As I write these words before the first presidential debate, expectations have been racheted up for a Trump win and Clinton loss. Here is just one example (via Politico):
‘She will have to answer every single question flawlessly, exude gravitas…not cough, wear an acceptable pantsuit, smile enough, be likable, not laugh and have a good hair day. Donald Trump will just have to show up,” said an Ohio Democrat.
I have no idea of who might come out on top, or who will be the next president of the United States. Given the low expectations for a Clinton victory in the debates, here are some stocks with a common theme that could benefit should HRC perform well in the debate.
“A muscular foreign policy”
As I wrote before (see How to trade the US election), the one sure thing about a Hillary Clinton presidency is a more muscular foreign policy compared to the Obama administration. Here is the New York Times of Clinton on her philosophy on foreign policy:
As Hillary Clinton makes another run for president, it can be tempting to view her hard-edged rhetoric about the world less as deeply felt core principle than as calculated political maneuver. But Clinton’s foreign-policy instincts are bred in the bone — grounded in cold realism about human nature and what one aide calls “a textbook view of American exceptionalism.” It set her apart from her rival-turned-boss, Barack Obama, who avoided military entanglements and tried to reconcile Americans to a world in which the United States was no longer the undisputed hegemon. And it will likely set her apart from the Republican candidate she meets in the general election. For all their bluster about bombing the Islamic State into oblivion, neither Donald J. Trump nor Senator Ted Cruz of Texas has demonstrated anywhere near the appetite for military engagement abroad that Clinton has.
Think Nixon or Reagan, rather than Bill Clinton or Barack Obama.
I have no idea of whether a HRC administration would put boots on the ground in the Middle East or anywhere else, but a much better bet would be the enlargement of the intelligence budget. Then I came upon this article from The Nation, entitled “5 Corporations Now Dominate Our Privatized Intelligence Industry”. While the tone of the article was meant to spark outrage, my ears perked up.
Privatization of intelligence services? Oligopoly? Oligopolistic pricing? Tell me more! After all, the barriers to entry in this industry are high. It isn’t as if anyone can hang out their shingle and become a government intelligence services contractor. If the government wasn’t satisfied with any company’s services, there aren’t a lot of alternatives.
The article from The Nation outlined five companies that employed about 80% of the privatized intelligence industry. My comments are bolded and in parentheses. Any data is comes from either Yahoo finance or company 10K filings.
In August, Leidos Holdings, a major contractor for the Pentagon and the National Security Agency, completed a long-planned merger with the Information Systems & Global Solutions division of Lockheed Martin, the global military giant. The 8,000 operatives employed by the new company do everything from analyzing signals for the NSA to tracking down suspected enemy fighters for US Special Forces in the Middle East and Africa. (Ticker: LDOS, about 70% of revenues comes from military/intelligence. L12m P/E 11.3 Fwd P/E 13.7)
Booz Allen Hamilton, which has stood like a colossus over US intelligence as a contractor and consultant for over 30 years, is partly owned by the Carlyle Group, the politically connected private-equity firm. Booz is basically the consigliere of the Intelligence Community (known in Washington as the “IC”), serving “the Director of National Intelligence, Undersecretary of Defense for Intelligence, National Intelligence and Civil Agencies, and Military Intelligence,” according to the company’s website. And this work can be lethal: Under a contract with Army intelligence, Booz personnel “rapidly track high-value individuals” targeted by the US military in a system now “deployed, and fully operational in Afghanistan.”
CSRA Inc. was created out of a merger between CSC, which developed and manages the NSA’s classified internal-communications system, and SRA International, a highly profitable company with a long history of involvement in intelligence, surveillance, and reconnaissance (ISR). Among scores of other contracts, CSRA, which has close ties to the US Air Force, provides 24/7 support for the “global operations” of US commands in Europe and Africa and, under a January 2016 contract, manages the “global network of intelligence platforms” for the most advanced drones in the US arsenal. And in a bizarre set of contracts with the Pentagon’s prison in Guantánamo, it was hired to help both the defense and the prosecution in the military trials of individuals accused of planning the 9/11 attacks. (Ticker: CSRA, about 50% of revenues from military/intelligence. Mkt cap: $4.5b. L12m P/E 52 Fwd P/E 13.0)
SAIC is a well-known military contractor that has expanded into spying by buying Scitor, a company deeply embedded in the Pentagon’s top-secret satellite operations. Scitor’s real value for SAIC is its reach into the National Reconnaissance Office (NRO), which manages those satellites and integrates downloaded signals and imagery from space for the NSA and the National Geospatial-Intelligence Agency (NGA). SAIC’s latest project: an $8.5 million contract from the Army’s Intelligence and Security Command for “aerial ISR” in Afghanistan to be partly carried out at the NSA’s huge listening post in Fort Gordon, Georgia. (Ticker: SAIC, about 76% of revenues comes from military/intelligence, rest from civilian federal government, Mkt cap: 3.1b. L12m P/E 24.5 Fwd P/E 19.2)
CACI International is the Pentagon contractor infamous for supplying interrogators to the US military prison at Abu Ghraib in Iraq. CACI recently acquired two companies doing extensive work for the NSA and the CIA: National Security Solutions (bought from L-3 Communications) and Six3 Intelligence Solutions. Both have given CACI new inroads into national intelligence. Six3, for example, recently won substantial contracts to provide “counterinsurgency targeting” to NATO forces in Afghanistan. It also just won a new Army contract to provide intelligence to US military forces in Syria—an indication of how deeply US forces are now engaged there. It’s also the only contractor I know that quantifies its results: CACI’s intelligence services have “identified more than 1,500 terrorists threatening our nation,” it claims. (Ticker: CACI, about 65% of revenues comes from military/intelligence. L12m P/E 17.7 Fwd P/E 15.1)
Under a HRC president, these “pure” plays in the sector and they should therefore receive the lion’s share of the benefit of any enlargement of the intelligence budget. This represents a macro sector theme and my individual company due diligence has been highly limited. Anyone who wishes to buy into such an investment thesis should either perform their own company research, or use a portfolio approach of buying all of these stocks.