Tuesday, January 04, 2005 9:13 a.m. EST
Dear Subscriber to TheStreet.com Stocks Under $10,
Over the past few weeks, we have debated the merits of
holding homeland security play RAE Systems (RAE:Amex). The
recent resignation of the company's CFO and steady stream
of insider selling raised some red flags, but RAE's
business prospects are seemingly bullish for at
least the next 24 months, given the need to secure U.S.
ports and large venues. We've come to the conclusion that
the stock's 14% pullback in the last month has created a
buying opportunity, and so we are going add 200 shares of
RAE at the open today, taking our position to 900 shares,
or about 5.8% of the model portfolio. Shares closed
yesterday session at $7.05.
We first bought RAE two months ago as a low-dollar way to
gain exposure to the burgeoning homeland security
industry. The company has been in the hazardous material
detection business for a bit more than a decade, and its
chemical and gas detection sensors are also being used in
worker safety, for aircraft laborers who could potentially
be exposed to toxins on the job.
We continue to believe RAE will ultimately leverage its
time-tested technology into new markets for homeland
defense and will benefit from increased federal spending
to secure ports. (Its sensors could be used to detect
hazardous materials before they ever touch land.) In
addition, RAE's acquisition of Chinese defense company KLH
should allow the company to play a large role in security
for the 2008 Summer Olympics in Beijing.
Despite all these positives, at $7.05 a share RAE is 18%
below our cost-basis. Investors have had little to cheer
about, as the only news out of the company in recent weeks
has been the departure of CFO Joseph Ng and a spate of
insider selling. Even so, we believe the stock can trade
into the double-digits later this year, as companies like
L-3 Communications (LLL:NYSE) look to sub-contract larger
homeland security deals out to smaller companies like RAE.
This has been a controversial holding to date, but we
believe our patience will ultimately pay off.
Regards,
The TSC Investment Team
Enviado: 4/1/2005 15:21