bp

MOST NOTEWORTHY:

• Stanford initiated BMC Software (NYSE: BMC) with a Buy rating and $45 target. The firm highlights the company's broad product portfolio and configuration management database leadership and thinks margin expansion should continue.
  
• ThinkPanmure assumed Smart Modular (NASDAQ: SMOD) with an Accumulate rating and $5.50 target. The firm expects better DRAM pricing but expects SMOD to experience some headwinds with Hewlett-Packard (HPQ) losing share in the server market.
  
• Broadpoint expects Entropic Comm (NASDAQ: ENTR) to benefit from the adoption of applications that allow video through numerous devices, especially high definition and data content. Shares were started with a Buy rating and $6 target.

• Banc of America initiated General Dynamics (NYSE: GD), Lockheed Martin (NYSE: LMT) and Northrop Grumman (NYSE: NOC) with Buy ratings and targets of $100, $120 and $80, respectively.
  
• Intercontinental Exchange (NYSE: ICE) was initiated with a Buy rating and $150 target at UBS.
  
• Intrepid Potash (NYSE: IPI) was assumed with a Buy rating at Merrill Lynch.

Ultralife Batteries (NASDAQ: ULBI) provides a range of non-rechargeable and rechargeable batteries, charging systems and communications accessories for use in military, industrial and consumer portable electronics products. The company's non-rechargeable lithium batteries are used to power such diverse devices as radios, emergency radio beacons, search and rescue transponders, portable medical devices and smoke alarms. Its lithium polymer and lithium ion rechargeable batteries are used in such portable devices as laptop computers and cell phones. The US Department of Defense accounts for about twenty percent of Ultralife's sales. Major commercial customers include General Dynamics (NYSE: GD), General Motors (NYSE: GM) and RadioShack (NYSE: RSH).

The company pleased investors last week, when it issued upside guidance for the current quarter and year. Management sees Q2 revenues of more than $75 million ($60.43M consensus) and FY08 revenues of at least $250 million ($240.27 million consensus). The CEO said the better performance was attributable to "strong shipments to date, strong backlog in most businesses and requests from customers for accelerated deliveries against their orders."

MAJOR PAPERS:

• Merger talks between UAL Corporation's (NASDAQ: UAUA) United Airlines and US Airways Group Inc (NYSE: LCC) have been put off for now, the Wall Street Journal reported. United is reportedly close to an alliance with Continental Airlines Inc (NYSE: CAL).
• Harris Corporation (NYSE: HRS) is for sale and the company has begun to hear from interested parties, the Wall Street Journal also reported. Harris is looking for $75 to $80 per share. Speculation about the bidders includes General Dynamics Corporation (NYSE: GD) and Northrop Grumman Corporation (NYSE: NOC).

• The Charleston Gazette reported that Chesapeake Energy Corporation (NYSE: CHK) has decided not to build its Eastern Division headquarters in Charleston, West Virginia in the wake of a West Virginia Supreme Court ruling on May 22.

• AppleInsider reported that Apple Inc (NASDAQ: AAPL) is expected to announce a back-to-school deal soon that will encourage students to buy new Macs by offering some of the largest incentives in the history of the company.

I have not decided who I am voting for yet. Or maybe it would be more accurate to say I have decided on multiple occasions only to become undecided again. While some will see me as fickle, or worse, others may be in the same boat.

I am also continuing to think about what difference any of the candidates can make on the economy, and based on these musings, where to invest. My current belief is that none of them will have a profound impact on our economy.

There are no financial wizards among them. Here is the shocker though: I like all three candidates, or at least can find some good in each of them. Each of them is a fighter, and I believe each one of them brings certain skill sets to the job. There are also things about each candidate that are inescapably negative. Clinton has so much baggage, Zsa Zsa Gabor would be jealous. Obama does not have the experience and he has a degree of arrogance (right sweetie); McCain is an old stick-in-the-mud who, as a long-time senator, has spent more hours with lobbyists than almost anybody, though he is pretending otherwise.

Where does this leave me from an investment perspective? My first choice, for stability with moderate growth and dividends, remains the defense sector. I wrote Defense sector rolls over S&P 500 for 8th straight year a while back and I still think that it is the most secure. Here's why:

A) None of the candidates will want to appear soft on defense when we are at war, and all three have made threatening remarks in some country's direction to make sure the electorate knows that.

