One sector that has been quietly moving higher, immune to the recent selling from subprime credit and economic concerns, is the defense sector. The nation's defense isn't subject to too many outside forces other than what the government says as to what they are willing to appropriate to the country's defense efforts. The U.S. has always led the world in innovations in defense, and since the terrorist attacks of Sept. 11, 2001, there aren't many who can argue against strengthening the country's defenses.
This has been a boon to many defense contractors, and has led to tremendous breakthroughs in new technologies that deal with electronics use in military. This is the subsector we are focusing on: the military electronics manufacturers. These companies seem to be making the best inroads and have the products that save lives and allow for better and more detailed monitoring.
The space is made up of many larger companies like
and then a number of more specialized, smaller companies like
Level 3 Communications
In the upcoming year, the Pentagon is expected to spend $28 billion for communications, electronics and intelligence equipment, a hefty sum. This number is actually lower than the money earmarked in 2007. However, the electronics companies are somewhat more insulated from any slowdown or cutbacks, as their technologies are more directly utilized in all facets of the war on terror.
This is what makes Flir Systems attractive. This company makes thermal imaging and infrared-camera technology. The use of this technology by U.S. ground troops in Iraq obviously benefits the company, and the continued presence of troops on that front, as well as in Afghanistan, makes the continued use of this technology very likely.
The technical configuration of Flir Systems is positive and reflects strong demand for this issue, confirming the strong fundamental outlook. The stock broke out of a multiyear base back in February of this year and has been trending higher ever since.
There have been a few pullbacks or consolidations along the way, which are always beneficial to the stock. These periods of profit-taking allow the stock a period of pause that results in lower prices, once again attracting buyers to the issue as it pulls back.
The volume configuration has been positive as well, with strength occurring on increasing volume and pullbacks on lighter volume. This is a sign the stock is under accumulation. The recent strength is once again displaying these bullish characteristics, suggesting higher prices are likely. Look for further strength to the $60 level.
At the time of publication, John Hughes and Scott Maragioglio were long Flir Systems. Hughes and Maragioglio co-founded Epiphany Equity Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indices and sectors. Hughes advises numerous asset managers, hedge funds and institutions managing in excess of $30 billion. Maragioglio is a member of the market technicians association (MTA) as well as The American Association of Professional Technical Analysts (AAPTA) and holds a Chartered Market Technician (CMT) designation. Maragioglio has also served on the board of directors of the AAPTA.