The Trend Every Nation on Earth Is Pouring Money Into

Keith Fitz-Gerald Oct 24, 2014
16 

When we began our time together here at Total Wealth, I promised you a deep look at each of the primary trillion-dollar trends. I told you that every dime made in the markets for the next 10 years would be on this list of trends.

We jumped right in with Technology and our Human Augmentation target – the most inspirational tech company I’ve ever visited.

Today, I want to keep that promise and focus in on our second unstoppable global trend.

Sadly, given the state of the world these days, it could easily be the most unstoppable and profitable of all the trends we’re following.

I say “sadly” because I’m talking about War, Terrorism, & Ugliness.

Warfare… terrorism… disease… They’re all growth industries. It’s a natural effect of having more and more billions of people on this planet, greater interconnectedness, and greater access to travel, technology, weapons, and bad ideas.

Just look at the tragic shootings in Ottawa, Canada, earlier this week. The rapid spread of Ebola across continents. More abductions in Nigeria. ISIS terrorism in the Middle East. It’s a scary world out there. It’s my sincere hope that everybody who’s reading this is safe – and your families and friends are too.

Yet we’re not powerless.

Many of the best investment opportunities – including the one I’m sharing with you today – are geared towards STOPPING these things and mitigating the pain, suffering, and loss of life. In fact, this $7/share, off-the-radar company is working to keep soldiers and civilians out of harm’s way as part of the most promising technological advancement in warfare I’ve seen in my lifetime.

Whatever your feelings about war, there’s great satisfaction in making an investment that promotes the safety of the brave men and women who serve this country selflessly. I bet you’d agree.

Here’s everything you need to know about the War, Terrorism, & Ugliness trend…

Invest in This Trend for Peace and Prosperity

Given today’s subject matter, we’ve got to set some boundaries before we dive in.

War, Terrorism, & Ugliness are hardly happy-go-lucky subjects, so I don’t want to convey the impression that I’m taking the misfortune that comes with them lightly.

In fact, many of my choices in this sector are ultimately aimed at peace, health, and prosperity. In that sense, they are truly game changers. They can help us figure out how to keep the very things driving this unstoppable trend – War, Terrorism, & Ugliness – from happening more often.

This is a mind-bender. It took me years to get to the point where I could make the connection between war and peace.

Most investors – I’d even go so far as to say 99% of all investors – can’t make the jump. They get bound up by personal biases or emotion , so they miss enormous profit potential right in front of them. The biggest oversight is one we’re going to discuss today.

Warfare.

It’s just one element of the unstoppable War, Terrorism, & Ugliness trend. It’s not a popular topic for reasons that are self-evident, but boy, can it be profitable.

Part of that is the sheer size and momentum of this trend…

Every Nation on Earth Is Pouring Money into Defense Spending

Colossal Defense Spending

I realize “trillions of dollars” is hard to grasp, so let me put it another way… the U.S. Department of Defense actually spends more than $1 billion a day.

A billion seconds ago, it was 1959.

A billion minutes ago, the Roman Empire was in high gear. A billion hours ago, it was the Stone Age.

But a billion dollars in U.S. defense spending ago, it was yesterday.

That’s just one country.

Military spending is a nearly $2 trillion industry worldwide each year.

To put that into context, that’s nearly $250 for every person alive on the planet today, or roughly 2.5% of global GDP.

According to the Stockholm International Peace Research Institute’s 2013 Yearbook on military expenditures, just 15 countries account for 81% of the total military spending worldwide. So there’s a tremendous concentration of resources – something I talk about a lot because it’s key when it comes to identifying opportunity. Forget diversification. This is where the real money is made, for reasons I’ll share with you in a minute.

The U.S. leads the pack, with 39% of global expenditures, followed by China at 9.5%. So, right away you can tell this is a numbers game. The question is which numbers. I’ll explain that in a minute as well.

And, finally, the world’s top five arms suppliers are also the five permanent members of the United Nations Security Council – the U.S., the U.K., France, China, and Russia. So there truly is an “old boys” club, even if some of those members dislike or distrust the others.


Nothing can slow war down. Not central bankers, not Ebola, not another financial crisis… not even peace.

