This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Defense Plans Create Small-Cap Values

The estimated costs of the war in Iraq are heading north of $145 billion, as the price tag for more ammunition, gasoline, helicopters, armored vehicles and services increases every day. So while investors may well debate the capacity of U.S. consumers to continue spending like drunken sailors over the next few years, it's pretty hard to argue that the Pentagon will suddenly stop writing big checks.

Whether you consider that spending to be bullish or bearish on the economy, value investors seeking conservative capital appreciation should grasp the obvious and consider low-priced stocks with unappreciated growth potential in the military-industrial complex. On Thursday, I covered some of the undervalued large-cap and mid-cap growth stories that are getting contracts. Today I'll look at a few relatively inexpensive defense-industry small-caps and micro-caps.

Aeroflexx (ARXX), recently at $11.64, makes microelectronic, motion-control and test systems for the defense, aerospace and broadband communications markets. Many of its products are used in military communications and space systems. On Nov. 8, the company reported a big boost in fiscal 2005 first-quarter profit and sales, but it issued a forecast that fell beneath investors' expectations.

Shares were slammed 12% the next morning but rose to flat by the end of the day as investors warmed to management's declarations that the shortfall was a one-time problem related to a single customer and did not signal a broad slowdown. Shares are flat for the year but down 20% from their March peak.

Uncertainty has created what looks like a pretty good value, as Aeroflexx's 2005 price/earnings multiple is now 23 on expectations of 35% growth, and the 2006 P/E is 16 on expectations of 38% growth. The price/sales ratio, now 1.9, has historically been around 2.5 to 3 in better times, so there is ample room for multiple expansion to join earnings growth as a catalyst for a higher price. So figure a price target of $17.50 in the next 18 months, which would be a 50% move if it happens.

Orbital Sciences (ORB), recently at $12.52, manufactures and operates small space and rocket systems for the Pentagon and other government and commercial entities. The company's rockets can place satellites weighing up to two and a half tons into low-Earth orbit for communications and military clients. Just this week, it launched a target rocket for a Patriot missile defense system and also provided its Hyper-X launch vehicle to push NASA's X-43 scramjet to a record speed of Mach 10 in a California test.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,013.00 -26.49 -0.16%
S&P 500 1,990.26 -2.11 -0.11%
NASDAQ 4,538.3890 +6.2850 0.14%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs