Featuring Lutts’ Logic:
A Return to Hitchhiking?
AeroVironment is Still Attractive
An Undervalued Telecom Growth Stock
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Driving in my car yesterday, I was listening to a song by J.J. Cale titled “Homeless,” which includes these lyrics:
“I’m not a homeless man
I’m a gypsy by trade
And I’m travelin’ this land
I’m not a homeless man”
Over three decades ago I was homeless, too, but I didn’t call it that. I was in my early 20s and I was “traveling this land.” If I chose, I could have returned to the safety to my parents’ house. But I chose to travel, to seek new experiences . . . and I’m glad I did. I still love to travel.
Being chronically low on funds back then--and low on responsibilities as well--I did a lot of hitchhiking. My father was a hitchhiker in his youth, too. In fact, he was hitching a ride once in a car that tipped over. He still has a photo he took--of the car lying on its side--to prove it . . . luckily, no one was hurt.
But you don’t see many hitchhikers anymore--in fact, my kids have never hitchhiked (at least, to my knowledge)--and I think there are several reasons for that. Yet I think it’s possible we may see a resurgence of hitchhiking in the years ahead.
I’ll explain why below.
But first I’d just like to reminisce a bit, thinking back to my journeys of over three decades ago.
I remember hitchhiking north one autumn Monday morning, returning to college after a weekend of work, and getting a ride outside Portland, Maine, from a young man driving a bright blue Lotus Europa. The car was snug and fast, and so close to the ground I imagined we could go under tractor-trailers. Best of all, the same driver picked me up again the next Monday!
I remember riding in an ancient red Mercedes--with the vertical speedometer--over the mountains of Pennsylvania when a sudden snow squall reduced visibility to less than 50 feet, and cars started crashing into each other. My middle-aged good Samaritan pulled over, got a box of flares out of his trunk, and I ran back down the road, lighting them as I went and placing them to warn oncoming traffic.
I remember standing on the side of the road in Ohio, freezing cold, and jumping for joy (inside) when a big RV pulled over. Opening the door I found a very kind young couple returning from Florida . . . and no heat. The vehicle was an icebox, but I took the ride.
I remember the policeman in West Virginia who pulled up to me on a dark highway onramp and warned me, “If you’re here when I come back I’ll have to arrest you.” Luckily, I wasn’t.
I remember rolling through the red clay fields of Georgia, heading for Florida, marveling at the miles and miles of tobacco and thinking, this stuff is killing the people who use it but feeding the people who grow it.
I remember the fellow hitchhiker in Florida who hid his LSD tabs in the hollow aluminum frame of his backpack, confident the police would never think to look there. I distanced myself from him as soon as possible.
I remember being caught in a deluge in New Orleans, and realizing that while water flowed downhill in New England, there was precious little downhill to be had in New Orleans. The water mainly rose up.
I remember riding in a Chevy van over the Grand Tetons of Wyoming in the springtime. As the road rose higher, the snow deepened, and eventually, the van’s tires refused to grip. The driver didn’t fight; he calmly backed down, turned around, and took the long way around, extending the journey by at least an hour.
I remember the eerie lunar landscape of Idaho. Not the car, not the driver, just the landscape.
I remember the longhaired trust-fund couple in Southern California, who gave me a ride and then let me stay a few nights in their trailer on the beach, where I enjoyed warm strawberries and warm sunshine. They took me on a forgettable night to Tijuana, too.
I remember a few days in the U.K. with a dark-haired French girl named Christine who asked if she could accompany me as we hitchhiked from hostel to hostel. I think she wanted the security of a male companion and judged me harmless . . . and she was right. It also helped that my French was better than her English.
I remember the many professional truck drivers who picked me up late at night just to have someone to talk to . . . to keep them awake.
And I remember being fooled, again and again, by the Doppler effect, which makes it sound like a car that has passed is slowing down, even though it’s not . . . especially if it’s an old Volkswagen with an air-cooled engine.
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So why do I think hitchhiking might become popular again?
One reason is the pattern of generational changes, a topic I touched on two weeks ago.
In the 1940s, when my father hitchhiked, the country enjoyed a uniformity of purpose. The war effort had made materials scarce. People trusted other people. So it was only natural that, lacking a car, a young man would hitchhike. It was also natural that other people would stop to pick him up.
In the 1970s, when I did my traveling, the country’s uniformity of purpose had been replaced by a search for enlightenment. The old rules no longer applied--or at least some of us young people thought they didn’t--and Americans in general were tolerant of our explorations. Admittedly, the road wasn’t quite as safe as it was for my father, and the authorities were less supportive, but the traveling did teach me some wonderful lessons, the most important of which was that the country was full of good and interesting people.