B) The War in Afghanistan and Iraq rages on, and even the most optimist view is that a draw-down will take years.

C) Even if all war ceased immediately, the upgrading and replenishment of the hardware will cost billions of dollars and most of the defense contractors have that in their backlogs now. Chasing Value: General Dynamics & Raytheon -- The defense does not rest

When it comes to defense spending over the last nine years, there has not been any rest. As I have reported on numerous occasions, the defense sector has beaten the market indices year after year. This year is no exception and two of my recommendations remain ahead of the market and are reporting new contracts every day.

Today, theThe Arizona Republic reports [registration required] that General Dynamics (NYSE: GD) is to receive billions in contracts for its C4 Systems as part of the Army's extensive modernization plan. The company is building a communications network for the Army and is the lead contractor with Lockheed Martin (NYSE: LMT) for a wireless network that will deliver mobile connectivity to soldiers on the field.

General Dynamics is up about $10 (12.5%) in the last year and offers a 1.5% dividend yield. Its current P/E is 16.5 and its P/S is 1.33 with a 15% ROIC. It opened today at $90.58.

Radio World reported that Harris Corp. (NYSE: HRS) might sell itself. I just spoke with an analyst who said that there's a rumor that the suitor might be military contractor General Dynamics (NYSE: GD).

Harris is based in Melbourne, Fla., and has a market capitalization of $7.3 billion. Perhaps Harris thinks its growth potential in the defense industry is "less attractive" than anytime since Sept. 11, 2001. Harris has 16,000 employees and reported $5.1 billion in revenues and net income of $410 million over the last 12 months, ending March 28, 2008.

General Dynamics may be able to cut costs and increase revenues by combining the two firms. And Harris stock is clearly rising -- it's up 2.8%. Could it be due to this rumor? Please comment if you know more.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

Last year, my best Chasing Value recommendation was Aluminum Corp of China ADS (NYSE: ACH), which sailed from $22 per share to a 52-week high of $90.95. I will take credit for finding a winner, but I cannot in all honesty say that I thought it would more than quadruple -- that part was luck. (The original story was Chasing Value: Aluminum Corporation of China ADS, which I still think is worth a read today.)

If you acquired what is often referred to as Chalco (China Alum. Co.) anywhere near the time I recommended it and still own it you are probably still very content with only perhaps a 90% gain as the stock has come down some, closing last Friday May 9 at $40.98

Another of my recommendations was General Dynamics Corp (NYSE: GD), which closed Friday at $90.92. This one is only up a few percentage points from my starting point of $88 per share, but you will note, curiously, that it is only 3 cents off ACH's high. Given the market's bad year, a gain when the market is losing is a bigger plus than the casual observer would perceive. The defense sector has provided the anticipated market defense as I discussed.

MAJOR PAPERS:

• According to senior industry sources, the Financial Times reported that the Ministry of Defense could ask General Dynamics Corporation (NYSE: GD) to provide the vehicle design for a new generation of armored vehicles for the army. It is unclear whether General Dynamics, in competition with Nexter and Artec, will be awarded the contract or will be named the preferred bidder.
• Following the collapse in March of The Bear Stearns Companies Inc (NYSE: BSC), the Financial Times also reported that the SEC will soon require Wall Street banks to publicly disclose more details about liquidity and capital positions. Cox also urged lawmakers to pass legislation that would allow the SEC, or another regulator, the "explicit mandate to supervise" investment banks.

• According to the New York Times, Citigroup Incorporated (NYSE: C) will move senior investment banker Alberto Verme to Dubai by the end of the month in the hopes of establishing a stronger foothold in the region, a crucial area for global banks.
• The New York Times also reported that several large oil companies, including BP Plc (NYSE: BP), ConocoPhillips (NYSE: COP) and Chevron Corporation (NYSE: CVX), agreed to pay nearly $423M in cash in order to settle a lawsuit that alleged water contamination from methyl tertiary butyl ether, a gasoline additive. Under the terms of the deal, the oil giants also agreed to pay 70% of the future cleanup costs for the next 30 years. Exxon Mobil Corporation (NYSE: XOM) and several other companies named in the suit did not agree to the deal.

