In a shaky stock market environment, there is no better place to turn than the defense contractors. Leading the S&P index by about 20% in 2008 (the 8th straight year of better relative performance), the so-called “big five” have their work cut out for them in 2008 and beyond. It is pretty much a foregone conclusion that defense spending will increase this year.

With high global threat levels, the United States defense budget has historically increased regardless of the presidential party in power. Don’t listen to the fools that tell you a democrat president will cut the defense budget, that is simply not true. The funding put into homeland security as well as our defense budget is set to increase (President Bush recently introduced a $3.1 trillion dollar budget) regardless of the War on Terror’s outcome, and the big five defense firms are set to benefit.

There are pros and cons to each of the main defense contractors, but I want to defend the notion that they are all winners in this environment. Which companies? I am talking about United Technologies, Lockheed Martin, General Dynamics, Raytheon and Northrop-Grumman.

United Technologies (NYSE: UTX)
UTX is the largest of the Defense companies, and offers a favorable mix of risk-reward at this point. A widely expected healthy first quarter could be a huge catalyst for the rest of the year. United Technologies does everything from industrial turbine engines to elevators, and it is this diversity that really makes them the General Electric of defense contractors. The weak dollar actually bolsters a potential earnings beat (+15%) for 2008, despite a rocky economy, because European sales account for about 25% of United Technologies’ total.

Many investors have voiced concern over the recent announcement to acquire Diebold. I believe that speculation since the bid isn’t likely to be hostile and the relative size of the expense is small on UTX’s books. Other potential risks include a weakening in commercial construction markets and a slowing residential construction recovery, but I think that a strong aerospace backlog along with a geographic diversity balances their resume enough to ensure a strong year under even the worst conditions.

Lockheed Martin (NYSE: LMT)
Lockheed Martin is the kind of company that never gives you the value you want, but always performs with off the charts fundamentals and margins. I think a lot of analysts with HOLD ratings on the firm are underestimating LMT’s ability to drive profit out of even the bleakest of market conditions. This company has the most risk behind a 2009 administration changeover, but the threat posed is hyped beyond what will actually happen in my honest opinion.

Truth be told, I’d rather have you in a different defense contractor in the short term, but LMT’s performance is truly remarkable and I still have a BUY on these perennial EPS outperformers. They were up 32.8% during the last 2001 recession, and are poised to outperform the market again in 2008. What’s more, their 10-year annualized return is up at 7.3%. What I am trying to say is, Lockheed Martin is historically one of the top performers in a recession, and this go-round shouldn’t be any different.

General Dynamics (NYSE: GD)
General Dynamics is poised to be the largest holding in the Nittany Lion Fund, LLC., and I am generally stoked about their prospects for the year. GD has a leading market position in the areas essential to the U.S. military and has a strong track record of generating capital under every market condition imaginable.

The new Gulfstream G650 aircraft, from the leading unit of GD Aerospace, has really improved on fuel efficiency and speed (among other things) and I feel like the long-awaited release could really benefit sales. This is pretty much the world to GD, and offers a huge amount of visibility with low risk. Other than this, I continue to recommend General Dynamics because of their “no surprises” business model that continues to perform well, offering beatable 2008 EPS guidance and great long term prospects, that guarantees a safe investment.

Raytheon (NYSE: RTN)
RTN is really a conviction buy in the fact that they have an increasing foreign exposure, above average cash flow and a recession-proof portfolio. A lot of investors have Raytheon as the #1 defense company stock for 2008, and I really can’t argue with them. I do not like the fact that this company is overly tied to the Bush Administration, and would be effected slightly by a reduced US presence in Iraq or a more pro-China President (because of arms supplies to Taiwan). However, you need to consider that the defense budget is relatively stable.

Raytheon is set to benefit from some big contracts in homeland and border security, such as a $5+ billion Saudi middle east border contract and the ability to capitalize on cyber security after acquiring Oakley. Strong foreign orders and redeployment of cash should drive Raytheon into a profitable 2008/2009, and I stand by the hype.

