Those under the influence of Orwellian satire might choose to believe that Applied Signal (NASDAQ:APSG) is merely an instrument of totalitarian regimes used to control their populaces. Granted, it was founded in 1984, but it's more likely that Applied's products go toward preventing catastrophes and making the world more secure for civilians and those serving in the armed forces.

This small-cap defense outfit supplies the military and intelligence communities with the technology they need to remain, well, intelligent. Its products have applications ranging from communications and weapons systems detection to location of hidden explosives. It recently finished its fiscal 2008 with record high revenues, which potentially makes it a beacon of hope amid an economy in the dark. But is it enough?

When it announced its fourth-quarter and fiscal 2008 financial results last week, the public learned that Applied's yearly sales were a record $186.3 million -- up 9.4% from 2007. Operating margin, a measure of management's efficiency, hardly budged from last year, though earnings per share increased 14.5% to $0.63. More interestingly, it added 100 people to its staff, and announced intentions to add more in fiscal 2009.

Furthermore, management said that over the next several years, the government will need to upgrade existing signals intelligence equipment with new technology, which would provide Applied with an intravenous drip of taxpayer money.

Foolish takeaway
On the whole, it was a promising report of financial results, and there are plenty of good things to say on Applied's behalf. It's a slow and steady revenue grower that sports a 3% dividend yield. It differentiates itself from competitors like Argon ST (NASDAQ:STST) and L-3 Communications (NYSE:LLL) by focusing on providing superior value and customer service. I've always believed that the bitterness created by poor quality and service lingers long after the sweetness of low price is forgotten, so I was practically sold.

Then I saw it. Within an arm's reach of its 52-week high, its shares were trading more than 26 times its trailing earnings per share. Thanks, but no thanks. I've got nothing but love for Applied, but I must respectfully decline it an invite into my portfolio -- for now. Things could change down the road, so it's going on my watch list while I keep hunting.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.