Editors' Pick: Originally published Jan. 27.
The raw anger expressed by voters and candidates in this presidential campaign season is largely a consequence of the gridlock in Washington. As lawmakers decry the federal deficit and holler for austerity, they feud over major legislation that in previous sessions would have passed with ease.
Unnerved by this political circus, investors are punishing the stocks of companies that rely on Uncle Sam for revenue.
Bearing a disproportionate share of this pessimism are defense sector stocks. However, investors who fret that budgetary wrangling will significantly hurt military spending are missing the big picture. Other budgets may get slashed, but in the end, military honchos almost always get their way.
Below, we pinpoint an under-the-radar, small-cap defense stock that could more than double in 2016. It's among a group of small-cap rockets that should take off in a year that for the broader markets will be tumultuous.
Ignore the sanctimonious rhetoric about deficits. Fact is, the Pentagon won't be holding a yard sale anytime soon to fund operations. Exhibit A: While lawmakers bitterly wrangle over Planned Parenthood's minuscule funding, the Pentagon's fiscal year 2016 budget is slated to reach $534.3 billion, an increase of $38.2 billion over 2015's $496.1 billion.
Whether this high level of U.S. defense spending is a justified and efficient use of taxpayers' dollars is beyond the purview of this article. The point is that this gigantic pool of money (and generator of jobs) is woven into the fabric of the national economy and unlikely to ever shrink in any major way, regardless of ephemeral political passions in Washington.
When it comes to defense, investors tend to focus on the top mega-cap U.S.-based defense stocks: Lockheed Martin, Northrop Grumman, General Dynamics, Raytheon, and Boeing. However, concerns over the sustainability of defense spending are weighing on several of this well-known players. Year-to-date, the SPDR S&P Aerospace & Defense ETF (XAR) - Get Report is down.
We've unearthed a small-cap defense contractor with plenty of room for growth, making its undervalued shares a rare buying opportunity for investors who aren't distracted by the Washington circus. Tech bargains still exist in this risky and downward moving market, if you know where to look.
With a market cap of $834.89 million, Astronics Corp. (ATRO) - Get Report designs and manufactures products for the aerospace and defense industries around the world. It operates through two divisions, Aerospace and Test Systems.
The Aerospace division offers lighting and safety systems, electrical power generation, aircraft structures, avionics, and other products. The Test Systems division provides automatic test systems, such as communications and weapons test systems, and training and simulation devices to aircraft OEMs.
As demand increases for the sophisticated electronics that guide and power military aircraft, Astronics should prosper in a year that promises to be dangerous for investors.
This small-cap has revenue and earnings momentum on its side. The company's third-quarter revenue set a new record at $200.1 million, the first time it's ever been above $200 million, for a year-over-year increase of 11.5%. Earnings came in at $24.7 million, an increase of more than 44% from the third quarter last year when it reported earnings of $17.1 million. Diluted earnings per share in the third quarter were 94 cents, up from 65 cents a year ago.
With the stock now trading at $32.81, the median analysts' one-year price target is $56, for a gain of 70%, and on the high-end the projection is $64, for a gain of 95%. Some analysts are calling for the stock to reach $72, for a gain of 119%.
And yet, this little-known stock boasts a trailing 12-month price-to-earnings (P/E) ratio of only 10.46, compared to 17.24 for its industry of aerospace/defense.
As we've just explained, Astronics is a highly promising small-cap play. If you're looking for other small-cap rockets, take note: A recently declassified government program is flying completely under Wall Street's radar, and that's good news for investors like you. DARPA, the Pentagon's famous research arm that helped developed the Internet and GPS, is at it again. They've developed an innovation so ground-breaking it's been called "the greatest game changer in Army history since the machine gun." Click here now to learn more about this program, and how you can invest in its future today.
John Persinos is editorial manager and investment analyst at Investing Daily. At the time of publication, the author held no positions in the stocks mentioned.