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Homeland Defense for Investors

By Eric Wahlgren Protecting the U.S. against terrorism of all kinds -- bio, cyber, and general mayhem -- is a booming business. The homeland security industry should grow to more than $170 billion in 2006, from an expected $100 billion in 2003, says Homeland Security Research Corp., an industry research group.

The huge growth potential caught the attention of entrepreneur Dawn Van Zant, founder of ECON Investor Relations, a corporate-communications and investor-research firm in Point Roberts, Wash. Believing there was a need for a "one-stop shop" for information on companies big and small involved in the business, Van Zant launched investment portal in 2002.

The Web site offers research conducted by Van Zant, a former trader for various boutique firms, as well as from other stock and homeland defense experts. Although the information is free for now, investors should be aware that the site receives compensation from the "Featured Companies" it profiles once a month. It doesn't have ties to other companies mentioned on the site, Van Zant says.

In a recent chat with BusinessWeek Online Reporter Eric Wahlgren, Van Zant discussed trends in the homeland defense industry as well as certain companies that may stand to benefit from these trends. Edited excerpts of their conversation follow:

Q: How much is this industry expected to grow?

A: By 2006, it could grow to $170 billion. In talking to other analysts, fund managers, and homeland defense experts, everyone has the perception that this industry is very long-term. The ongoing war on terrorism is probably not going to end in our lifetimes.

Q: That's a scary thought. What kind of companies are going to gain from this war?

A: It has changed since September 11, 2001, when companies involved in X-ray security and detection, in terms of airport security, saw gains. These days, the key emerging areas are biodefense and port and border security. In port and border security, there's a move toward developing better ways to detect explosives and other dangerous materials.

Q: Before we talk specifics, you say investors should not view stocks that you mention here or on your site as recommendations for investment?

A: That's right. We don't make recommendations. We want to be an investment portal that investors can use as a starting point to do more research on particular firms.

Q: So any names that might benefit from the fight against bioterrorism?

A: One company that has gotten a lot of attention is Nanogen (NGEN). In September, they announced that they were collaborating with another company to create products that would detect infectious diseases. What differentiates them from others is that they use nanotechnology to speed up the testing process. While a traditional lab might take a week to come back with results, one using Nanogen technology could process information much faster.

There's also Avant Immunotherapeutics (AVAN). They're working on applications for the prevention and treatment of disease. Basically, they're looking for vaccines for troops and civilians against biological warfare.

Q: What about companies involved in the business of boosting port and border defense?

A: Well, the one company that's doing this is our client, Markland Technologies. It has a contract with the Homeland Security Dept. for a technology that basically uses acoustic waves to detect [hazardous] material. If the results are good, the technology would allow officials to determine what a particular material is, based on something akin to a DNA reading. This technology would enable border agents to better detect explosives and drugs. The company also has other products on the market right now for cargo screening and other uses.

Q: We've heard a lot about terrorists using the Web to send encoded messages, among other nefarious things. What companies that fight cyberterrorism might investors look at?

A: One company we follow here is Internet Security Systems (ISSX). They probably are one of the bigger names in the industry. They make protection systems against a full spectrum of cyberterrorism threats.

Another one is Rainbow Technologies (RNBO). They have secure-communication products for wireless transactions. They have commercial applications, but they also have applications for government defense and homeland security for securing classified information.

Q: How active are the big defense contractors in homeland defense?

A: One of the companies I've been watching is Honeywell International (HON). A lot of the people I talk to also like Northrop Grumman (NOC). We also watch Lockheed Martin (LMT), but Honeywell looks like it's trying to get more into homeland security than it was in the past.

It recently acquired a company called Silent Witness, which makes closed-circuit cameras used for surveillance. On the whole, I'm seeing more acquisitions like these by larger companies. I think homeland defense will be an area of growth for them.

Q: Are there any emerging technologies that are likely to have applications for homeland defense?

A: Again, nanotechnology is what a lot of people are looking at. It's still emerging. There is one smaller company that is making bulletproof vests and doors using nanotechnology.What makes nanotechnology attractive in this application is that it is very lightweight.

Nanotechnology is also being used to develop explosives-detection devices. These are mostly smaller companies, so investors should keep watch on that area.

Q: Any other companies investors should know about?

A: TASER International (TASR) has done really well. Their stock is up to more than $80 a share, from around $3 or so a year ago. They make what's called less-lethal weapons for law-enforcement and corrections officers. Their product is a compressed nitrogen electrified probe. There's a lot of interest in these less-lethal weapons. [TASER'S Web site says the electrical output from one of its probes "jams" the human body's communication system, usually causing targets to fall to the ground.]

Overall, though, I would really recommend that investors look at sectors within the industry. They will see that money is going into biodefense, port and border security, and nanotechnology. Companies that benefit may change, so it may be more useful to start keeping tabs on these sectors.

For instance, when you look at the $29.4 billion 2004 budget for the Homeland Security Dept., over $9 billion of that was allocated to port and border security. Follow the money. Along with government spending, you always want to look at what the bigger companies in homeland defense are doing in terms of acquisitions. That will help tell you what technologies are likely to be at the forefront.

Q: The Bush Administration has made the war on terrorism one of its top priorities. Would the homeland defense industry be less successful if a Democrat were elected President in 2004?

A: Most people say no. There are still major gaps in security. That is not going to change. If we come out with new technologies, terrorists are going to be looking at those technologies as well. You always have to be at least one step ahead of them. Wahlgren covers the markets for BusinessWeek Online in New York

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