In the decades that followed, Americans turned from the search for enlightenment to the search for material wealth and comfort. Selfishness took precedence over community, while a desire for safety (and the ability to pay for it) meant we erected walls around ourselves--often in the form of big SUVs--and warned our children to beware of strangers.
So what comes next?
If it’s a future limited by scarce, high-priced gasoline, growing numbers of people will be unable to fuel their cars.
If it’s a future characterized by high tolls and other user fees--a special tax on Hummers has been proposed--fewer people will be able to afford to drive. (Here in Massachusetts the governor just decided to raise the gas tax by 19 cents per gallon.)
And if it’s a future defined by a growing sense of community, particularly if the community is focused on minimizing the burning of fossil fuels, it will be patriotic to hitchhike, and patriotic to pick up hitchhikers.
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The logical thing now would be to recommend an alternative energy stock, or a super-efficient carmaker’s stock. Trouble is, there are none that look good today. The solar power stocks are still cooling off from their high times in 2007, and automakers in general look terrible.
The closest I can come is AeroVironment (AVAV), which I’ve mentioned here before. The company has a high-current fast-charge battery charging system that’s already being used by Ford Motors and Del Monte for their warehouse forklifts, and by Delta Air Lines for its baggage movers. But the big prize is the still-tiny--but potentially huge--market for charging electric cars! If this company’s system becomes the standard, this stock could soar for years!
Of course, the electric car market is still in its infancy, so investing in this company solely on the possibility that the electric car industry will favor it carries a big risk. Happily, the company already has a solid growth business; it’s the number one supplier of unarmed aircraft systems (UAS) to the U.S. government. Its hand-launched drones fly over Iraq, Afghanistan and more, sending back pictures to operators safe on the ground.
And this business is not going away. Just this month, the U.S. Army signed contracts for $58 million more of the company unmanned aircraft systems (possibly for Afghanistan, where we’re sending thousands more troops and where there’s a relative lack of these drones). Last year, the U.S. government accounted for 84% of the company’s revenues, and they’ll be spending even more this year. In a world where everybody seems to be spending less, our federal government is spending more, and that’s a big reason for AeroVironment’s strength.
There’s another company that’s benefiting from the same trend, and its stock first mentioned (briefly) in last Saturday’s Cabot Wealth Advisory. In that issue, editor Elyse Andrews reprised the Martin Zweig-influenced screen I sometimes use that finds attractive undervalued growth companies. Last week, it found only two. The one that caught my attention was Comtech Telecommunications (CMTL).
Comtech, you see, is in the same boat as AeroVironment, in that 66% of its revenues come from the U.S. government . . . and business is growing. The company makes a wide variety of telecommunications transmission and receiving equipment. It holds the #1 position in the industry in satellite-earth modems, forward error correction technology and over-the-horizon microwave systems. It makes jamming equipment, troposcatter systems, voice gateways, backhaul cellular traffic systems, movement tracking systems, VOIP systems, antenna systems, mobile systems for homeland security, real-time messaging systems, amplifiers used in counteracting improvised explosive devices (IEDs) and more.
Revenues and earnings have grown every year since 2002. In the latest quarter, revenues grew 67% to $192 million, while earnings jumped 81% to $1.07 per share. The after-tax profit margin was 15.7%. Yet the P/E ratio is just 11. And the price/sales ratio is 1.7, making it, as the Zweig screen says, a good bargain.
Of course, bargains can always become better bargains. But the system says this one has far more upside potential than down, and management (which has been buying back the company’s stock recently) will keep the company on the road to growth.
The stock fell from 50 to 37 in the past year, and today, sitting at 38, it looks like an attractive long-term investment.
Yours in pursuit of wisdom and wealth,
Timothy Lutts
Publisher
Cabot Wealth Advisory
Editor’s Note: Every Monday our in-house staff, aided by software program OptiMo, combs through stock charts to find the 10 strong charts that are most likely to keep on running higher in the weeks and months ahead. The result is an active investor’s guide to the best moneymaking possibilities TODAY. In past years, Cabot Top Ten Report has been an early recommender of Apple, Baidu, DryShips, eResearch, First Solar, Gamestop, Hansen Natural, Intuitive Surgical, Royal Gold, Titanium Metals and hundreds of other big winners. In 2009, it’s already identified the stocks that are attempting to lead the market higher today. If you want to own the best-performing stocks of 2009, I urge you to give it a try. To get started with a no-risk trial subscription, simply click here.
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