As my colleague Tom Hutchinson
recently pointed out
, defense sector spending may be under threat of budget cuts, but
make no mistake: demand will always be robust. That makes the
defense sector not only a safe place for investors to be, but it
also ensures a solid growth path.
How do I know? Well, unfortunately, there will always be wars, for
one thing. And nation states, particularly the United States, will
always need companies that can deliver the latest weapons,
equipment and technology to defend their interests.
That last component -- technology -- is especially important for
investors to take note, because it is an area that should be less
prone to budget cuts. That's because technology, and information
) in particular, is all about efficiency. And in this new global
era of austerity, anything that can provide efficiency and save
money is key.
My pick for today plays on this important theme. It is attractively
valued, shows growth potential and appears technically strong. You
should consider going long on this stock if certain conditions are
met and I'll give you the details for how I would trade this stock
But for starters, I'll tell you a little about the stock...
CACI International (NYSE:
, an IT infrastructure company, specializes in providing
intelligence and financial analysis solutions for government
organizations like the Department of Defense and Homeland Security.
Despite concerns that economic weakness could result in reduced
government defense spending, CACI was recently awarded a number of
multi-million dollar government contracts. Demand for the company's
services remains robust because, in many cases, government IT
infrastructure is outdated.
Technically, CACI appears to be moving up rapidly.
The stock is in a major uptrend and is attempting to bullishly
The ascending triangle is formed by the accelerated uptrend
line, formed off the stock's August 2010 $40.15 low and nearby
resistance at $54.11 -- the recent two-year high.
Since October 2010, the sharply rising 10-week
has run parallel to the accelerated uptrend line. During the first
trading week of January, CACI tested the 10-week moving average and
looked as if it was close to dropping below the accelerated uptrend
line, which currently intersects around $51.
However, this January past trading week, the stock quickly reversed
course, moving back up above the 10-week moving average.
CACI is currently re-approaching $54.11 resistance. If the stock
can break resistance and pierce the upper Bollinger band -- which
currently interests near $57 -- the
for an ascending triangle projects a price target of $68.07 ($54.11
-$40.15 = $13.96; $13.96 +$54.11 = $68.07). This is close to the
stock's all-time 2004 high of $69.18.
If the stock were to lose ground, historical support, dating from
October 2009, is nearby at the round-number $50 level.
The rising 20-week moving average, indicated by the middle
Bollinger band, intersects just below, marking additional support,
near $49. Further below, the rising 30-week moving average has just
bullishly crossed above the upward curling 40-week moving average.
The indicators are bullish.
Relative Strength Index (RSI)
has been in an uptrend since July. In the mid-$60s and rising,
is venturing toward overbought territory, but has not hit it yet.
has been on a strong, sustained buy signal since September. The
MACD histogram remains in positive territory.
Stochastics and Williams %R, although overbought, are on buy
Fundamentally, the government IT company should see sustained
In late October 2010, CACI reported better-than-expected fiscal
first-quarter results and raised its outlook for the fiscal 2011
full year. A number of new contracts caused revenue to increase
12.8% to $834 million, from $739.5 million in the year-ago period.
Analysts expected revenue of $810.8 million.
On Feb. 2, CACI will report fiscal second-quarter 2011 results.
Analysts' project revenue will increase 11.5% to $865.7 million,
from $776.7 million in the year-ago quarter.
The company also has a bullish outlook for the full fiscal 2011
year. CACI expects revenue to rise at least 9.4% to the range of
$3.5-$3.6 billion, from initial estimates of $3.3-$3.4 billion.
Revenue was $3.2 billion in the previous year. By fiscal 2012,
analysts' project revenue will increase a further 5.8% to $3.7
Theearnings outlook is equally strong.
According to Thomson Reuters, analysts expected fiscal
first-quarterearnings to be $0.88. Instead,
were $0.92, an 18% rise from the $0.78 earned in the year-ago
With continued government defense spending, analysts project fiscal
second-quarter earnings will increase 15.3% to $0.98, from $0.85 in
the year-earlier period. The company expects this growth will
continue throughout the full year.
Therefore, CACI recently raised its full-year fiscal 2011 earnings
guidance to $3.90-$4.10 from earlier forecasts of $3.70-$3.90. This
represents at least 12.4% growth from fiscal 2010 earnings of
$3.47. By fiscal 2012, analysts expect earnings will rise an
additional 9.7% to $4.28.
In addition to growth potential, the company is also attractively
valued on several metrics.
CACI has a trailing price-to-earnings (
) ratio of roughly 15. By comparison, competitor
SRA International (NYSE:
has a trailing P/E of nearly 80.
The company also has a low price-to-sales (
) ratio of 0.5. By comparison, SRX has a P/S of 0.9.
Action to Take-->
Given that CACI is attractively valued, shows growth potential and
appears technically strong, the stock is a good bet to go long on
if it breaks above nearby resistance at $54.11.
You may want to do this by placing a buy-on-stop order at $54.28.
This means if CACI does not hit or go above $54.28, you will not
enter the position. A good stop-loss would be at $49.83, just below
historical support. As calculated by the measuring principle, your
target should be $68.07, which means you could net a tidy 25%profit
if all goes according to plan.
-- Dr. Melvin Pasternak
P.S. -- We've just identified six surprising events that could
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Disclosure: Neither Melvin Pasternak nor StreetAuthority, LLC
hold positions in any securities mentioned in this article.