Investing in terrorism-resistant stock

Published 18 May 2010

Terrorism attacks not only the safety of people, but their wealth; an investment consultant says that while it is impossible to make a conventional investment portfolio terrorism-proof, it is possible to select securities that are a bit resistant to it

Terrorism strikes not only at the safety of U.S. citizens, but also at their wealth. After the 9/11 attacks, for example, the Standard & Poor’s 500 index fell 12 percent in a week. John Dorfman, chairman of Thunderstorm Capital in Boston, writes in the Star Ledger that concern about terrorism may have contributed to the index’s negative 22 percent total return in 2002, although there were other causes as well, such as slow economic growth. “You can’t make a conventional investment portfolio terrorism-proof,” he writes. “Yet it is possible to select securities that are a bit resistant to it.”

Buying shares of defense companies, particularly those related to intelligence-gathering or surveillance, can offer some protection (he also says that energy and gold stocks provide a buffer). Here are some of the companies Dorfman keeps an eye on:

  • Applied Signal Technology (APSG), located in Sunnyvale, California, makes surveillance and reconnaissance equipment used by U.S. intelligence agencies and the military. The equipment helps monitor activities in unfriendly countries, as well as terrorist communications. “Intelligence gathering is our nation’s best defense against terrorism, in my opinion, and a cost-effective way to spend defense dollars,” Dorfman writes. He also appreciates the company’s balance sheet. Debt is less than 3 percent of stockholders’ equity. In the fiscal year ending 31 October 2009, Applied Signal posted record earnings of $14.5 million on sales of about $203 million. The stock is not cheap, but it is not terribly expensive either, at 17 times earnings.
  • New York-based L-3 Communications Holdings (LLL), which describes itself as the U.S. sixth-largest defense contractor, is cheaper than Applied Signal but its balance sheet is less appealing. It is involved in C3ISR work: command, control, communications, intelligence, surveillance, and reconnaissance. The company’s stock sells for about 11 times earnings. Debt, at about 61 percent of equity, is in the average range. After its initial public offering in 1998, L-3 posted rising earnings for ten consecutive years. Earnings fell last year, but only slightly. Analysts expect a 9 percent ncrease in profits in 2010.
  • One of L-3’s founders, Robert LaPenta, is now chief executive of L-1 Identity Solutions (ID), which makes computer software that can verify the authenticity of documents such as passports. The Stamford, Connecticut-based company also makes biometric products used for fingerprint identification, facial recognition and iris scanning. Dorfman notes that L-1 stock is speculative. The company posted losses in eight of the past nine years. It seems, however, to be gaining momentum. Revenue grew to $651 million in 2009, from $164 million three years earlier.

Dorfman’s disclosure note: he currently has no long or short positions in the stocks discussed above, personally or for clients.