Ever since the market sold off back on February 19, I have given you a steady stream of tech winners who should at least be on your watchlist.
Here’s the thing. Most of those companies have been larger firms with stocks that have relatively high sticker prices.
And for good reason. When you’re in a bear market, you can often find big discounts on household names like Apple Inc. (AAPL).
But I would be remiss if I didn’t at least let you know from time to time about low priced small caps targeting Trump’s more than $700 billion defense budget.
Remember, what we want are well-run firms in multibillion-dollar markets with a lot of upside.
That’s just the set up I see in play for a tiny defense electronics firm that supplies the U.S. military with robust radar systems.
Small but Mighty
Now then, back on May 5, I told you about a defense leader that is the polar opposite of the small-cap I have in mind for you today.
Trading at close to $400 a share, Lockheed Martin Corp. (LMT) defines Big Defense. It is a diversified Pentagon contractor with a $109 billion market cap and roughly 2 million shares trading hands per day on average over the last 50 days.
By contrast, Rada Electronic Industries Ltd. (RADA) has a 50-day average volume of about 335,000 shares. It has a mere $175 million market cap.
But don’t let that fool you. Based in Israel, this is a great company whose high-tech approach is catching on with the U.S. Department of Defense.
You see, there’s an old saying in Texas: It’s not the size of the dog in the fight, it’s the size of the fight in the dog.
And Rada is a perfect example of that. It may be small, but it has built a powerful niche in a key strategic sector that is sure to grow in the years ahead.
That’s the great thing about finding small but strong contractors. When they grow, the gains are huge compared to defense giants.
Rada did $10 million in March, selling equipment for counter-drone short-range air defense. That’s 67% better than last year’s sales for March.
What’s more, the sales were to existing customers. That means they liked what they had and now want more, a very encouraging sign. For the year, Rada still expects $65 million in sales, a 47% increase from last year.
The point is, this company – and its stock – are going places. Its total addressable mini-tactical radar market is about $5 billion in the coming years.
Old Name, New Game
Rada’s specialty is delivering mobile radar systems that can be attached to forward-deployed bases or on vehicles in the operational theater. This gets radar where it needs to be – with the forces engaged in action.
More specifically, it is providing mobile forces with radar that can detect UAVs as well as enemy fire. And not only can it detect it, but it can find it, which helps those forces destroy the threats before they become lethal.
It’s called tactical radar. And it’s a term you should remember if you’re interested in defense stocks. This is the next big deal for going granular on the networked battlefield.
The tactical radar can also be set up for 3D perimeter surveillance as well. The US Navy has deployed Rada systems on its vessels that are patrolling the Straits of Hormuz in the Persian Gulf.
But Rada isn’t a spunky start-up hoping to make a splash with its tactical radar. It has been around the Israeli-defense community for more than 50 years.
It got its start in avionics, building core avionic systems for military aircraft. Today, its systems are integrated on planes and helicopters around the world, from Boeing to MiG to Embraer to Rafael.
That means it has deep roots in the global defense community and also understands the needs its defense customers have across the modern battlespace.
Smart Pick for Smart Conflicts
Rada is taking advantage of a major driver in Trump’s defense buildup. Big firms are already so diversified, it doesn’t make sense that they tackle every new concept out there.
Instead, they often let small firms develop high-margin specialty markets and sub-contract work to them. That’s where Rada is now.
It has steady work for the Israel Defense Force and Air Force and it has a growing base of customers outside Israel. It currently does business with all branches of U.S. armed forces, as well as India.
Rada also has established a U.S. subsidiary. This is an important step for foreign defense firms to gain access to the broader U.S. market.
If it grows on its own, there’s a good chance it will double from here in the next two years. And if it gets acquired, you can be sure it will go at a hefty premium.
Acquiring firms pay a premium for growth. Radar growth was more than 100% in fiscal year 2019 and looks to be more than 60% in FY20, even with the pandemic. And margins are a sizable 36%.
We’ll have a better sense of how Rada is executing against its plan when it reports earnings on May 19.
Yes, this is a much riskier play than a giant like LMT. But this isn’t a fly-by-night firm and the competitive moat Rada has built is sizable.
That doesn’t make it a straight shot to the moon. But it does provide leveraged growth in the defense sector.
And in an increasingly unsettled world, there will be plenty of demand for defense firms long into the future.
With so much potential upside ahead for this stock, I believe it should be in the high-risk, high-reward part of your watchlist.
The 5G Revolution
RADA’s tactical radar systems are just one of the ways in which revolutionary information technology can save American lives.
During the coronavirus pandemic, we have had to adapt to doing as much as possible over the internet in order to maintain safe social distancing.
And in order for America’s internet infrastructure to keep up with the new demand that this is creating, a whole new standard of wireless connectivity is going to be needed.
I’m talking about 5G wireless. It’s been getting hyped for years, but now, during this crisis, it’s never been more serious.
I’ve been doing special research about how this new high-tech standard is going to change our lives, and how it could drive massive profits for folks like you. Just click here to check out what I’ve discovered.
Cheers and good investing,
Michael A. Robinson