How Buying a “Step-Up” Stock Can Boost Your Defense Profits

Keith Fitz-Gerald Jun 19, 2015
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Colt Defense LLC filed for Chapter 11 bankruptcy last Monday. Investors were stunned, and questions flew.

How could this happen to America’s legendary gun maker at a time when more than 10 million background checks were completed for gun sales in 2014, including 175,000 on Black Friday alone?  Is this a sign that the defense industry is flagging? And, more importantly, what does this mean for my money?

Today I want to talk about that because we’ve got an ideal teaching moment on our hands when it comes to how to invest in what I call the MOST Unstoppable of the six Unstoppable Trends we follow:

War, Terrorism & Ugliness.

Today’s lesson is about how to find a “step-up” stock that positions you for maximum profitability in a sector no one in their right mind actually likes – but no one can afford to ignore, either.

And it applies not just to Colt – which was privately owned – but to public companies like Smith & Wesson Holding Corp. (NasdaqGS:SWHC) and Sturm Ruger & Co. (Stuttgart:ST2.SG), so if you own those or any other firearms maker for that matter, take careful notes.

Understand the critical difference I’m about to lay out for you and you’ll do very well. Miss it, and a Colt-like experience could clobber your portfolio.

Here’s the one factor that makes a “step-up” stock…

Why My Least-Favorite Unstoppable Trend Is Here to Stay

There’s no easy way to say this, and admittedly it’s a very discomforting thought, but War, Terrorism & Ugliness are growth industries.

We just saw yet another sad example with the horrifying events at the Charleston, S.C., church this week when an apparently pill-popping, drug-addled 21 year-old named Dylann Roof murdered nine people.

Why this is an Unstoppable Trend is really a moot point. We could spend all day discussing what’s driving this, and it wouldn’t be wasted if the world returned to more peaceful times. But that’s not likely to happen. Not anytime soon, sadly.

According to Amy Belasco, a Congressional Research Specialist, the cost of Iraq, Afghanistan, and other global War on Terror operations since 9/11 tops $1.6 trillion. The figure jumps to $4.4 trillion and counting when you factor in interest rate payments, veteran’s care, homeland security, and other war-related aid, according to a 2014 paper from The Watson Institute for International Studies at Brown University.

At the same time, more people want personal defense, the military needs more firearms, law enforcement has to “up gun” to counter increasingly well-armed criminals, and there’s a lot of legislative momentum against guns which implies a looming scarcity.

Under the circumstances, it’s a logical move to go with gun makers like Smith & Wesson, Sturm Ruger, Olin Corp., and Colt Defense. Yet that’s the wrong move.

What most people are missing is the fact that guns are a dime a dozen. You load, point, and pull the trigger. Then a projectile comes out one end that’s intended to kill.

Functionally speaking, guns are merely more sophisticated versions of slingshots, knives, and bows and arrows that have been used for thousands of years. Soon people will even be able to make a “wiki weapon” using commercially available 3D printing technology.

Again, you may have your opinion about this just as I do mine. Understandably, the issue is fraught with emotion. But the emotion that this subject stirs – or any other emotion, for that matter – has no place in any investing strategy.

What matters from an investment perspective – and what most people are missing – is that a growing number of competitors in a crowded field make firearms an increasingly low-margin business. Anyone can do it. There’s no defensible “moat,” as they say, and that makes it a bad investment.

Let me give you an example that illustrates my point.

No Company Has a Monopoly on Innovation – But Some Collapse without It Anyway

Michael Dell came out of nowhere in 1984 when he began selling hand-built computers from his UT dorm room at a fraction of what established competitors charged. By the 1990s, Dell Computer was the fastest-growing company in history, outpacing both Microsoft and Walmart. By 1999, revenues were $18.2 billion annually.

Now smartphones are doing to Dell what Dell did to his competitors: killing his business. The PC market is dying and expects to ship only 293.1 million units this year, according to IDC. Apple sold nearly 74 million iPhones last quarter alone. By 2019 the entire PC market will be $175 billion, or $8 billion less than Apple’s 2014 revenue of $183 billion.

Colt lost a multi-million dollar bid to the military that completely derailed its business because it doesn’t have the technology nor the margins needed to defend itself in an increasingly commoditized industry.

