Investing in homeland security

strengthen their business. As we reported last week, Billerica, Massachusetts-based Viisage Technology, which has annual revenue of $70 million, bought Martinez, California-based SecuriMetrics, for $28 million — but this was only the last of Viisage’s recent acquisitions: During the past three months the company acquired Nashville-based Integrated Biometric Technology; the Birmingham, Alabama-based AutoTest Division of Openshaw Media Group; and merged with Minnetonka, Minnesota-based Identix. In the process Viisage has put together a full-spectrum biometric company.

Here is what some analysts say:

Brian Ruttenbur, homeland security technology analyst at Morgan Keegan, says that predicting the market is tricky because priorities are always shifting focus with the latest threat. Still, “There are some big buckets for spending,” and it is encouraging that “all the buckets are growing.” Ruttenbur has an outperform rating on several biometric stocks, including Identix (which merged with Viisage), Philadelphia-based ID Systems, and Mountain View, California-based LaserCard. He also likes San Jose, California-based RAE Systems, which monitors chemicals in the atmosphere. Ruttenbur says he is easing back on stocks related to airport security — the primary focus after the Sept. 11, 2001, attacks — now that airport screening equipment has been fully funded.

William Benton, technology analyst at William Blair, sees growing opportunities in homeland security, but said that “there’s always a risk with government funding.” He has an “outperform” rating on Melville, New York-based Verint Systems, a player in the wiretapping business [see HSDW 2/10/06 On other wiretapping compliance players]. There may be political discussions right now about possible invasions of privacy, but “wiretapping will always be around,” Benton says. He also rates Ra’anana, Israel-based Nice Systems, a video-recording company, at “outperform” because he forecasts increasing use of surveillance cameras. At some point, security guards will be replaced by video cameras, he said.

Scott Sacknoff is manager of the SPADE defense index, an index of fifty-nine defense, homeland security, and space stocks, which tracks the whole sector. The SPADE index has done well, outperforming the S&P 500 index in the five years since SPADE’s inception, but the majority of stocks in the index are defense companies, with only about one-third doing some business in homeland security. It is not always easy to find companies with a solid track record in the business of homeland security, Sacknoff said. Out of more than 200 public companies working in the sector, he said he could only find four companies with their primary business in homeland security, which could also meet the criteria of the index: for twenty-five days before inclusion, the companies need to maintain a market capitalization of $100 million, have a stock price of at least $5, and daily trading volume of 50,000 shares or more. They are Billerica, Massachusetts-based American Science & Engineering, South Pasadena, California-based, Cogent Systems, Viisage, and Hawthorne, California-based OSI Systems, a maker of security inspection and monitoring equipment. Sacknoff does not make recommendations on individual stocks.

DHS is three years old. Down the road, Scott Sacknoff said, “there will be a lot more money going out to companies than there has been in the past.”

-read more in this Financial Post report