Last week I traveled back to the Mid-Atlantic for the first time in several years. Of course, I arrived just in time for a snowstorm, which reminded me of all the reasons I moved to Florida. I had to do quite a bit of running around while in the Baltimore-Washington area, and I came away with some investable observations in my travels.
I noticed ads for cyber-security and electronic-warfare jobs, training and degrees were everywhere. There were billboards and commercials for specialized training to gain one of the government or private-sector jobs in this rapidly growing space. Two major universities had billboards in the airport advertising their degree programs. Cyber warfare and security is the next big thing, and I cannot see the industry shrinking much as we become more reliant on data and data storage at all levels of society, from government to Aunt Minnie's photo collection.
As a value investor, there is not much for me to do in this space right now, but I do have some exposure via long-term holding Kratos Defense & Security Solutions (KTOS), which has a cyber-warfare division. But there isn't a plethora of cheap stocks in this space. The next big thing is rarely cheap without a significant pullback in the broader market. I called a price-and-earnings-momentum friend, who told me that Vasco Data Security International (VDSI) is the red-hot stock in the space right now. It trades well above book value and at about 27x earnings. It is not my cup of tea, but earnings are growing at a rapid pace this year.
A little digging turned up an Israeli company that is on my radar for possible purchase to get in on the cyber boom at a reasonable price. SuperCom (SPCB) provides traditional and digital identity solutions to governments and private companies around the world. Its products allow customer to identify, locate, track, monitor, count and protect people and objects like inventory and vehicles. It also provides electronics monitoring, which allows governments to maintain national identification databases, digitized driver's licenses and electronic passports. The company is not cheap on asset value now, but the shares fetch just 12x earnings and might be worth considering as a long shot.
The other thing I noticed was that in spite of all the talk about infrastructure, very little has been done so far. State and local governments remain cash-strapped and may still have substantial pension obligations, so the money is just not there right now. We are going to need to figure this out soon as bridges, highways and roads are in shockingly bad disrepair, and not all of it could be attributed to the rough winter. I have talked with several friends and family who have had problems with electricity all winter, and while some problems can be expected due to weather, repeated and sustained outages should not be occurring as regularly as they have been.
I have kept a list of infrastructure stocks close at hand since 2008, when I was able to buy Granite Construction (GVA) and Pike (PIKE) below book value and did pretty well with them over the next few years. These stocks have gained alongside the six-year rise in the market and are not cheap enough to buy now, but I would be looking to buy them again in a pullback. Infrastructure money has to be spent at some point in the future, and an enormous amount of cash will be flowing into these names.
I reviewed my list this morning and several stocks are almost cheap enough: Fluor (FLR), Primoris Services (PRIM) and MYR Group (MYRG) are almost cheap enough based on their enterprise-value/EBITDA ratio. Based on price-to-book value, Tutor Perini (TPC), Great Lakes Dredge & Dock (GLDD) and Amresco (AMRC) are almost cheap enough.
Layne Christensen (LAYN) is the sole infrastructure company that is safe and cheap enough to buy now. The water management, construction, and drilling services contractor currently trades at just 70% of book value and will see huge sales and profit growth when we finally turn towards fixing our water-related problems in the U.S.
Value investors may not be able to load up on cyber security and infrastructure-related companies at current levels, but you need to know which companies are in these two sectors and at what price they become bargains. They have the potential to be big winners for many years to come.
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