Now here’s where it gets interesting…

When you peel away the personal moral objections that stop people from really thinking about this trend with the cold logic that big profit potential requires, you are left with four things:

  1. First, war is a function of military expenditures, which are, in turn, a function of natural resources. This means that Scarcity and Allocation (another trend) become key drivers in your quest to find lucrative investments.
  2. Second, war itself is a function of foreign policy objectives and the very unpalatable combination of real and perceived threats. Military prowess delivers supremacy, but peace delivers prosperity. They’re symbiotic, and have been since the dawn of humanity.
  3. And third, rapid technological development means the nature of war changes in a way that’s commensurate with the rate of economic growth. This means that traditional military threats are no longer conventional military threats.
  4. But here’s what everybody is missing…

  5. the nature of warfare changes as the risk of conflict rises and the need to preserve life increases.

That’s why there are trillions of dollars flowing to corporations engaged in defense technology, development, and services.

In that sense War, Terrorism, & Ugliness are about a never-ending race to maintain “technologically advanced industrial capacity,” as noted by Stephen Stables in remarks delivered at The Hague on May 12, 1999.

It’s technology that gets turned into trillions of dollars of sales and earnings that, in turn, translate to higher stock prices over time.

Here’s the most promising technological advancement in warfare I’ve seen in my lifetime.

WTU Investments Give You Four Advantages

  1. Built-in upside: Most investors know how to appreciate this quality when it comes to media darlings like Apple or Facebook, but for some reason they have real trouble with this thought process when it comes to War, Terrorism, & Ugliness. So they sell off at the first hint of budgetary problems or any dovish shift in public sentiment. They should be buying. That’s because companies selling into the WTU trend are long-cycle providers. Short-term market pullbacks do not disturb these companies one iota. But they do put them “on sale.”
  2. Sole-source specialization: Many WTU companies – like Becton, Dickinson and Co. (NYSE:BDX), a medical technology company, or the military technology company Raytheon Co. (NYSE:RTN) – are singularly focused. That actually gives them tremendous security because politicians actually like small groups of sole-source qualified suppliers. So the federal contractor bidding process is actually set up to reward this. Anything deemed a national priority – like defense spending – is the first to be funded and the last to be cut.
  3. Dominance: American military spending is greater than the next dozen countries’ spending combined. Most investors are stunned to learn that as expensive as the wars in Iraq and Afghanistan have been, they only represent about a quarter of total U.S. military spending, according to Forbes. So buying RTN – or the little California-based company I’ll show you shortly – gives you unparalleled staying power and market exposure that would otherwise be limited by anti-monopoly or business trade regulations in other industries.
  4. Countercyclical stock movements: Traditional investors rely on conventional diversification in an attempt to spread risk amongst various investments on the assumption that not everything goes down at once. By its very definition, this sector is a countercyclical choice. It zigs when everything else zags. But only if you’re on board.

The New Age of “Standoff Warfare”

I spend a lot of time around our military, and one of the things I’ve learned is that our war-fighting doctrine has become one of precision and highly targeted engagement.

The future of this is Standoff Warfare.

What this means in plain English is that our military is transitioning to hyper-accurate weapons that can target enemies from miles away, keeping our service members out of harm’s way until they absolutely have to personally engage. That way, they can limit resources and exposure while still achieving maximum effectiveness on target.

This differs dramatically from the large “boots-on-the-ground” programs that traditional defense contractors still favor, and which are facing congressional headwinds as warfare becomes more sophisticated and money ever tighter.

Don’t get me wrong, I still believe well-trained, well-equipped troops represent a vital part of U.S. defense – but our military is increasingly shifting its focus to unmanned, drone-style standoff warfare wherever and whenever possible.

It’s all very high tech (so an investment here taps into the Technology trend at the same time), and almost entirely focused on current security demands, the vast majority of which are “standoff,” or remote in nature.

The benefits are obvious.

Traditionally, our military would call in some helicopters, load them with troops, fly them into a dangerous area, and deploy the troops to conduct missions at hand, only to pick them up later.

But now, with the advent of high-tech surveillance, reconnaissance, and combat drones, our military can actually execute missions from thousands of miles away. Operators remain in secure locations, risking only the hardware being deployed. Many of the drones flying Afghanistan are piloted from Creech Air Force Base in Nevada, for example.

