeoEye spokesman and its vice president for marketing.
The consequences of a botched launch? In September 2001, GeoEye’s predecessor company, Orbimage, put up a satellite that failed to make it into orbit. The company filed for bankruptcy in April 2002, and its common shareholders got wiped out.
Full story at Forbes.com
Times are flush in the Canadian province of Saskatchewan. Dare we call it a boom? “That’s the way we’ve been describing it,” says Maynard Sonntag, Saskatchewan’s Minister of Industry & Resources. “Absolutely.”
Sonntag ticks off the stats. Saskatchewan, which provides the world with a quarter of its uranium and sells the U.S. more oil than Kuwait, is one of two Canadian provinces to increase its gross domestic product for four years straight. Since 2002 spending on uranium exploration has jumped tenfold to $280 million annually. “We have more jobs than we have population,” he says.
The recent performance of non-U.S. resources stocks such as energy, construction materials and precious metals reflects the go-go days in the resource-rich north. An index compiled by FactSet Research Systems, for example, shows that shares of nonenergy mineral companies outside the U.S. have gained an aggregate 66% over the last year.
Buyers beware. We looked at non-U.S. natural resources companies with U.S.-listed shares and market values over $10 billion. Of the 80 that qualified, 30 carried multiples of book value, earnings and sales all in excess of five-year averages. Only four stocks passed a simple value screen of price-to-sales below their five-year average.
Each autumn, we hold a stock-picking contest called “Love Only One.” Twelve investment bigwigs must each choose one stock to beat the S&P 500 long over a 12-month period, while five more must lag the index with a bearish pick over the same time frame.
Pickers who complete the mission are eligible to return for another year. Those unsuccessful get replaced by new experts.
The Love Only One class of 2006 to 2007 is holding up well. Since the contest’s price date of Oct. 31, 2006, bulls have posted an average 16% gain, vs. a rise of 11% for the S&P 500. The bearish picks are down a collective 8%.
Investors in aerospace and defense are playing with fairly high stakes these days. Over the last five years, the sector’s stocks in the Standard & Poor’s 500 have outperformed the broader index by 20 percentage points. In the aggregate, U.S. aerospace stocks now trade at 17 times the projected next-12-month earnings, a premium to the market multiple of 15 times projected earnings.
“You’re not going to get the same performance out of the aerospace stocks that you did in 2004, 2005, 2006,” warns J.B. Groh, an analyst covering the sector for Great Falls, Mont., brokerage firm D.A. Davidson & Co. “You can still beat the market, but not in the same dramatic fashion.”
Groh, 39, doesn’t speak from vast experience–he started covering aerospace and defense in 2004. But he’s had an admirable track record since. According to research firm StarMine, which tracks analyst performance, over the past 36 months, Groh has bested an industry return of 89% (cumulative) by 50%. In our most recent analyst ranking, conducted in partnership with StarMine, Groh was the No. 1 stock picker in his category.
Underlying that success has been his preference for the commercial rather than the defense side of the sector. When he first chose the companies he would cover several years ago, Groh saw a contrarian play in recommending suppliers of equipment to the airlines.
At the time, both sectors had been hit by the effects of the war in Iraq, a so-so economy and severe acute respiratory syndrome, or SARS. The latter, a viral illness first reported in Asia, was blamed for 774 deaths in 2003 and whipped up fears that aircraft cabins were prone to contagion. In mid-2003, traffic across the Pacific dropped 40%.
“I thought, well, you still have to travel,” says Groh.
WASHINGTON, D.C. – The housing industry slump has Wall Street flummoxed.
“There’s still a lot of uncertainty among us as to when the recovery will come,” says Daniel Oppenheim, who covers the home building business for Banc of America Securities. Indeed, analyst profit estimates in Oppenheim’s industry are all over the place.
Yet in uncertainty lies the chance to make money, especially if you listen to the right experts. For that, we turned to our partners at San Francisco analytical research company StarMine and our recent tabulation of the best security analysts.
StarMine gives out separate awards for picking stocks and for estimating earnings. The rap on the most accurate earnings estimators is that they tend to be Excel jockeys, more adept at spreadsheets than market-timing heroics. This label fits Daniel Oppenheim, 32, who ranks as the third best earnings forecaster in his category, household durables, according to StarMine.
Oppenheim’s secret? Each month, he and colleagues survey 4,000 real estate agents across the U.S. The topics: what kind of foot traffic those agents see, the price movement of listed properties, incentives offered by home builders, overall inventory of homes on the market and the amount of time needed to close deals. The numbers give Oppenheim a sense of pricing–the key to home builder profitability–in the 40 biggest markets for new home construction.
Broadly, the data these days tell Oppenheim that home prices have further to drop. “We still have excess inventory relative to demand,” he says. That, combined with recent upheaval in the mortgage business, has Oppenheim cautious. He’s got “hold” ratings on all but two of the stocks he covers.
The only two stocks on his buy list are Standard Pacific and Hovnanian Enterprises. In their past two reported quarters, both builders of single-family homes lost money. But Oppenheim feels both have proven themselves the most realistic in writing down the value of their landholdings. As such, their book value, or the difference between assets and liabilities, more accurately reflects market conditions that of other companies.