The same thing will happen to other firearms makers. Perhaps not immediately, but ultimately – unless they can develop something that makes them unique beyond just shooting a projectile.

That’s why you want to step “up” the food chain when it comes to making the most profitable investments in War, Terrorism & Ugliness.

Defense Companies Have to Specialize to Survive

Take Kratos Defense & Security Solutions Inc. (NasdaqGS:KTOS), for example.

I initially recommended it to you on January 9, 2015, and it’s returned 32.08% to date, climbing 16% in the last month alone.

This San Diego-based defense contractor provides extremely sophisticated systems integration and manufacturing for the military and national security platforms. It has very specific (and this is key) non-replicable expertise in satellite communication systems, electronic warfare, missile and cyber defense, among other things.

Practically anybody can make a gun these days. But, very, very few companies can do what Kratos does.

Or, consider Raytheon Co. (NYSE:RTN).

I initially recommended the Massachusetts-based defense giant to Money Map Report readers back in August 2011. Since then, the stock has returned 137.68% versus the S&P 500 which has logged only 68.25% in the same time frame.

Like Kratos, the company’s offerings are highly specialized and include everything from guided missiles to space and airborne systems to integrated intelligence and electronics systems including close in weapons systems, kinetic kill vehicles and directed munitions.

Again, guns are easy to make but Raytheon’s offerings aren’t, which is why they can command a premium.

Both companies (and others like them that I will cover in the future) are still great buys in case you’re wondering.

Wrapping up, I hope you see the logic here because it’s critical to bigger profits and long term investing success in any industry – specialized companies with highly profitable offerings that cannot be commoditized are your best bet.

You’ll know you’ve found one when it’s got a solid competitive advantage capable of protecting the longer-term capital growth we know leads to outsized gains and Total Wealth.

Until next time,

Keith

15 Responses to How Buying a “Step-Up” Stock Can Boost Your Defense Profits

  1. H. Craig Bradley says:

    GUN CONTROL & SOCIAL VIOLENCE AS UNSTOPPABLE TRENDS

    I don’t think very many individuals will be fabricating ” Wiki-Guns” on home 3D printers anytime soon. The printers that can fabricate a polymer capable of withstanding chamber forces involved in firing a 30 caliber rifle will be way too expensive. Only specialized commercial operators will be able to afford it, but they could, with proper Federal and State licenses, possibly compete with the traditional firearm manufactures who still machine their products. So, remains a tendency to overstate technology and its near-term impacts.

    Firearm manufactures in the U.S. are going to either go out of business or be nationalized. Gun Control is possibly an “unstoppable trend” with our political class here a home. There are potentially thousands of Dylann Roofs out there waiting to “happen”. So, there will probably be more and with each new incident, more political pressure will build to confiscate private handguns and possibly, all private firearms. The Constitution won’t prevent a friendly Supreme Court some day from ruling it “Constitutional” either, as was in case of the ObamaCare Ruling in 2010.

    No doubt there the demand for “shrinks” will grow proportionally with the growth of pathological individuals in the general population. There may be a need to pre-identify those who are likely to “go-off” beforehand, as in the Sci-Fi movie ” Minority Report”. Call it preventative incarceration ( removal of political incorrectness).

    • RJ says:

      The NDAA, signed into legislation by Obama on New Year’s Eve, suspended habeas corpus. Does anyone here think for one second, the unelected fourth branch of government, the NSA, can’t extract specific and singular targets with all of the back doors built into every piece of electronic equipment in use, including your TV?

      I would suggest that people read Battlefield America: The War on the American People, by John W. Whitehead. You’ll gain an appreciation that “preventative incarceration” is already here.

  2. Bertrand de Frondeville says:

    A simple constitutional solution to the Gun Rights controversies: Follow Judge Scalia’s reasoning in the Supreme Court majority “Heller Decision”, which is
    – “No weapons for criminals or the mentally ill (requiring checking a national database by any and all vendors)
    – no automatic weapons such as machine guns (incl. the new assault weapons),
    – no right to bring weapons in sensitive buildings such as schools, government buildings.”

    If the Best Congress MCB refuses that simple “Law of the Land” approach, go for mayors, governors , and the 60+% individual (non-corporate) NRA members who support a reasonable set of rules.

    • Ron says:

      I am a menber of the NRA, and support most of it’s policy’s and views—but I support this sensible idea.

