Homeland Defense Stocks Spade Defense Index Interview; Performance and Best way to play the sector at this time

Homeland Defense Stocks Spade Defense Index Interview; Performance and Best way to play the sector at this time


POINT ROBERTS, Wash., DELTA, B.C. – February 24, 2009 – www.HomelandDefenseStocks.com (HDS), a leading global investor and industry portal for the defense and security sector, within Investorideas.com, provides interested defense stocks investors with an update and interview with
Scott Sacknoff, manager of the SPADE® Defense Index.

Spade Defense Interview – February 18, 2009

More info and previous interviews:http://www.homelanddefensestocks.com/Content_Partners/SI/Default.asp

HDS: This is Dawn Van Zant with HomelandDefenseStocks.com. We are joined today once again by Scott Sacknoff, manager of the SPADE® Defense Index, which provides an investment benchmark for the defense and homeland security sector. There is a lot to cover so we’ve come up with ten questions for you. So let’s get started.

1. Perhaps the most important driver of defense and homeland security sector is the government budget. What is the status of the FY-2010 budget?

SMS: Normally, budget specifics are released on the Monday following the Super Bowl. However, when a new administration enters the White House, this is usually shifted to April in order to give them more time to make changes. That said it is likely that at least a top line number for the defense sector will be known before then.

2. HDS: And what do you expect dollar-wise?

SMS: The prevailing thought is that the topline figure will be what appeared in the FY-2009 budget, an increase from $515 billion to $527 billion. This does not include the funds associated with the war effort in Iraq and Afghanistan nor does it include the roughly $11.4 billion that appeared in the stimulus package. But your readers should keep in mind that the more important figure is that associated with what is called ‘investment programs – procurement and R&D. So of the $11.4 billion mentioned, most went toward military and security facility construction, grants to local law enforcement, and things like this. Though some may trickle down, just $1 billion went for airport baggage screening equipment for example.

3. HDS: Talk to us about major program changes.
SMS: Ultimately the biggest changes will occur in the FY-2011 budget, which would be the first under the 2010 QDR – the Quadrennial Defense Review, which is currently in preparation. Analysts expect that the FY-2010 budget will be mostly along existing lines but several major acquisition programs are likely to see cuts or reductions in size or scope. In particular, those programs in development that have cost or scheduling problems are likely to see changes to their budgets.

4. HDS: What other changes will the new administration implement?
SMS: The biggest changes are going to be procurement-related. You’re going to see more fixed price and fixed plus incentive and much less cost-plus contracts. Requirements will be frozen earlier, backup plans will be defined, and complex R&D-driven systems will graduate at a much later date. The changing philosophy at DoD is to focus more on production of existing systems and to approve development programs only when the technology is ready. It is what they are calling a 75% solution, a focus on meeting existing needs instead of the 100% perfect solution that tends to increase costs and produce significant schedule delays.

5. HDS: What upsides are there that could benefit companies?
A quicker exit to Iraq will begin to free up the $12 billion spent monthly on the effort. Higher volume productions even of lower costs systems can increase manufacturing productivity. Fixed price contracts can lead to better margins

6. HDS: How are defense companies positioning themselves for a flattening budget environment?
Many of the larger companies have been getting their finances and balance sheets in shape and are well positioned to handle what is to come. For the most part there are two key things they are working on. One, resources devoted to R&D which will pay off on future activities, and two, diversification of activities; whether this is going after non-military contracts or positioning themselves for future government efforts in clean energy, cybersecurity, and health care IT.

7. HDS: Is the sector still undervalued?
Several issues of our SPADE Investor newsletter last year highlighted the fact that from a price to earnings, price to sales, and a number of other metrics were all the lowest we’ve seen them in a decade. Pierre Chao of Renaissance Strategic Advisors, mentioned at a Cowen & Company investor event that defense companies were trading at levels normally seen when defense spending has bottomed.

8. HDS: What is the best way to play the sector at this time?
As you know we don’t make individual recommendations however companies involved with homeland security and cybersecurity are expected to be in favor. And for those that believe in the sector as a whole but worry about unknowns associated with President Obama’s plans, the Powershares Aerospace & Defense ETF (NYSEArca: PPA) that tracks out Index is an option and will enable them to diversify their holdings in the sector.

9. HDS: How did the sector perform in 2008?
2008 was a horrible year for most of the market and while our index tracked the broader markets for most of the year, a surge in December allowed us to end the year on a price basis, ahead of the S&P 500 for the ninth consecutive year. That said, the index and the markets were down significantly.

10. HDS: How has it performed year-to-date?
After ending the year strong, the defense and security sector continued to outperform the broader markets and although down 3% that was nearly 5.5% better than the market as a whole.

HDS: Once again, thank you for your time. If and of our listeners are interested in getting more information about the SPADE Defense Index, or signing up for the complimentary “SPADE Investor” newsletter, please visit www.spadeindex.com.

And as always, the information presented in this interview is for information purposes only and should not represent a solicitation or an offer to purchase an investment product. Investors interested in the Powershares ETF that tracks the SPADE Defense Index and trades under the ticker ‘PPA’ should visit the powershares.com website for a prospectus.

About the SPADE Defense Index

The SPADE Defense Index® (AMEX: DXS) is a modified capitalization-weighted index comprised of publicly traded companies that benchmarks the performance of companies involved with the defense, homeland security, and space marketplace.
The SPADE Defense Index has been developed to be used by investors, financial professionals, trade analysts, and media as a benchmark for publicly traded stocks involved in these business sectors. The Index can be used as the basis for a range of financial instruments including options and other derivatives, exchange traded funds, and conventional mutual funds.
For more information: http://www.spadeindex.com

Disclaimers: The information presented in this interview is for informational purposes and should not represent a solicitation or an offer to purchase an investment product. SPADE and the SPADE Defense Index are registered trademarks of the ISBC.

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For more information contact:
Dawn Van Zant 800.665.0411
Email: dvanzant@HomelandDefenseStocks.com
Source: HomelandDefenseStocks.com, Investor Ideas