These days, Wall Street recoils from pure-play fuel cell companies. Several in the table below have seen their share price cut in half over the past year. Two trade below a buck.
But Washington remains bullish on fuel cells.
“We’ve seen an uptick in the interest level,” says William Mitchell, vice president of marketing at Nuvera Fuel Cells of Cambridge, Mass.
Mitchell and other fuel cell industry reps recently hosted a meeting to pitch their wares to federal government purchasing managers. More than 80 showed up. “That was sort of groundbreaking,” he says. “It shows they really think there’s some valuable products coming out.”
Tuesday, Nuvera was up on Capitol Hill to show off its products to Congress at an event sponsored by the U.S. Fuel Cell Council, a trade group. Presenting companies, among them giants like United Technologies and Chevron, had sales booths set up in a congressional caucus room, while rides in fuel-cell powered cars were ongoing down the street.
These are difficult times for companies offering technical services to the federal government. The grind of waging war in Afghanistan and Iraq has threatened agency technology budgets and darkened the outlook for big Beltway businesses such as CACI International and SRA International.
Covering this area from Stanford Group’s Washington offices, Erik Olbeter has kept his footing. For eight months in 2006, for example, he cautioned against shares of Dynamics Research, an Andover, Mass., company that does engineering work for defense and intelligence customers. The stock dropped 44% during that period.
But it wasn’t all bearishness that won Olbeter his No. 8 StarMine ranking among all analysts for 2006 stock calls. Last August, he put a buy rating on DynCorp International , at $10. By the end of the year, shares of the company, which provides governments with services ranging from narcotics eradication to vehicle maintenance, had climbed to $16.
Investing in the defense business these days is a musical-chairs situation. Both military budgets and stock valuations in the defense and aerospace sector look historically high. When will the music stop?
We can’t answer that question, but we can offer up individuals likely to make the right calls in this tricky environment: the defense and aerospace analysts winning awards in our annual analyst survey, published this week on Forbes.com.
Our ranking, prepared for us by research firm StarMine, assesses analysts in two areas: the outcomes of their 2006 stock recommendations (buy, hold, sell) and the accuracy of their earnings forecasts for the four quarters through March. For more on the methodology, click here.
In terms of stock recommendations, these three folks won top spots among defense and aerospace analysts: J.B. Groh of D.A. Davidson & Co., Troy Lahr of Stifel Nicolaus and Heidi Wood of Morgan Stanley. J.B. Groh is a repeat winner, climbing up to first place from his No. 3 ranking last year.
Of those three, Troy Lahr is geographically closest to Washington, D.C. Stifel Nicolaus, part of Stifel Financial, is headquartered in St. Louis but has a big presence in Baltimore, thanks to its 2005 acquisition of Legg Mason’s brokerage business. Lahr, who came to Stifel via Legg Mason, says the robust defense industry presence in Maryland was one factor in his becoming a defense analyst six years ago.
These days, Lahr’s wary of prospects for big military contractors such as Lockheed Martin and Northrop Grumman. Defense budgets, he expects, will increase in the 5% to 7% range in the next year or two. “Beyond that, it’s probably going to start slowing down” he says. “A lot of these companies are really at peak valuations relative to the growth outlook.”
Being buried alive can change your view of making money.
Prior to December 2005, Jon B. Kutler fit the profile of the hard-charging investment banker. A Harvard business school grad and founder of a successful aerospace and defense boutique, he had worked on hundreds of deals. Long hours and constant travel were his companions–and fond ones, given the money he made.
One afternoon in December 2005, though, Kutler found himself under six feet of snow, buried by an avalanche on the last run of the day during an Austrian ski vacation. It took 45 seconds for him to pass out and 20 minutes for rescuers to dislodge his head. By the time he reached the hospital, his body temperature was 89 degrees.
“Your life flashes before your eyes,” says Kutler, 50, of those 45 seconds of consciousness trapped beneath the snow. “None of my thoughts related to investment banking.”
So in March 2006, Kutler turned a new chapter. He quit the banking outfit he had started, sold in 2002 to New York’s Jefferies Group, and turned his attention to private equity. He put up $70 million of his own money to found Admiralty Partners.
But in contrast with today’s private equity environment, where big players are raising billions and closing massive deals, Kutler had no intention of building another financial empire. “I rarely travel,” he says, “except for vacations.”
Out too are the long hours at the office. In their place, Kutler says he substituted more time doing charitable work with his wife and more attention to their two teenage kids. A U.S. Naval Academy grad who majored in engineering, he became a trustee of the California Institute of Technology. He also helps oversee the Jet Propulsion Laboratory, NASA’s center for robotic research of the solar system, which Caltech manages.
The scaled-back schedule means less time for scrutinizing deals. With Admiralty, Kutler gets plenty of pitches sent his way but invests in just one or two a year. His targets are usually companies with sales in the range of $25 to $250 million.
Andrew T. Gillies 