Editor's note: Nat Worden sat down with Wall Street Confidential's Gregg Greenberg to discuss the making of this story. Click here for the Webcast.

If presidential candidates were stocks, then Sen. Barack Obama might be the quintessential momentum play.

The young senator from Illinois stands as the current rock star candidate for the White House in 2008. Unlike his rivals, who are longtime fixtures on the national political scene, his reputation is pure. So, like a trendy new stock that is soaring on wings of speculation, either Obama can flame out under a long-term dose of public scrutiny or he can deliver enormous returns to believers.

A look at his recent investment record reveals that, like his supporters, Obama has a taste for betting on long shots. But two such bets placed in 2005 raise questions about the senator's judgment when it comes to buying stock in companies that are in line for federal funding.

In the second installment of TheStreet.com's review of the investing and Wall Street affiliations of 2008 presidential candidates , we peruse Obama's investment portfolio. ( Click here to see the first installment on likely Republican candidate Rudy Giuliani.) The data are based on information reported on Stockpickr.com that is drawn from public filings combined with information provided by Obama's presidential campaign.

Obama's lean portfolio from 2005 -- the most recent data available to the public -- reflects his status as a newcomer and an outsider to the establishment of beltway presidential politics. The more conventional candidates, such as the early Democratic frontrunner, Sen. Hillary Clinton , and her Republican counterpart, Sen. John McCain , boast vast networks of investments that are typical of a public figure heading up a well-oiled political machine. Obama's investments, meanwhile, are mostly tied up in a short list of conservative mutual funds.

A closer look, however, shows that in 2005 he dabbled in two obscure stocks -- Skyterra Communications ( SKYT) and AVI Biopharma ( AVII) -- that happened to get large amounts of revenue from a source with which Obama has some familiarity: the federal government.

Aside from sharing the same deep-pocketed benefactor, the two have one more thing in common. They both provide services in an area that has become a hot-button issue on Capitol Hill and with the electorate: homeland security.

"Homeland Security is a field that has really sprung up in the years following the terrorist attacks of Sept. 11, 2001 , and you have a lot of small companies that are vying for a lot of big government contracts," says Massie Ritsch, the communications director for Center for Responsive Politics, a nonpartisan organization that tracks money and influence in U.S. politics. "When the people controlling the purse strings for government contracts are invested in the companies that stand to get those contracts, it definitely raises ethical questions."

To be sure, it's not uncommon to find elected officials in Congress who hold investments in companies that receive federal funding or provide testimony to their legislative committees. In fact, it's hard to find any politicians with money in the stock market who aren't at least indirectly invested in a major government contractor, such as General Electric ( GE) or Boeing ( BA).

But Obama's 2005 trades raise questions in that Skyterra Communications and AVI Biopharma are far more speculative and uncommon stocks than those blue-chip staples. They both have much smaller market caps -- less than $700 million -- and lower trading volumes. While there's no evidence that Obama had a role in the contracts for the companies, given his other investments, it seems an unlikely coincidence that the senator would be familiar with either company except through his work as a legislator.

Bill Burton, a spokesman for Obama's presidential campaign, says that in the process of setting up a blind trust for the senator, the stocks were recommended and purchased by a broker at UBS.

"The broker's intention was to hold on to them long-term -- but to avoid any potential conflict, he sold the stock to reinvest the money in mutual funds," says Burton.

Betting on Satellites

Public filings show that Obama bought somewhere between $15,000 and $50,000 worth of Skyterra shares in February 2005. Burton says there was a mistake made on the senator's disclosure form and that he actually invested between $50,000 and $100,000 in shares of Skyterra. The discrepancy is in the process of being corrected.

Skyterra, based in Reston, Va., is controlled by the New York private equity firm Apollo Management. The company, which didn't return repeated calls seeking comment for this story, holds stakes in several technology companies, including a satellite communications outfit called Mobile Satellite Ventures.

In 2005, Skyterra was viewed by Wall Street as a way to speculate in the public markets on the fortunes of MSV, which provides testimony and white papers to Congress about the value of satellite communications to the U.S. military and the Department of Homeland Security.

Obama's purchase came right around the time that MSV received approval from the Federal Communications Commission to construct a nationwide wireless network with both satellite and terrestrial components. That ruling raised the prospect that MSV would form an alliance with a major terrestrial phone carrier, such as Verizon ( VZ) or AT&T ( T).