Northrop-Grumman (NYSE: NOC)
All the buzz over Northrop-Grumman has been the contract win over Boeing to supply a new tanker worth a potential $35 billion. Despite Boeing’s dispute, NOC will more than likely come out with the win on this one. Regardless, I feel that the bigger development is Northrop’s “Guardian System,” a missile-jamming “pod” that can be attached to aircraft to prevent them from getting shot down in hostile flight areas. Before this system was released on March 26th, it was widely expected to favor Raytheon and BAE Systems… I think this can be a huge driver for NOC that has really gone unnoticed in the market.

Northrop is a steady performer at an attractive price. With a PEG at 0.88 and a Beta at just 0.38, they seem to be ripe for investment. Not only are the valued well, but they have that low debt that we love (debt/equity is just 0.23). The numbers are good, they are getting contracts nobody thought they would get, and they carry low risk in a poor market environment. NOC is good.

The power behind defense in a down market is the ability to lock in contracts, backed by a rising national defense budget, for the long term. The big five all have their advantages, and I would expect most of them to capitalize regardless of what twists and turns are in store for the rest of the market. Sometimes, the best offense is a good defense!

-Jimvesting

There’s GOLD in them thar hills!

You’ve heard the news, gold is the hottest thing since sliced bread… especially in this devastating stock market environment. Gold has historically been one of the best flights to safety for investors in troubled times, and 2008 is no exception. With bullish analysts predicting prices from $1,600 (Jim Cramer) to $3,500 (Jim Rogers), current trading values at $919.60 are far too low and present one heck of an opportunity. It’s no surprise that Yamana Gold’s CEO Peter Marrone said there was a “good chance” gold goes over $1,500 in 2008.

Earlier in the week, gold was trading at over $1,003 an ounce. After the biggest dollar decline in 28 years on Thursday and a terrible week overall, gold lost just about $100 of its value. I call this selling on strength and taking profits off the table. I call this the best entry point of the year!

The Best Gold Stock of The Year – Yamana Gold (NYSE: AUY)
If you want to capitalize on appreciation in the value of gold, you want to buy Yamana Gold! I’ve already owned and sold this stock in 2008, taking a quick 19.4% profit (bought at $15.28 January 17th, sold last week at $18.24), and with the latest drop in value… I’m gearing up to buy more. Risky? Yeah. Rewarding? You bet. I think gold will trade up to $1400 in 2008, making me the most conservative of Jim’s… but that is still a pretty impressive amount of upside.

Why Yamana? Ever since Yamana, Meridian and Northern Orion Resources became one in September of 2007, this mineral (70% gold) monster is in the best stock of all to make money on a rise in the commodity. Among the Tier II gold producers, Yamana is the most liquid and one of the “growthier” companies in the mix. They have historically traded at a premium, and I feel that they deserve this. There are a number of earlier-staged projects coming from Yamana that haven’t been factored into the stock’s outlook yet.. and I think these could be a huge catalyst for the year. Cash flow multiple’s were increased last week from 20x to 25x because of copper operations. Yamana is in the smartest places of the commodities party, and with their smaller relative size and growth capacity (management projects 120% production increase to 2012)… I expect good things.

Let’s talk briefly about valuations. Yamana’s target price was recently raised by RBC Capital Markets to $21, and they were trading above $20 just a few weeks ago! I got greedy and held them, I ended up attaching a trailing stop to my position in order to lock in 20% gains.. and its a good thing I did. This stock was trading too high for its own good, but now that it was pulled back under… I don’t see any reason you can’t buy into it at $15 and sell at $20 once again. Rinse and repeat.

Feeling Conservative? Safer Gold Stocks Offer Security
As much as I am married to Yamana, and don’t see much risk in buying at $15, I realize that many of you might be scared off by its Tier-II status and want a more established player. That’s fine, and I have two winning stocks for you in Barrick Gold (NYSE: ABX) and Goldcorp (NYSE: GG).

Starting with Barrick, these guys are a bit more secure than Yamana in the fact that they are 5 times bigger, and after dropping 7% on Friday they present an interesting buy point. There are, however, some problems at home. In a recent article from the Wall Street Journal, some tax-sharing problems were exposed in Barrick between Argentina and Chile. Most of Barrick’s mining is in Chile, but most of the processing is in Argentina… there are a few uncertain government taxation issues at hand that could hurt you in handling costs. But as a whole, Barrick is one of the best stocks to get growth on gold with a nice valuation.