With the rise in Standoff Warfare, it’s clear that a company with devices to perfect the new form of combat will do extremely well in this new era as will companies providing the secure communications and critical infrastructure security needed to pull it off.

And that brings me to my favorite way to play this development.

It’s actually got a lot in common with our Ekso Bionics Holdings Inc. (OTC:EKSO) recommendation that targeted the Human Augmentation trend. But here we’re talking about a $1.7 trillion trend that is already 10 times larger and which may have 100 times the profit potential – perhaps more.

My $7/Share Recommendation

Based in San Diego, Calif., Kratos Defense & Security Solutions Inc. (NasdaqGS:KTOS) operates in two related segments:

  1. the production of mission critical command, control, and communications gear for the U.S. government and its allies, and
  2. the provision of public safety and security services for the national security priorities of the United States and her allies.

Think of them as “professional services” for the war-fighting community. KTOS and its roughly 3,900 employees provide engineering, manufacturing, and systems work for everything “standoff,” from satellite communication to missile systems, electronic warfare, and infrastructure.

What really sets Kratos apart is how they procure business.

Realizing that the mega contracts of the past are, in fact, liabilities, the company has focused almost exclusively on much smaller $1.4 million to $15 million deals in a wide variety of areas including drone and targeting systems, flight instrumentation, full fidelity simulators, and avionics and satellite communications and control. It’s a “sole-source” provider in many cases.

If that sounds specialized, you are right – it is. Kratos concentrates on dominating markets where there are very few qualified providers. The company’s EPOCH Command and Control System, for example, is used by more than 75% of commercial satellite operators, the Department of Defense, and other agencies.

I like that. It means management has a clear vision of what they do and where they want to take the company. I’m also particularly keen on the fact that management goes to great lengths to diversify its business mix and wants to compete only where they have a distinct advantage.

To be fair, most of the traditional defense contracting firms such as General Dynamics, Lockheed Martin, and Honeywell have high-tech “standoff” offerings as well. However, most of them are still huge old-school programs increasingly facing the chopping block. All it takes is a rumor that one of those legacy programs may be on the verge of being defunded, and traders will punish the stock.

On the other hand, KTOS’s products and programs have two things going for them:

First, they’re almost all high-tech or in support of high-tech mission profiles, which means they represent a critical need rather than a pork program that politicians want to keep alive so they can get re-elected.

Second, the contracts are small (by defense contract standards), typically ranging from $1 million to $15 million each. That makes them very easy to approve in a budget, especially when compared to the multi-billion budget items that come under intense scrutiny.

There’s something else I like, too. Just like a trader who limits a given trade to 2% of overall capital (one of the tactics we’ll talk about in the coming weeks), Kratos has deliberately diversified its contract base so that no single contract accounted for more than 6% of fiscal 2013 revenues. At the same time, they’re not solely reliant on the DoD despite the fact that it is a defense contractor per se.

According to management, approximately 35% of revenues come from outside the DoD and from clients spread around the world. This strategy has delivered a powerful upside to Kratos, which benefits from the security of not having all its contracts placed in one basket. Since 2009, revenue has grown from $334.5 million to a projected $980 million by the end of 2014. That would represent a stunning 192.97% if the 2014 forecasts are accurate.

Not bad for a company that is trading for under $7/share at the moment.

Here’s how I expect this to play out.

Prepare for More Triple-Digit Returns in the Defense Sector

This same kind of growth was also in store for Raytheon Co. (NYSE:RTN) when I recommended it in August 2011.

Most investors look at the company as a classic defense contractor, so they sold hard when budget cuts hit in 2011 and 2013. What a mistake!

I reasoned that companies like RTN that are engaged in standoff warfare would not suffer from budget cuts but would actually grow because they help soldiers carry the day with minimal loss of life.

At the same time, I believed that technological development would extend from conventional munitions to include communications, logistics, and intelligence, so there was plenty of potential at a time when the company’s stock price did not reflect the upside.

Raytheon has not disappointed in either regard. The company’s missile systems, for example, are used by the United States, Israel, and 28 other countries, and translate into more than $ 6.6 billion a year in revenue.

