Interview – January 3, 2006


Hi, this is Ann-Marie Fleming with HomelandDefenseStocks.com

With the new year upon us, we will take a quick look back at 2005 with Scott Sacknoff, manager of the SPADE(r) Defense Index, who will also provide us with a basic introduction to investing in the homeland security market. For those unfamiliar, the Index provides a financial benchmark for defense, homeland security, and space. Its value and charts can be obtained using the ticker symbol, 'DXS'.

Q> So how did the SPADE Defense Index do in 2005?

A> For the year, the Index was up 5.30%. While this doesn’t sound like much, the broader market as measured by the S&P 500 gained only 3.00%. What’s remarkable is that the SPADE Defense Index has now outperformed the S&P 500 for six consecutive years and in 18 of the last 22 quarters. Also, on December 27th the Index reached its all-time high of 1804.88. Since 2000, the Index has gained 79.2% vs. a 15.0% decline in the S&P 500

Q> Since September 11th, the Index has annually outperformed the broader market by 10-20% or more. Does this mean the run is over?

A> Not necessarily, but obviously in the aftermath of 9/11, there was tremendous growth in the U.S. budget for military and homeland security. Still, the Index outperformed the broader market in 2005. Going forward, one can only offer predictions. Forecasts by Wall Street analysts show that they are expecting 3-5% growth by the large defense contractors and 8-12% for the smaller, more specialized companies and those involved with homeland security. So while huge gains associated with the budget increases of the last couple of years may not continue at the same pace, there are still a number of factors in play that could lead the sector to outperform again. As much depends on the broader market as it does on defense and homeland security.

Q> We have seen different people define homeland security in different ways. In order to give an investor a better understanding of the sector, can you give us an overview of how you see the market?

A> You are correct in that there is no official definition of homeland security. When the term came into play after 9/11, firms with a myriad of capabilities all declared that they were involved with ‘homeland security’ as a means to capture the increased spending in this area. Lehman Brothers in October 2004 estimated that the overall market for security was nearly $120 billion, nearly three times the size of the budget for the U.S. Department of Homeland Security; although the actual amount that firms could compete for is much lower.

Now, when an investor looks at the sector, they’ll see that security falls into several overlapping categories – national and border security, local security, biotech, and computer & IT security. Now when I say overlapping its because access control and biometrics could be used in passport control as well as in an entry system to access a corporate headquarters. Likewise video surveillance, reconnaissance, and data mining are elements of national and border security as well as local security.

For the SPADE Defense Index, I tend to equate ‘national’ with ‘homeland’.

Q> So how many firms are out there?

A> An investor performing a search for firms involved with homeland security will find several hundred public companies. In looking at the business operations of these firms, a large percentage of them are really biotech firms that have a product that can be used to sense a specific chemical or biological agent or that can cure the ailments. There are also a large number of firms involved with computer and IT security such as those that scan your computer for viruses, prevent SPAM, or put up firewalls.

Investors will also notice that many of the firms are small and thinly traded. Depending on what the investor is looking for and how much research they want to put in, there are opportunities – whether it is due to the firm’s internal fundamentals or the fact that the homeland security market is ripe for consolidation. With so many companies offering single solutions and products, we can expect a number of acquisitions in the homeland security market in the coming years as firms seek to offer a portfolio of security options under one roof. To find the best prospects, investors will need to spend some time to identify the best opportunities.

For those investors who want to invest in the sector but don’t have the time or knowledge to identify specific opportunities, an ETF or mutual fund, such as the Powershares Aerospace & Defense Portfolio ETF (AMEX: PPA), is an option they should consider.

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. Powershares is a registered trademark of Powershares Capital Management.


For More Information:

Dawn L. Van Zant - President
800.665.0411 – dvanzant@investorideas.com 

Ann-Marie Fleming – Corporate Development
866.725.2554 – afleming@investorideas.com