Let’s move on to Goldcorp. The fourth quarter was great news for GG, and added revenues from their plants in Alumbrera and Red Lake were definitely helpful. This is one of the few established companies that actually increased guidance into 2008. They were able to produce 623,000 oz at total cash costs of $208/oz, versus an anticipated 617,000 oz at total cash costs of $175/oz for the quarter. Investors considering an investment in Goldcorp should consider the risks associated with development of the large scale Penasquito project, and the risk associated with expected improved performance of the recent startup of the Marlin mine. Overall, I give the green light on this mineral powerhouse.

“There is a good chance we will see it before the end of this year.” – Yamana CEO Peter Marrone on gold’s $1500+ future

There are a lot of mineral gold/silver companies out there, but the others are just too risky for my blood. Newmont Mining (NYSE: NEM) issued very poor guidance and rising production costs, Agnico-Eagle (NYSE: AEM) is essentially at its target price with no upside, Harmony Gold Mining (NYSE: HMY) is just too speculative for my blood and Gold Fields (NYSE: GFI) is much too volatile. I would stick with Yamana at the current price. The gold producers as whole are a BUY for me with the recent fire-sale. Don’t be scared off when people move to secure gains, the time is approaching when you should put more money in.

-Jimvesting

The stock market investing environment is certainly scary to a lot of investors in the short term. With fears of a recession on the horizon, along with problems like the falling value of the U.S. dollar, rising commodity prices, distressed credit ratings and problems with inflation, the thought of pushing new money into the stock market is definitely not a popular idea.

After testing the January lows somewhat successfully, I feel as though the market’s conditions may finally be seeing improvement. In my honest opinion, we are oversold. While the market may continue a downtrend, an oversold market is no place for shorting… and reaching into the bargain bin in the first half 2008 may be the best move you ever make.

Looking into “safe” areas of the market, our selections are few and far between. Straying away from the popular markets like tobacco and discount foods, I want to highlight some areas of the stock market where high growth remains a potential… and risk remains somewhat in check. Which sub-industries am I talking about? Agriculture and Aerospace & Defense of course!

Agriculture
Out of all of the sectors in the stock market, agriculture is an investing hotbed that hasn’t really slowed down or produced negative numbers for 2008. As we watched all of the pillars fall (banks, retailers, restaurants, etc.), agriculture’s turn never came! The ag. commodities such as wheat, corn and soybeans have showed no signs of stopping their run-up, and the 2008 outlook out of these stellar companies has been nothing but positive. Whats more? Most of these companies come with low risk, despite high upside… something rare in today’s market.

If you want to play this bull, and I suggest that you do, you want to keep a keen eye on Deere (NYSE: DE), Monsanto (NYSE: MON), Potash (NYSE: POT) and Mosaic (NYSE: MOS). Let’s start with Deere. I feel that they are the safest way to play this ag boom because they are an industrials sector company by definition. I recommended this company back on February 11th, and my views really haven’t changed. You aren’t going to get a great valuation as they almost always trade at a premium to the market… but as long as you can catch a dip, I don’t see this train slowing down any time soon.

Moving over to Monsanto, this is a fantastic investment if you can get in at an attractive price now. They recently announced a huge agreement with Becker Underwood and Plant Health Care to provide a new hybrid seed treatment platform. The Dow recently partnered up with Monsanto, and prospects are very good for the future.

Potash and Mosaic are really sitting on cloud nine right now. Even after we have seen a big drive into these companies over the past week, I think there is some space available and people really aren’t being as aggressive as they should be. Mosaic is another stock that I recommended, this one back in late January, and their catalysts haven’t changed. Their PEG is over 3. Ignore it. These ag. companies don’t come cheap, but I see them continuing to stride upward.

Aerospace & Defense
Being an Industrials sector buff, you can’t help but feel confident in the Aerospace & Defense industry. One thing that typically will not slow in recessionary times is the growth behind military contracting, national defense funding and aerospace development. With the ongoing war over in Iraq, there is a constant driver for most of the big five A&D firms, and much of this is guaranteed for 2008 and beyond. I like General Dynamics (NYSE: GD), United Technologies (NYSE: UTX) and Lockheed Martin (NYSE: LMT).