The company’s new Excalibur howitzer system is a revolutionary precision projectile that’s already held up in 750 rounds of precision testing to date. With a radial miss distance of less than two meters from its target, it’s expected to be used by the U.S. Army and Marine Corps artillery. The company is also developing a laser-guided Excalibur S missile that will excel in hitting moving targets – yet another product that helped the company secure more than $500 million worth of contracts in the past month alone.

I’m recommending KTOS today in part because it has so much in common with the position RTN was in during the fall of 2011. Undervalued by the markets and doubted by many, KTOS is now poised to see explosive growth just as RTN did, by tapping the same trend, as recent history repeats itself.

Here’s what to do:

Action to Take: Buy Kratos Defense & Security Solutions Inc. (NasdaqGS:KTOS) at market and set a 25% trailing stop to protect your capital and harvest gains along the way.

All of this brings me to the main point I want to leave you with today.

There are a lot of investors who are making the devastating mistake of not investing because the headlines are scary. What you really want to do is invest because of the transition that will inevitably happen when the headlines are benign.

It’s important to remember that as a company grows, earnings mount. And as earnings mount, share prices, which are a reflection of those earnings, inevitably rise as well.

There is nothing more important than finding companies with strong earnings growth when it comes to building Total Wealth. Studies like the one I’m going to share with you in an upcoming column show that companies with the strongest earnings growth gained more than eight times that of their peers with the weakest growth.

Keep that in mind, follow our unstoppable trends, and your wealth-building potential will be unstoppable too.

Best regards for great investing,

Keith

Test Case: The Other Side of War, Terrorism, & Ugliness

The Ebola outbreak now sweeping the planet is, unfortunately, a textbook-perfect case of this trend.

While many analysts have been speculating on some of the more promising companies developing various vaccines and inoculations – with little success – I recommended subscribers purchase Becton, Dickinson and Co. (NYSE:BDX), a company that sells medical testing equipment, instruments, and reagents – much of which are single-use.

To me this is a “picks and shovels” play. It’s a lot like owning the store at the base of the mountain that sold shovels to the gold miners headed into the hills in 1849. They profited handsomely.

Subscribers who followed along had the opportunity to enjoy total returns of as much as 77.15%. The markets have now taken some of that away on Ebola-related fears, but that’s just putting the company on sale as far as I’m concerned.

Despite our best international efforts, this outbreak is already bad enough that it runs the risk of a multi-year burnout before it’s finally eradicated. And that means still more sales for BDX. Despite the hearty returns it’s already made already, it’s still a great buy. Just in case you’re wondering…

16 Responses to The Trend Every Nation on Earth Is Pouring Money Into

  1. Kathy says:

    “at market and set a 25% trailing stop to protect your capital and harvest gains along the way.” What does that mean? Thanks for your awesome information. What company manufactures the bio-hazard suits and equipment?
    Thanks,
    Kathy

    • Editor says:

      Hi Kathy,

      “At market” means at the price where KTOS is currently trading (around $6.50 a share right now). A trailing stop is a risk management tool most brokers offer at no charge. It’s a mechanism that limits your downside risk by automatically selling when your investment falls to a predetermined level – in this case, 25% below the highest close achieved since your entry.

  2. Gary B. Harris, MD says:

    Thank you for getting back to common sense reviews and suggestions. It is very tiring receiving these endless offers to get rich quick from the various other branches of your firm such as the offerings to invest in oil weeks before oil begins its crash. I far prefer this current approach of yours which allows time to research suggestions and make informed decisions. Those that get rich quick are often those that also get poor quick. I have no interest in taking that risk. Thank you again. I look forward to your continuing, well reasoned and timely suggestions. GH.

    • Keith says:

      Dr. Harris,

      Your kind words are tremendously appreciated. Thank you for your perspective and for being part of the Total Wealth Family. I will do the best job I can to ensure that the trust you place in me is not unfounded.

      Best regards,

      Keith 🙂

  3. richard says:

    Hi Kieth. Defense. As you mentioned,boots on the ground will be needed. Check out this company.
    Vitra Systems VTSI. Precision training and cost effective. Military and law enforcement. Thanks.

  4. Barry Sorkin says:

    Hi Kieth, Hope all is well

    Am doing well with Esko & bought thios and trailing stop locked in and already bit up

    MY QUESTION

    Can u distill down why pick this now as its been down for every period 10, 5 & 1 year time frames, YTD, 6, 3, 1 Months periods , basically hit 52 week low intraday of $ 5,88 on Oct 10 I think, and slowly made its way back up somewhat .

