[Beginning of Cramer's verbatim comments for this segment...]

Jim:          On this show we are always looking for broad themes like the mobile internet tsunami that I have talked about endlessly… we are looking for big picture investment ideas that give you something to fall back on when the market inevitably gets hammered… look, I know today was a good day… but it is my job to play devil’s advocate and prepare you for the next time that stocks get polaxxed… you need a shopping list done in the cool of day… not the heat of battle… shopping lists based on these big secular growth themes… and that is why all week I am going to explore a huge new one… that I think can really work in terms of trying to make you a lot of money… homeland security...

This is a theme, frankly, that I wish did not exist at all.. but the facts are the facts… just last week, President Obama spoke at the National Counter Terrorism Center… he was talking about pressing the battle to cripple global terrorist networks and protecting America against future attacks… we all know the government lavishes the defense contracts with boat loads and boat loads of money… nobody feeds at the Federal trough like these guys… but traditionally we think of these companies of making fighter jets, tankers, submarines… basically new weapon systems… but the new theme… the new theme of defense is prevention and protection… we do not care as much about huge anti-ballistic missile shields anymore… we want the nuts and bolts that will protect us from the bad guys… and unfortunately, I do not think that the bad guys are going away any time soon… even if we double down in Afghanistan… not even if the next season of “24” turns out to be the last but the greatest.

As long as we have terrorism problems and as long as countries around the world are spending $140b to fight it… that is going to double over the next decade according to homeland security research… so you might as well try to make some money off of the gigantic defense theme… to get some idea about how big this is… the 20 biggest government contracts awarded for 2010, are worth $180b combined… and the largest of them… the Department of Homeland Securities new Eagle2 IT system… it is the kind of stuff that you see Chloe working on with all of the computers… with all of those “24” machines… it is estimated to be $45b.. that is a quarter of the total top 20 contracts… just as there are many different ways to play a big theme like the mobile internet tsunami… there are also lots of different areas of the counter terrorism business that I think could be worth getting some exposure to… but only on a pullback.

That is why every day this week I am going to focus on a different facet of homeland security… and a different way that I think you can try to play it… today we start with detections systems… the best way to keep our country safe, is to be able to detect threats as they try to enter America and stop them… this involves scanners being used at our ports of entry… specifically x-ray scanners that can detect weapons like explosives.. they also detect drugs, but let’s handle one global war at a time on the show… even though these machines fight two for the price of one… now in just the US the market for x-ray scanners that can detect explosives… worth about $370m… is growing at a 12% clip to $735m by 2014... and the total market opportunity for detecting goods, smuggled goods, weapons, people and contraband is more like $2b.

The way to play it… American Science & Engineering Inc. (ASEI)… before you pull this trigger… I do not think that any of you should buy ASEI until it goes lower… the name of this game is patience… all week I am giving you the stocks that I would buy as the market comes down… now there is nothing going to happen tonight for AS, for American Science… nothing, nothing at all…I mean look, you go do your homework… okay? you decide for yourself if you want… let’s wait please for the whole week… you pick one after the whole week if you like it… but if we get a decent pullback… you are going to get a great entry point.

With that disclaimer out of the way, I am going to talk to you about ASEI’s business… and I have known this company for 25 years… it is a pure play on x-ray machines that scan bombs, drugs, and weapons… now 30% of the companies sales come from its Z Backscattered vans… mobile x-ray systems housed in vehicles… another 20% comes for the Z Portals, large drive thru x-ray systems… ASEI’s Backscattered technology is protected by a wall of patents… this is not the traditional x-ray that you get from the dentist… it can detect just about everything… and because the companies products are so high tech… they also tend to be higher margined… meaning more profitable in each sale.

What else do you need to know?… gets roughly 63% of its sales from the US government… it has got a funded backlog of $155m… 70% of which is expected to be delivered in the next year… and its growth could be stupendous… the company sees a $2b adjustable market for its products… about 10 times the size of the current annual revenues… and it is getting more orders… ASEI won a $39m contract to upgrade the Z Backscattered vans that are already deployed in Afghanistan… now, ASEI has been around for a very long time… and I have to be candid, it has a checkered very mixed track record… it has been boom and bust over and over again… and it still has not recovered over the latest bust… the stock is down over 13% year to date.

So what is different this time?… well in the past ASEI was almost entirely dependent on the Unites States government… now it is building up a big international business… that matters… international sales have quadrupled over the last 4 years in 2008... and now represents 37% of the companies total revenues… in the most recent quarter international made up 87% of ASEI’s bookings… thanks to oversea contracts with China, Russia, India, and Australia, And Abu Dhabi… that is its largest foreign customer… it did not have any foreign customers when I used to follow it 25 years ago… this is a company that is going from an almost entirely American anti-terrorism stock… to one that is totally global… in the past when the US government cut back… ASEI was toast… but now its international business can pick up the slack.

And once ASEI gets its hooks in it, it keeps earning a recurring revenue from services and support for its machines… something that currently represents 40% of the companies revenues… the larger its installed base, the larger its service revenues will get… that is why ASEI recently won a $24m contract with the US Military… for service and maintenance… that is American Science and Engineering the company…. how about the stock?… it has got $15 of cash per share… a small but better than nothing 1.2% yield… and a divided analyst base… of the 5 brokers who cover the stock, 2 rated it a buy, 3 rated it a hold… given that ASEI is trading at 18 times earnings with a 16% growth rate… that makes it a bargain.. but I would still wait for a pullback before buying.

Here is the bottom line…

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Bottom Line:     Terrorism is not going away…nor is the fight against it… Nobel Peace Prize or not, and that makes counter terrorism, homeland security a pretty big business… a huge theme that you can fall back on when the market gets hit… I like American Science & Engineering Inc. (ASEI)… ASEI, for x-ray detection… I am going to give you other plays, and even more later this week.

 

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