Not Too Late to Buy Into High-Tech Security Shops
By Jim Seymour
Special to TheStreet.com
09/24/2001 12:00 PM EDT
The terrorists' attacks have led us to redefine -- or perhaps take a broader view of -- "technology" stocks. Many key security systems suppliers are certainly very high-tech, and
deserve to be counted in analyses of tech stocks.
It goes without saying that providers of security products and services are going to have a lot higher profile after the attacks. Public spending will soar, but so also will businesses'
investment in greater security for their people and facilities.
That spending will produce rich investment opportunities -- if you guess right, if you buy right.
Three small companies are especially interesting. Unfortunately for the trader, all have already enjoyed substantial run-ups after the attacks two weeks ago. But I think these three
will continue to climb over the next couple of years.
X-Ray Inspection
InVision Technologies (INVN:Nasdaq - news - commentary - research) was the first high-tech security stock to take off when trading resumed last Monday, opening at $11 after a
$3.11 close Sept. 10, and finally falling to $8.25 at market close. This was heady stuff for a company that sold for $1.30 in January.
By last Friday, InVision was around $9.20, producing a whopping price-to-earnings ratio of 130 or so. We've seen lots of high-P/E-flyers fall to earth over the past two years, so not
only that fast run-up but also the resulting sky-high P/E should be a warning for investors.
However, InVision looks to be squarely in the path of fundamental changes in security systems in public places in America: airport security check-in counters, security operations in
lobbies of public buildings, and more.
InVision has developed what amounts to a CAT scanner for X-ray inspection tunnels. The company's equipment delivers a 3D look inside packages, suitcases, attaché cases, etc.,
making it much easier to spot illegal items. I think virtually all X-ray-tunnel replacements are going to use the InVision technology, and the company will prosper mightily.
A second promising technology, back-scanning, allows thorough examination of travelers, providing a clear look at what's under their clothing.
As the analogy suggests, there are huge, obvious privacy issues, but as we go through the inevitable rethinking of personal privacy-vs.-public security just now beginning, I think
workable compromises will be found.
Back-scanning is just emerging from the labs, and there are no good investment vehicles for back-scanning products today. I'll keep an eye on this and let you know when they come
to market.
Face Recognition
Viisage Technology (VISG:Nasdaq - news - commentary - research) more than doubled at opening last Monday, to $4.80 from a Sept. 10 close of $1.91, rose to an intraday high of
$5.50, and finally closed at $4.70. By week's end, it had bettered that gain, closing Friday around $5.30.
Viisage is the leader in biometric "face-recognition" systems. Its facePASS product allows high-reliability scanning of faces at key entry points -- once again, think of airport security
stations, or lobby security gateways in public buildings. The software underlying facePASS can either match individuals' facial characteristics to a database of known authorized
persons -- for example, all corporate employees at ABC Corp. -- and allow admittance, or search immense databases for matches with suspects, who are then denied access or
arrested.
Face recognition is a little "out there." Still, remember the outcry when the FBI used Viisage's face-recognition software to identify suspects among the football fans at Super Bowl
XXXV in Tampa? Accuracy, while far from perfect, is surprisingly high.
In a recent comparison test against similar products run by the International Biometric Group, Viisage's "False Acceptance Rate" was a stunning .22 -- meaning 99.78% of
imposters attempting to get through were stopped. Its "False Rejection Rate" score, reflecting potentially embarrassing errors identifying authorized persons, was just 2.69%. Not
perfect, but well above the threshold of usability.
Perhaps more important to investors, Viisage has just turned in its seventh-consecutive quarterly profit. The numbers are small -- net income for the quarter was only a penny a
share, or $220,000, and gross revenue for the first six months of the year was just $13.2 million. But these days, tech investors welcome any profit.
The numbers are about to get bigger, much bigger, as Viisage's products become a standard part of security operations.
A Mini-Security Conglomerate
Talk about CompuDyne (CDCY:Nasdaq - news - commentary - research) with five people who've heard of the stock -- there aren't many -- and you'll think you're hearing about five
different companies.
One of the most visible parts of its business is its Norshield Security division, which provides bomb- and bullet-proof (or at least resistant) windows and doors for government and
public buildings. State Department endorsement and adoption has helped hugely here. I expect to see an enormous number of Norshield windows and doors sold as both public
and private facilities are rebuilt for the age of terrorism.
CompuDyne's Norment Group sells security systems to the corrections industry; its Quanta Systems division has provided classified, security-focused design and engineering
services to the intelligence community, military and government agencies since 1950; and its Fiber SenSys produces high-tech, high-security fiber-optics sensors. This summer,
CompuDyne bought Tiburon Systems, which has a gold-plated customer list of more than 400 government agencies, for now mainly in corrections, for which it provides complex
computer systems for identifying and tracking the bad guys.
Like the other companies mentioned here, CompuDyne had a big run-up right after the World Trade Center attacks. It's been bouncing around between its preattack close on Sept.
10 of $8.25 to as high as $18.10 before settling back to around $16.20 at Friday's close.
I think it has plenty of room to move up over the coming months.
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I have emphasized the quick gains, high P/Es and "bounciness" that these three small-cap companies have shown over the past couple of weeks because I want to underscore the
risks in making big bets now in the very early stages of our new war market.
Look into them, but tread cautiously. These are not times for impetuousness |
