Could These Companies Prevent Another Pearl Harbor?

70 years ago, one of the most devastating attacks on US soil occurred, prompting the country to engage in the greatest war of modern history. The attack on Pearl Harbor marked a turning point for the United States, forever transforming the country into a global military and political force. While American military intelligence did not foresee the attack, times are now different. Are there any government contractors that may be able to provide the technology to prevent devastating attacks in the future?

Kratos Defense & Security Solutions KTOS is a small-cap company that assists US national security agencies by providing services and products relevant to their activities. For example, Kratos has been contracted to develop security systems and vehicles for government agencies as well as military organizations including the US Navy.

In today's world, civilians are at higher risk than before. Fortunately, Kratos specializes in building safety and automation. It has created products to control the inflow and outflow for any given building. It has also optimized communication systems as well as surveillance networks. While the products are extremely useful, does Kratos represent a good opportunity for investors?

It has increased its revenue streams over the last five years, penetrating markets ranging from personal protection to national defense. At the same time, it has managed to widen gross margins, which is always positive for companies. In recent years, it has started to ramp up research and development, meaning that it may have interesting technology in the pipeline. In 2010, especially due to non-operating expenses, the company became profitable. If the trend continues into 2011, Kratos may be turning into a stable contractor with reliable contract streams and development chains.

Kratos has also increased its operational cash flow, primarily as a result of positive working capital changes. It has also pursued acquisitions and asset purchases in the last year, decreasing its cash flows significantly, albeit in a positive way. Lastly, Kratos has started to issue significant amounts of debt in the last few years. While it has also repaid its debt loads on time, investors may not appreciate the fact that Kratos requires continuous debt issuances to continue and fund operations.

Some investors may find positive and negative aspects to Kratos' business model, so are there any other options that investors have? There are many other defense contractors out there that may be able to play a role in protecting the nation from future harm, but which of those companies present an interesting, futuristic investment opportunity?

Anaren Inc ANEN is a small-cap firm that specializes in providing defense solutions requiring wireless and microelectronic technology. The types of projects that Anaren works with include wireless communications, wireless data management, and radar manipulation and development services.

Anaren ultimately provides innovative solutions to manage the power grid for systems that are directly related to national defense. Anaren has also been filing for patents throughout its existence, and has undertaken various strategic acquisitions to bolster its patent portfolio. Would it, however, be an interesting investment?

Like Kratos, has been able to increase its revenues and gross margins over the years. It has also been ramping up its research and development efforts. As expected, it has been increasing its bottom-line and its EPS figures. Another thing that investors would appreciate is that Anaren has consistently maintained profitability during the last five years.

Anaren has a positive cash flow situation, as it has consistently increased operational cash flows and kept debt and equity issuances to a minimum. As such, Anaren's balance sheet has grown significantly, with cash accounts along with other current assets growing. It has also increased its gross property, plant, and equipment. One interesting thing to point out is that goodwill was written down from $43 million to $42 million in 2010. While the write-down is extremely small, the fact it happened means that some facets of its acquisitions may not be producing expected results. Certain synergies may not be coming to fruition, so investors should understand why that may be.

Anaren's debt loads have been fairly minimal, although it has maintained a constant level of short-term debt over the last three years. Its long term debt has fluctuated significantly over the last few years as well. Anaren has also maintained a minimal amount of liabilities. Ultimately, it has been able to increase retained earnings, directly adding value to its shareholders. It has also increased the amount of treasury stock it holds, meaning that it is consistently buying back stock, indicating the company's strong belief in its own success.

Kratos Defense & Security Solutions and Anaren Inc provide investors with two unique investment opportunities that also help promote the US' national defense. They both participate in differing sides of the industry, and may both be appropriate for investors who are considering long-term investments. Investors should learn more about each company's previous contracts and historical interaction with the US government. Investors should also understand each company's efforts in the research and development front.

The attack on Pearl Harbor occurred 70 years ago, affecting over 2,000 veterans and their families in an adverse manner. A mere three years after, Allied Forces stormed the beaches of Normandy, France, marking the famous D-Day invasion. World War II was a colossal battle of the minds of strength, and while the American and the Allied Forces prevailed, national security has always been a priority. As the government continuously outsources its abilities to private companies, the fate of the United States becomes increasingly dependent on civilians. Apart from investments, this very fact provides added incentive to investors and civilians across the United States.

Kratos is currently trading at about $6.15, down over 53% for the year. Anaren is currently trading at about $17.05, down about 19% for 2011.

• Long a basket of small-cap and large-cap defense contractors, including Anaren and Kratos. Each company provides a unique service to the government, and civilians never know which exact service is of the utmost importance.

• Aerospace companies including Boeing BA and Lockheed Martin LMT also develop technologies for the government and military. They are not directly tied to national defense, but the technology is used in projects and missions required for protection.

• Long an ETF like the Industrials SPDR XLI.

• Short the aforementioned companies, as small-cap companies are likely to be more volatile.

• Short the Aerospace & Defense iShares ETF ITA, since such a revelation would adversely affect both aerospace and defense firms.

• Technology companies like IBM IBM and Hewlett-Packard HPQ provide auxiliary support to government services, so they may decline if the government does everything by itself.