Thursday, October 30, 2008

Bookkeeping: Taking Profits on AeroVironment (AVAV) "Cramer" Effect

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I did not notice the performance of AeroVironment (AVAV) yesterday because so many stocks are now being whipsawed 10-25% a day up and down but it looks like the stock was mentioned by Jim Cramer on Monday's Mad Money and the stock has screamed higher - I am cutting the vast majority of the position and selling to Cramer nation and taking it down from a 1.0% stake to 0.1% near $36.

This is what kills me about the stock market - you can have an excellent small cap stock, with excellent fundamentals but until someone with a bull horn gets on a mountain top and screams about it, it can trade in oblivion for quarters or years. [Sep 16: New Position #2: AeroVironment]

As I think through the credit crunch (I have a good piece from Bloomberg coming tomorrow) - if indeed it is protracted - we know there is one bulletproof customer in the world who seems to spend like there is no tomorrow - the U.S. federal government. (for example in this morning's GDP, spending by government increased from +4% year over year two quarters ago to +6% this past quarter - I can only imagine what that number will be during the current quarter - take out the government spending and the faulty inflation assumptions and GDP would be far worse than the happy go lucky -0.3%). So as I survey the stocks who live off the government, obviously the defense plays stand out - in our focus group this means AeroVironment and Emergent BioSolutions (EBS); the latter has been an excellent performing stock in this horrid market. Both these names are over all moving averages. Because of course their customer spends... and spends... and spends... and never stops.

Anyhow this thesis of "the only safe customer is the federal government" would limit long ideas to a very few but it is what it is. So as much as I like AVAV I am going to hand off our shares to the Cramer lemmings and then try to get them back lower. In this market, I'm sure it won't take too long.

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If the polls are right, then Barack Obama will be our next president. It’s news most aerospace and defense investors don’t want to hear. But not every company in that sector might suffer if the Democrats take the White House. In fact, Cramer thinks AeroVironment could do quite well.

AeroVironment [AVAV 34.75 0.99 (+2.93%) ] makes small, unmanned aerial vehicles or UAVs, which Obama supports. UAVs range in size from something a soldier can carry into combat to those closer to person-flown planes. And most often they’re far less expensive than the F-16s or F-22 Raptors the U.S. uses, and there’s no risk of losing human life.

This is a small, $580 million company (with a clean balance sheet, no debt and about $112 million in cash) that competes with giants of the industry like Northrop Grumman [NOC 45.64 0.57 (+1.26%) ] and Lockheed Martin [LMT 79.96 1.35 (+1.72%) ]. But CEO Tim Conver told Cramer Tuesday that “very well positioned” to compete in this space. AeroVironment four industry competitions, beating some of the largest prime contractors in the world to do it, and the company is the only supplier small UAVs to the Department of Defense. Plus, there’s a big pipeline of new products on their way to market.

There is only a small group of stocks that Cramer thinks can rally on that poll-predicted Obama win, and AeroVironment is one of them. He said this stock could jump “very quickly” after the election, so he’s bullish on AVAV.

Long AeroVironment in fund; no personal position



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