Follow the Biggest Spender: the Government

So investors might want to take a closer look at Humana (HUM - commentary - Cramer's Take), which has a big focus on government insurance programs. An even more pure play on the publicly sponsored health care programs would be Amerigroup (AGP - commentary - Cramer's Take). The company has a market cap of $1.5 billion and a net cash position of $500 million.

The biggest factor affecting these companies is benefits expenses. The recent trend has been that costs are rising faster than revenue. And with many state budgets facing deficits, there is legitimate concern that rising costs will continue to hamper profits. Still, private companies have demonstrated that they can run government health programs much more efficiently than the government. And with health care a top budget item each year, it's less likely to suffer from crippling cuts to funding.

The long-term case for defense spending is rather obvious; it's a matter of national security. And with economies all over the world contracting, national security becomes even more valuable. No country wants to appear vulnerable during such times.

KBR (KBR - commentary - Cramer's Take) has been a favorite of mine for some time. This Halliburton (HAL - commentary - Cramer's Take) spin-off does contract work for governments all over the world. KBR has a big focus on energy, but its work stretches far and wide. It currently trades for 9 times forward earnings, carries no debt and has about $7 a share in cash in the bank against a $16 share price.

Granted, some of this cash is in the form of contract deposits, but the company continues to book new work, and loss of contracts is minimal, as many of them require years to complete. I wrote extensively about KBR two months ago, and the stock is up about 30% since then, so it's not as cheap as it once was, but I predict fair value in the mid-$20s.

Another little gem is Spirit Aerosystems (SPR - commentary - Cramer's Take), a designer and manufacturer of structural components for the commercial and military aircraft industry. This is the company that makes the supplies used by the big guys such as Boeing (BA - commentary - Cramer's Take). It currently trades for 5 times forward earnings and has a very manageable debt level.

Consumption has contracted significantly. The biggest consumer is the U.S. government, and it spends a lot on health care and defense, two essential components of economic security. No one knows how deep this recession will be, but many stock prices are sensible again and offer great long-term gain. The defense and health care spaces, backstopped by the government pocketbook, merit a very close look.

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At the time of publication, Gad had a long position in KBR, although positions may change at any time.

Sham Gad is the managing partner of the Gad Partners Fund and the Gad Partners Offshore fund, value-centric investment partnerships based in Athens, Georgia. Gad has written extensively for the Motley Fool and was a securities analyst for UAS Asset Management, a small, value-focused fund in New York City in 2007. Previously, Gad managed assets for the Gad Investment Group. For additional information, please visit www.gadcapital.com.

Gad also runs a value-investing blog inspired by the teachings of Benjamin Graham and Warren Buffett. Additionally, he is currently working on a value investing book to be published by John Wiley & Sons in the fall of 2009. Gad earned his BBA and MBA at the University of Georgia. Send Sham Gad an email. You can reach Gad at [e-mail].