A well-crafted watchlist is critical to smart investing: It can help you find attractive buying opportunities, and it can save you from rushed, emotional decisions by slowing down the process. The Fool now offers MyWatchlist.com, your free customized hub to follow the performance and Fool news and commentary about the companies you're watching.
But what to put on your watchlist? In the latest entry in our ongoing series, Motley Fool analyst Andrew Sullivan exposes his split personality by offering up two growth companies poised to capitalize on the run-up in gold and two value companies that have taken hits as part of the defense industry.
On guns
Having spent time working on Wall Street researching aerospace and defense stocks, Andrew is acutely aware of the gloom and doom that hangs over the industry in the wake of the Deficit Reduction Commission recommendation to slash $100 billion from defense spending. But instead of running from the companies that seem to have their necks on the chopping block, Andrew is seeing opportunity.
Raytheon (NYSE: RTN ) is right at the top of Andrew's watchlist because the stock is very cheap and more than enough pessimism is already figured into the price. What others are missing, Sullivan says, is that only $27 billion of those scary-sounding cuts hit contractors, a worst-case scenario means the budget stays flat until 2015, and the recommendations haven't even become law yet. More specifically to Raytheon, it runs thousands of small- to medium-sized programs, meaning it is less reliant on a few huge ones like some of its peers, which reduces its exposure to proposed cuts. And with more than 20% of its sales outside the United States, a chunk of its work will be unaffected. "There's a lot of short-term reaction to this news, but it's a long-term winner at this price."
VSE Corp. (Nasdaq: VSEC ) has a market cap about a tenth the size of Raytheon's, but it faces similar problems. The company, located a short drive from Fool HQ, handles engineering, logistics, management, and technical services contracts for the Department of Defense and has seen its stock knocked down with its counterparts.
But the company has been shaking up its staid and stodgy approach since hiring a new CEO last year, and its small size has allowed it to be nimble in picking up new business. As many of the company's contracts come to an end for its work in Iraq, VSE will need to demonstrate it can keep the flow going with its new, more vibrant approach. A couple quarters of growth will convince Andrew.
And gold
As the defense industry has been beaten down, the price of gold has soared, making miners look more attractive given their huge leverage to the price. Andrew thinks there's still room for gold to run and sees a lot of value in mining stocks, many of which have not risen as much as gold over the past few years.
The key is to find the Goldilocks miner -- you don't want a little one that is based on a blend of hope and prayers, but you also want to avoid the big ones that no longer have room for growth. Andrew sees Northgate Minerals (AMEX: NXG ) as just right.The company is producing cash yet still has room to grow. Andrew anticipates a weak 2011 as the company ends work on its main mine and doesn't get started on its next key project until 2012, but that should provide a great buying opportunity for Northgate. It's lagged metal prices so far, but we could see a nice run-up as the company picks up steam.
Another miner that has caught Andrew's eye is Minefinders (AMEX: MFN ) , which has barely budged in the six months he's been watching the company. As he wrote in his Rising Stars portfolio, "When I analyzed the mining sector six months ago, both Minefinders and Northgate appeared reasonable on their own merits. But since then, gold has advanced 12% -- which increases these companies' real value even more, given the leverage in their business models. Moreover, competitor valuations have skyrocketed, making the stocks cheaper on a relative basis."
And that's exactly why it pays to watch. You can make smarter investing decisions with your own version of My Watchlist, new and free from the Fool. Click below to start following one of the stocks mentioned above:
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