Like other investors, Obama may have purchased the stock in February based on the company's new prospects, but MSV also got a huge influx of public money that year.

"Satellite has tremendous value to the public interest, especially in times of emergency, because you're not dependent on the terrestrial infrastructure for communications," says Dale Hatfield, an independent consultant and telecommunications professor at University of Colorado who was recently commissioned by MSV to write a white paper for policymakers. "If everything else fails, you can still make a satellite call."

According to OMB Watch, which tracks the spending habits of the federal government, MSV received $167,064 in federal funds in 2004, and 28% of that money came from so-called no-bid contracts.

In 2005, the year Obama traded Skyterra stock, the amount of federal funds MSV received swelled to more than $250 million, and 76.4% of that came from no-bid contracts.

Obama sold his Skyterra holdings on Nov. 1, 2005, when the stock closed at $31. Based on the stock's closing price of $39.10 on Feb. 10, the day he bought the shares, he recorded a loss of about 21% on the investment.

Burton says Obama lost $15,000 on his Skyterra trade. Still, the sale was timely because Skyterra shares then dropped off precipitously in early 2006 after a partnership with a major phone carrier never materialized.

Bioterror Stock Takes Off

Some of the senator's losses in Skyterra were mitigated by his investment in AVI Biopharma. That company makes drugs that can be used to treat a number of infectious diseases, some of which are listed on the Department of Homeland Security list of bioterrorism viruses, including West Nile, bird flu, Dengue, SARS and Ebola.

AVI spokeswoman Jenny Moede says the company, based in Portland, Ore., has collaborated with various agencies of the federal government to test its technology on animals. It has not yet been used on humans, and the government has yet to stockpile any of its drugs.

OMB Watch reports that AVI received $164,078 in 2004 for research grants. In the first three quarters of 2005, the year that Obama made his trades in the stock, that amount increased nearly three times to $471,696.

According to public filings, Obama purchased between $1,000 and $15,000 worth of shares in AVI on Feb. 22, 2005, when the stock was trading at just above $2. He then sold his stake on Oct. 28 of that year, when the stock closed at $3.47 that day, suggesting Obama had roughly a 73% gain.

AVI shares had popped in early October 2005 on news that the U.S. Senate Committee on Appropriations had approved $22 million for AVI's research and development programs as part of a 2006 defense spending bill.

That money was contingent on approval by the full Senate, and AVI ultimately received $11 million from that bill. Last December, the company announced that it was awarded a two-year $28 million research contract to explore treatments for biological warfare and bioterrorism agents. That was a big deal for a company that recorded just $4.7 million in annual revenue in 2005.

AVI's Moede says executives told her that they've had no interactions with Obama and that they were not aware of his buying and selling in AVI shares.

Burton says the Senator recorded a profit of roughly $2,000 on the trade, leaving him in the red for his stock trading in 2005 by $13,000.

Murky Rules

While Obama ultimately lost money on his stock trades, these two moves do raise the question of whether there are ethical issues that should have restrained the senator from investing in shares of such unusual companies at a time when they were benefiting from federal funding.

There are no rules for senators prescribed by the Senate Ethics Committee that directly prohibit them from owning shares in companies that deal with the federal government. They are not, however, allowed to trade on information that isn't available to the public, and they are supposed to avoid conflicts of interest between their legislative duties and their personal financial interests.

"The senator was not on the Homeland Security Committee at the time he made these investments and has never been an appropriator," says Burton. "The senator has never taken any legislative or official action in order to specifically benefit either one of those companies."

Alex Knott, political editor for the Center for Public Integrity, says that, despite the rules in place, conflicts of interest for elected officials in Congress arise all the time.

"Wall Street and Pennsylvania Avenue connect in so many ways, and lawmakers constantly have the ability to drop earmarks or amendments into legislation that could make a stock on the Nasdaq rise or fall dramatically," says Knott.

To address whatever shortcomings may exist in the rules, lawmakers are required to disclose their personal investment holdings so they can be held up to public scrutiny.

"The best thing for a lawmaker to do is avoid any appearance of a conflict of interest, because they get you in positions that you don't want to be in politically," says Ritsch.