Terrorism Fear Spurs Security Stocks
By ANDREW LECKEY
June 20, 2004

Fear of terrorism translates into dollars.

That's the cold, hard fact behind the 25 percent average price gain this year of the 13 companies related to homeland security that are followed by the Morgan Keegan investment firm. In the 90 days after 9/11, that same group averaged a 200 percent gain before settling back down again.

"The No. 1 driver of these stocks is fear of additional terrorist attacks, such as the bombings in Madrid, and our officials saying there's a high threat between now and November of additional attacks in the U.S. and against our allies," said Brian Ruttenbur, a homeland security stock analyst with Nashville-based Morgan Keegan.

Security funding is always being directed toward the most recent fear.
About $12 billion has been spent on airport security since 9/11, most of it affecting how passengers access airports. A second round of funding on perimeter airport security is coming. Rail security following the Madrid disaster is where the next significant batch of security funding will be headed.

Also gaining attention are code systems for starting fuel truck engines, protective clothing for emergency situations and improved home security systems.

The dilemma is that, just as no experts could have accurately predicted airplanes crashing into buildings or rail bombings, it is impossible to determine whether a nuclear device in a cargo container or the bombing of an apartment building might be next on a chilling agenda.

"You could think up any scenario for what's next because, well, who knows?" Ruttenbur said. "This is a volatile stock group, but one that provides one heck of a hedge if future attacks do occur."
Ruttenbur believes Verint Systems Inc. (VRNT), maker of analytic software used in security for airports, public buildings, financial institutions, retail stores and corporate sites, has big potential, based on the possibility of future terrorist threats. Verint upgrades communication through interaction of video, voice, e-mail and Internet.

Drexler Technology (DRXR), maker of LaserCard optical memory cards and chip-ready Smart/Optical cards, is another Ruttenbur recommendation. Its cards are used in procedures for immigration, border crossing visas, cargo manifests, motor vehicle registration and identification cards.

Drexler, which produces the Italian national ID card, was selected by Saudi Arabia to provide its ID card.

Ruttenbur doesn't own stock in these companies, but his firm has done banking with them in the past year.

"Security stocks we like going forward are businesses that were going to be successful before 9/11 because they already had real businesses and customers," said Michael Hoffman, a security stock analyst with Friedman Billings Ramsay in Arlington, Va. "They are benefiting from homeland security spending, not totally dependent upon it."

Homeland security legislation has been passed that sends money to individual states, but not a lot has been spent yet, Hoffman said. He predicts spending will "drip, drip, drip" through 2004, with a "modest flow" in 2005 and a "gush" in 2006.

Hoffman chooses Allied Defense Group Inc. (ADG), an electronic security business in Europe that specializes in banks and government agencies, and CompuDyne Corp. (CDCY), which makes blast-protected windows and doors and provides 911 systems for small and midsize cities.

His other choices are The Brinks Co. (BCO) in home security and armored transport, and Integrated Alarm Services Group Inc. (IASG) in commercial and residential security.

Politics plays the dominant role in the traditional defense industry. For example, it experienced a boom during the presidential terms of the late Ronald Reagan.

"There is more room for the defense industry to grow if we don't have a change in the White House, so this is definitely a year that could have a big impact on defense," believes Paul Nisbet, defense and aerospace analyst with JSA Research Inc. in Newport, R.I.
"In the 1990s, public opinion was negative as far as defense spending was concerned, but has been very positive since Bush became president."

After years of cutting back the defense budget, levels of ammunition and equipment going into the Iraq war were low, and are now being replenished with long-term contracts, Nisbet noted. Because, for example, it takes eight or more years to build an aircraft carrier, current projects won't be significantly affected by the Iraq situation, he added.

General Dynamics Corp. (GD), Lockheed Martin Corp. (LMT) and Northrop Grumman Corp. (NOC) and L-3 Communications Holdings Inc. (LLL) are all giant defense contractors that Nisbet is recommending. Smaller companies he favors include defense electronics maker DRS Technologies (DRS) and rocket system manufacturer Orbital Sciences (ORB).

Andrew Leckey is a Tribune Media Services columnist.