Recently, I wrote an article about the catastrophic affects of sequestration on the economy. However, at the end, I explained how even if sequestration wrecks the economy and devastates the stock market, there will still be companies that survive and bounce back, giving the savvy investor a much-needed boost to his or her pocketbook. So without further ado, here are my top three picks for companies capable of surviving sequestration.
I know, not glamorous. But necessary? Absolutely. In fact, Cyber-security is a growing concern, and one that will continue to be a problem no matter what happens with sequestration. Moreover, analysts expect the market to grow 50% over the next few years, even as defense spending decreases. That's great news for companies such as CACI International (NYSE:CACI), SAIC (NYSE: SAI), and ManTech International (NASDAQ: MANT). All of these companies provide technical security programs in the United States and internationally.
More good news? CACI recently released its quarterly results. While many companies saw declines in business, CACI reported an adjusted net income increase of 1.7% compared with the same time last year.
SAIC, along with Intel (NASDAQ: INTC) subsidiary McAfee, is on the cutting edge of cyber-security, with the combining of McAfee firewall enterprises and SAIC's CloudShield CS-4000. The joint solution to cyber attacks is touted as being one of the industry's most secure firewalls, providing what's being called "Enterprise ready protection from zero day and reconnaissance attacks." Even better? The joint solution is supposed to reduce acquisition and maintenance costs.
ManTech is one of the companies providing cyber-security to the Department of Justice under the Information Technology Support Services (ITSS-4) contract, which has a ceiling of $1.4 billion through the end of fiscal 2017.
Although all three of these companies look as if they could pull through a catastrophic event like sequestration, my favorite is CACI. It has promising quarterly results, and to top it off, CACI was awarded a prime position on a $300 million, five-year contract to support the Air Force Research Laboratory Information Directorate, which CACI says will allow it to expand in the cyber market and in rapidly fielding mission-critical cyber-security solutions. In addition, Lockheed Martin (NYSE:LMT) awarded CACI's cyber market division a $36 million five-year subcontract to provide cyber forensics and information technology solutions for the Department of Defense Cyber Crime Center. In all, CACI's cyber-security division looks promising.
Defend your bottom line with defense companies
Wait, aren't these the companies that will take the biggest beating if sequestration takes effect? Arguably, yes. However, there i lies the real moneymaker. If sequestration goes into effect, defense giants such as Boeing (NYSE: BA), Northrop Grumman (NYSE: NOC), and Lockheed are probably going to see their stock prices tumble. But these companies are already in the process of making themselves lean and mean to survive budget cuts.
They also have an ace up their sleeves. Defense companies provide a service the military can't live without. Consequently, they're likely to survive even if worse comes to worst. They might not look as pretty as they do now, but their chances of pulling through are pretty high. And when they do, they'll probably see their stock prices rise.
My favorite among these defense companies? Lockheed. This choice might surprise you, as I usually favor Northrop Grumman -- and, to be clear, I still think Northrop is a great company for the long-term investor -- but after contacting Northrop and inquiring about its ability to survive and thrive after sequestration, I learned that its survival plan is to not comment on employee matters, while at the same time urging Congress to avoid sequestration.
Yes, we all hope sequestration will be avoided, but if it happens, I want a company to have a plan of attack. Lockheed, while it's had its foibles -- F-35 program, anyone? -- has been pretty direct on how sequestration will effect its business. Thus, it seems more prepared for that possibility. In addition, though defense budgets have been slashed, in its latest annual report, Lockheed reported a 2% increase in sales and grew its backlog to a record $80.7 billion.
Can't forget the big discounters
This one's a no-brainer. When the economy suffers, companies such as Wal-Mart (NYSE:WMT), and Costco (NASDAQ:COST) usually do pretty well. Why? Because when people are looking to save a penny, there's no better place than the bargain bins.
In fact, USA Today reported that these companies thrive in a recession. Think about it: While Whole Paycheck -- er, Whole Foods (NASDAQ:WFM) -- is like Disneyland for grocery shoppers, the fact that it's nearly impossible to leave there with money in your pocket (I keep trying, much to my husband's chagrin) makes discounters like Wal-Mart seem pretty attractive to those who are looking to cut costs.
Yes, organic cream-top milk is the bee's knees of dairy products, but at almost $6 a gallon, it's anything but economically savvy. Wal-Mart, on the other hand, sells its store-brand milk for around $1.97 a gallon. That's a savings of around $4 on milk alone. Factor in the rest of your groceries, and the savings really add up.
Wal-Mart, the king of discounters, is my favorite here. In 2012, Wal-Mart grew comparable sales by 1.6%, opened 64 new stores in the United States, and expanded its international segment by 1,094 stores. Yes, people, Wal-Mart continues to dominate in the field of discounters, and it doesn't look like that's going to change anytime soon.
That's a Foolish wrap
So there you have it: CACI, Lockheed Martin, and Wal-Mart. My top three picks for companies capable of surviving sequestration. Feel free to share your own thoughts in the comment box below.