    • public defender says:

      It’s fine to pass a law to keep criminals from owning firearms. But they will acquire them anyway. They are criminals. At best, that law would simply keep them in jail longer after they violate it.

      Automatic weapons are already illegal. Those laws are probably unconstitutional, but they are uniformly accepted.

      No right to bring weapons into “sensitive buildings” means schools, government buildings, and army bases will be “welcome shooter!” locations, as they have been for several years, keeping the victims inside defenseless. The best way to INCREASE the number of gun violence victims is to increase the number of locations where citizens are not allowed to defend themselves.

      • DeborahG says:

        Anyone who thinks more laws are the answer vis a vis stopping the growth of crime in urban areas,stopping the flow of drugs and zero responsibility for laws broken simply because of your color as PC then they are deluding themselves. What is has done is created the biggest black market in guns America has ever seen. criminals have to be stopped before they become criminals. Welfare abuse,fraud and having two sets of rules doesn’t work. Guns in the hands of legal citizens is the best hope for self defense.

  3. Patric Mobley says:

    there is technology that could vivify a manufacturer with the cojones to go against the NRA. It makes it impossible for anyone but you to fire your piece. That would remove the ‘he was going for my gun’ defense of the police when they shoot and unarmed man.

  4. John McGirr says:

    I’m very interested in your reports, as a defense against what is going on around us.

  5. John McGirr says:

    Yes

  6. Dave says:

    If and when the 2nd Amendment is altered by the Congress or the People, in accordance with the Constitution, I will comply, unless such compliance would significantly inhibit my ability to protect and defend my self or my family.
    Any scheme that that is not totally enforceable on all inhabitants of the country, all the time, without exception, is a non-starter and unacceptable. In practice such a scheme would be impossible just as it is now because the criminal element will never abide with such a scheme. Since the criminal element has been with us from day one and will be with us in the foreseeable future, it would be insanity to believe that a few word changes to the greatest document ever written would have any effect on criminal behavior. I will not force anyone to carry arms nor will I allow anyone to prevent me from carrying arms. To carry or not carry is an individual right that law abiding competent people must exercise as they see fit.

  7. ruth says:

    Hi Keith: Thanks for all the information and resulting encouragement – it’s wonderful!

    Please could you provide an alternative to VWElK – Schwab informed me that Vanguard
    is not providing this any more to “new investors.
    Also, Schwab cannot get me CPFXX . Where could I try for this and howl much to get
    seeing it shares are only $1 ?
    Thirdly, if a stock is not on the list, should it have been sold: e.g. ABBVIE, DICE and
    KRATOS? (I sold the latter – alas!)
    Best regards.

    • Keith says:

      Hi Ruth,

      There’s a common misconception that the VWELX fund is closed based on a press release from February 28, 2013, which noted that the Vanguard Group said it would stop opening new accounts from financial advisers and institutional customers in its popular $68 billion Wellington Fund, which invests in a mix of stocks and bonds. Individuals are still welcome to open accounts directly or add to them, assuming that the financial advisor they use had a relationship with Vanguard prior to that date.

      Best regards for great investing, and thanks for being part of the Total Wealth family! Keith 🙂

  8. Michael Upper says:

    Keith

    Just a general comment on Unstoppable Trends.

    Thanks for the leads to Vuzix and Synaptics. Both have been excellent and interesting investments.

    Michael Upper

  9. neil e williamson says:

    ruger still a good buy…was rec several years ago and still is…SHTF or not we are buying..

  10. Karen says:

    Hi Keith, Any advice for someone living on social security but wanting to invest? I have over 20,000 in an ETrade account, almost half of which is Apple. I was smart to purchase Apple years ago and if I had had more money then I would have even more today!!! I had an account with TD Ameritrade after selling my family home in 2004. I moved the whole account to ETrade a couple of years ago and it has done well, and I felt I could watch all the accounts. There are some SPIDR, foreign accounts, etc. that make up the portfolio. Most of them are doing fine, but I want to infest in some of your suggestions. I have to “cash in” some of my investments on some occasions for personal use, but all-in-all I have left it alone. Should I just leave it, or how can I take some and invest in something that will do as well as Apple has done for me? I’m no pro at investing, but I have had good instincts so far. Thanks for your articles!

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