General Electric Company (NYSE: GE) recently down $4.49 to $31.96:

GE reported Q1 earnings per share (EPS) of 44 cents versus consensus estimates of 51 cents. GE lowered 2008 EPS guidance to $2.20-$2.30. GE's Jeffery Immelt completed "Transformational" deals in 2003; paying $10 billion for Amersham and considerations valued at $5.5 billion for Vivendi.

GE call option volume of 410,894 contracts compared to put volume of 371,896 contracts. GE May option implied volatility of 33 was above a level of 27 from April 10 and its 26-week average of 25 according to Track Data, suggesting larger movement.

Options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

In recent months I have been recommending that investors take a look at the defense sector as a safe haven during this erratic stock market -- erratic and down. My most recent post on the subject was Chasing Value: Raytheon (RTN) up on earnings & 2008 outlook. The defense sector has beaten the S&P 500 index for eight years running and this year may mark the ninth straight.

In a previous post I trumpeted General Dynamics Corporation (NYSE: GD) and still believe in the stock. The price-to-sales is a modest 1.33. The P/E of 16 and dividend are average, but it has a healthy ROE near 20%. If you believe the forward looking P/E it is only 14. GD makes the Gulfstream aircraft for the wealthy jet-setter and the Abrams tank for the military. How many of those will need parts or replacement in the coming years?

When I was evaluating my 2008 picks I looked at most of the large defense contractors and included RTN over GD. If you look at the chart below and the original story Chasing Value: General Dynamics (GD) looking long and flying high!, you will find I was looking at General Dynamics around $90 a share. We bought in at $88 so you know I like it even more in the area of $83 where it is trading now.

"The weak start to 2008 has left many investors scrambling for a safe haven in which to stash their cash," notes Jocelynn Drake, who sees the defense sector as one such haven.

The analyst with Schaeffer's Investment Research explains, "The recent losses suffered by many of the defense-sector components has brought them back to long-term support, creating potentially strong buying opportunities."

"What do General Dynamics (NYSE: GD), Lockheed Martin (NYSE: LMT), Northrop Grumman (NYSE: NOC), and L-3 Communications (NYSE: LLL) have in common? These four defense stocks have enjoyed strong rallies during the past four years.

"In addition, they are all currently resting right near support at their ascending 10-month moving averages. These stocks have benefited from this long-term support level and could use their respective trendlines as springboards to launch them on the next leg of their uptrends.

"What also makes these stocks very appealing from a bullish perspective is that short-term options players are very skeptical of the stocks' outlooks. As a result, options speculators have loaded up on bearish bets toward these securities in an attempt to call a top to their rallies.

MOST NOTEWORTHY:

• Baird upgraded shares of Stryker (NYSE: SYK) to Outperform from Neutral as they believe the company's manufacturing problems are more manageable than expected and that supply constraints involving the Trident acetabular cup appear more limited.
  
• Wachovia raised General Dynamics (NYSE: GD) to Outperform from Market Perform, citing valuation, likely resumption in buybacks, and conservative guidance.
  
• Oppenheimer upgraded shares of Garmin (NASDAQ: GRMN) to Outperform from Perform on valuation, as they believe sentiment has troughed and that downward revisions are already priced into shares.

• Merrill raised Turkcell (NYSE: TKC) to Buy from Neutral.
  
• Lehman upgraded HealthSouth (NYSE: HLS) to Overweight from Underweight.
  
• Bear Stearns upgraded McAfee (NYSE: MFE) to Outperform from Peer Perform.

Ultralife Batteries (NASDAQ: ULBI) provides a range of non-rechargeable and rechargeable batteries, charging systems and communications accessories for use in military, industrial and consumer portable electronics products. The company's non-rechargeable lithium batteries are used to power such diverse devices as radios, emergency radio beacons, search and rescue transponders, portable medical devices and smoke alarms.

Its lithium polymer and lithium ion rechargeable batteries are used in such portable devices as laptop computers and cell phones. The U.S. Department of Defense accounts for about 20 percent of Ultralife's sales. Major commercial customers include General Dynamics (NYSE: GD), General Motors (NYSE: GM) and RadioShack (NYSE: RSH).