I want to recommend Boeing (NYSE: BA), especially with their currently dirt-cheap valuation versus their historical trading range, but I just can’t see through this cloudy future. Personally, I want to own them now, but with the disputes and such after losing a contract to a combined Northrop-Grumman and Airbus EAS team, their future is somewhat uncertain. Instead, I like General Dynamics. Not to be cliche, but Jim Cramer recently devoted an entire segment to this A&D powerhouse. They are the biggest holding in the industrials sector of the Nittany Lion Fund, LLC that I help manage, and we are very confident in their future success. If McCain is elected, this is a superstar. But even if he’s not, this company is still secure in its fundamentals and is trading at a discount in a bullish industry.

The Aerospace & Defense industry is red hot, safe, and trading at a discount to its historical premiums despite leading the market averages this year. With this in mind, I like United Technologies and Lockheed Martin in addition to GD. UTX recently made a proposal to acquire Diebold, which would position United Tech for some solid growth opportunities overseas. All future implications remain bullish on the stock, and analysts seem to be loving this, the biggest domestic aerospace & defense company, for the future. Lockheed Martin is your typical flawless company that continues to impress. These folks don’t disappoint and have had remarkable fundamentals and cash balance for as long as I can remember. LMT is safe and at an attractive price

As investors, we need to look for safe havens like Agriculture and Aerospace & Defense for predictable growth, stability and recession-proofing measures in order to continue to grow our portfolios. I wanted to touch on commodity-tied stocks like those tied to Gold, Oil and Natural Gas… but we will be touching on those soon, so we will save the best for last. Focus on the ag. and defense companies if you, like me, can sense an oversold market with some bargain prices up for grabs. Its one thing to catch a falling knife, but these industries really haven’t fallen at all… so they are ripe for investment.

-Jimvesting

The bad times are over for Cisco Systems (NYSE: CSCO). After a drop in early November (and late October), Cisco is primed for a nice future. This is the company that doesn’t lose money. They haven’t dropped an earnings estimate since I can remember and have seemed to grow under the radar ahead of their industry for decades. My bullish discounted cash flow valuation came up with a target price at $35, appropriate purchase price is around $28.

Wanna know why Cisco can’t miss? Because Cisco doesn’t miss. Their past present and future is laden with performance. For whatever reason, investors stopped believing in CEO John T. Chambers, one of the tops in the business, and a business they seem as just too big for sustainable growth. Well their ROIC has been over 18% for the past 5 years, hitting 23.95% YTD. Return on assests and equity are just as good, sitting at 15.17% and 26.27% respectively. What’s better? Their competitors go negative in growth, with the closest coming in with an ROA of 3.06% and an ROE at 7%. Oh and can you say cash flow? Cisco grows cash flow 30%+ year after year without taking on debt! This is a red flag for growth potential with low downside risk.

Competition? Don’t blink twice. Cisco has a virtual monopoly on the networking industry. They are the 4th largest Read the rest of this entry »

Everybody loves CAKE! After the Cheesecake Factory (NYSE: CAKE) missed their earnings estimate by a cent on November 2nd, there is more reason than ever to get in on this golden stock. Investors saw this shortcoming and completely overreacted by selling this stock down far below their potential. Where other restaurants felt the effects of higher food costs and slower consumer spending, the Cheesecake Factory produced a revenue growth of 15.4% and an outstanding increase in sales. We are seeing CAKE take over the restaurant market, with Brinker (NYSE: EAT) and Ruby Tuesday (NYSE: RT) experiencing flat or dropping sales, and being boosted just yesterday (November 5th) back to a “Buy” rating. When earnings-per-share grows by 13.4% in a bad quarter, we have a winner!

After running a discounted-cash-flow valuation on Cheesecake Factory, I have settled on a target price of $31.25. With this in mind, I’d look to buy the stock at $20-$24, which we have reached today at $22.19. Download my excel valuation here. Once the stock breaks out of its moving-average funk, look to pounce on it (or just pick it up now).

But “why is the Cheesecake Factory such a good company to own” you ask? Well first of all they are starting to dominate the restaurant industry. Just last month, Cheesecake Factory said it would open 17 restaurants in 2008. The company opened 21 in 2007. Read the rest of this entry »