    I love the products u note but again why pick it now

    Thanks , Barry

    • Keith says:

      Hello Barry and thanks for taking the time to ask. That’s a very logical question and there are really two answers:

      First, as I wrote in my column about why you always want to be in stocks, I believe capital is a creative force. So I know that I want to harness upside at times when prices appear out of line with earnings potential, like now.

      Second, if you wait until you hear the robins, spring has already sprung to paraphrase my grandfather and Warren Buffett both. I believe the markets do not yet widely understand the implications of WTU as I’ve laid them out and that means we have an opportunity to move first.

      Best regards and thanks for being part of the family,

      Keith 🙂

      • Barry Sorkin says:

        Kieth ,

        I appreciate your answer.

        BTW, Loved the keep emotions out of it article ,, something hard but that article will help me keep myself in check as will remind myself about it when i make decisions and ensure thats not a part of it

        also your column about why you always want to be in stocks was appreciated & something i had once noted withh my money manager, but we all do have varying circumstances , ( mine are quite differenbt than the average person ) that come into play and luckily I have some good ones that back up any mistakes , unfortunately that ace in my hole is a result of hard ward yes, but also some bad disabilities we need not get into.

        You provoke thought and that I really appreciate , Love to learn

        Anyway , thanks again. Barry , Have a great weekend

  5. Edward Darlow says:

    I am new to investing and need some guidance. Can you help or direct me to someone who could?

    Thanks!

  6. glenn underwood says:

    I’ve been reading a few investment letters for the past week, and I have to say that yours is by far the most sensible. It’s clear that some aren’t really concerned about the people who read them, but sensationalize to the point that readers feel a disconnect. I’m 67, and have avoided the market place to grow real wealth, relying on real estate as a vehicle. While I can truthfully say I’ve not had one loss moving foreclosures, my age and health
    are getting to be a challenge….thus my interest in the market. I’m learning the different segments of market investing and look forward to each of your recommendations, I still trust good information, and my own gut feeling, but having someone with market experience and insight adds to the mix to make sound decisions.
    thanks for thinking of the rest of us. Do you offer any subscriptions to any newsletters? Thanks… glenn

  7. Richard Pruett says:

    I recently cashed out of Kratos. The stock went sideways and then hit my trailing stop at 20 percent. I’ll continue to watch this space, though. These stocks can turn on a dime with the introduction of a new catalyst, and in this sad world, a new catalysing crisis is always just around the corner.

  8. Steven B says:

    I still fight with my gut. Against my knowledge- as many others do. Perhaps a parable- would also be good dose of knowledge for us hard headed gut traders.

  9. Clint Bunke says:

    Clearly, your trend analysis is engaging. Question: What do you see on the horizon that would spike the expansion of the customer base for Kratos as opposed to simply expecting more and more contracts from its existing base? What would expand, in other words, the reach of Kratos’ appeal as a supplier globally? Thanks.

  10. tom says:

    RE: Kratos: Looking at their earnings- there are no earnings, only losses. So here is this company who lost -.90 cents per share in 2011, lost -$2.41 per share in 2012, lost -.56 cents per share in 2013, and in the first half of 2014 has lost -$1.13 per share- and this loosing trend doeesn’t seem to be turning arround any time soon. Revenues and profits have been dropping. They have spent over HALf of their cash reserves over the last 6 months. They are currently running a deficit of over 624 million dollars, up 11% in the first 6 months of 2014. One small ray of hope, they were able to re-finance their 10% debt down to 7%. They are continuing to lay off employees. This is not the signs of a growing company, but of a company in trouble. Where is the silver lining? What is there is the catalyst to take this company to take them from BAD to ” LESS BAD”?

  11. Lois Nielsen says:

    MTRX stopped out; KTOS dropped like a rock to nearly my 25% take out. Any comments on the future of both of these companies.

    L Nielsen

  12. Aaron says:

    KTOS got stopped out today, what is your outlook for this company Keith, still a good buy?
    Cheers.

Leave a Reply

Your email address will not be published. Required fields are marked *