Legally Profit From the Pirates

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This pirate thing is getting even further out of hand. The aggression and the disruption of business off the Horn of Africa must not stand. Er, float.

Pirate depredation has forced commercial shippers like Maersk and DryShips (Nasdaq: DRYS) to cope with ransom requests costing into the millions of dollars. Because the sea lanes that the pirates prowl are key to the international Gulf Oil trade, major oil shippers such as Frontline (NYSE: FRO) have had to reroute their vessels to avoid the bandits, lengthening voyages and increasing costs. Insurance rates for everyone involved are going through the proverbial roof.

Equipping ships with water cannons and licensing private groups to hunt down pirates might be innovative, low-cost measures, but as long as the area remains lawless and next to vital shipping lanes, the U.S. and other nations will have to improve their ability to patrol the area.

But who's going to stop it?
Last week, I argued that the most logical solution is to arm the merchant vessels. In a fight between a rowboat manned by four AK-toting thugs and a 20-story-tall commercial liner with a crew of 20 similarly armed, there should be no contest. Or, alternatively, that Raytheon (NYSE: RTN) could find a market for its Active Denial System to zap attackers until they flee the unbearable sensation of heat.

Fools replied with suggestions that ranged from installing electrified guardrails on-deck to equipping tankers with the Phalanx weapons system (which would be more like smashing a gnat with a sledgehammer). But given shipowner intransigence about arming their crews and national security concerns, the more firearms-intensive options seem to have fallen into disfavor.

But if we cannot arm the merchant mariners, what is the answer? Former presidential contender Ron Paul suggests we adopt a 19th-century solution to the piracy problem: issuing letters of marque to vessels interested in playing privateer, thus creating government-approved pirate hunters.

The Wall Street Journal opinion page suggests a 20th-century idea -- forcing vessels sailing the Gulf of Aden to travel in convoys. NPR recently ran a story suggesting such low-tech deterrents as high-powered water cannons and slippery foam applied to ship surfaces.

All fine ideas, worthy of consideration. But as an investor, I have to admit that I'm still having trouble finding one that I can invest in. There are ideas, however, that do offer investment opportunities.

The ocean is a big place. (In other breaking news, it's also wet.) The three dozen or so military vessels currently operating off Somalia and tasked with ending the pirate threat have a big job ahead of them. How big? Roughly speaking, there are over a million miles of ocean off the East African coast. (To put that in perspective, it's like tasking a handful of police cruisers with maintaining order in a territory stretching from Dallas north to Minneapolis, east to Philadelphia and south to Orlando.)

Sure, adding ships to the constabulary flotilla is one solution, and I suspect it's contributing to Defense Secretary Robert Gates' enthusiasm for the Littoral Combat Ships being developed by General Dynamics (NYSE: GD) and Lockheed Martin (NYSE: LMT). But let's face it -- mass production of these vessels is still a ways off. The companies that can provide solutions today are the ones that will profit.

Unmanned Aerial Vehicles
Northrop Grumman (NYSE: NOC) offers one technology that seems admirably suited to expanding search capabilities at sea. In contrast to most defense contractors' unmanned aerial vehicle (UAV) offerings, which resemble model airplanes, Northrop's new Fire Scout UAV is more like a mini-helicopter -- a much better concept for take-off from a small warship's flight deck.

The U.S. Navy has already given Northrop the green light to begin low-rate initial production, and is busy testing the system. Seems to me, the African coast would be a dandy place to put the Fire Scout through its paces.

Another UAV maker who could benefit from this aquatic testing ground is our very own Motley Fool Rule Breakers recommendation AeroVironment. As recently as last year, the company was lamenting the dearth of a market for its Aqua Puma UAV -- a "model airplane" variant, but unlike most other UAVs, it's capable of landing on water. Ring any bells?

Manned aerial vehicles
Flying robots probably offer the cheapest way to observe vast stretches of the sea. But manned aircraft can do the job, as well. Enter Boeing (NYSE: BA) and its new P-8 Poseidon sub hunter, which despite its namesake is also an effective shipping interdiction tool for the Navy. Last I heard, the aircraft was slated to begin testing this year. Thanks to the Somali pirates, now we've got just the place to do it.

And if the current order isn't enough to do the job, the Navy can always fill the gap with a few of the planes the P-8 is supposed to replace, Lockheed's P-3 Orion.

Come to think of it, a head-to-head competition might be just the thing to catch us some pirates, and put to rest some criticisms of the Pentagon acquisition process at the same time.

Looking for other high-tech defense prospects for your portfolio? Check out Motley Fool Rule Breakers, where we're looking into options in everything from unmanned airplanes to bombproof trucks to bulletproof soldiers. Thirty-day free trials are available on demand.