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Cramer IDs Security Spec Stocks

“Biometrics is one of the fastest-growing areas of homeland security,” Cramer told viewers on Friday, and he gave them two speculative ways to play it: Cogent and L-1 Identity Solutions.

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This industry is part of homeland security, a secular growth theme that Cramer’s been highlighting all week on Mad Money. So far he’s recommended American Science and Engineering for is bomb-detecting X-ray machines, ArcSight for its cyber security, NICE Systems for voice and data analytics, Applied Signal Tech for communications intelligence and FLIR Systems for thermal imaging. Biometrics got the nod today for its ability to catch bad guys using fingerprint and eye scans.

Cogent and L-1 are spec stocks, trading under $10, the former a pure play on fingerprint biometrics and the latter a hybrid of biometrics and other security technologies. The risk lies in their niche businesses, which depend on government contracts, but Cramer said he sees potential for both companies.

L-1 makes a biometrics recognition device that helps to identify insurgents in Iraq and Afghanistan, and other countries are testing the system. The company is also big into IDs, as it’s the largest maker of driver’s licenses in the US. L-1 is bidding on a contract with New York and Mexico right now, and its also partnering with Tata Motors in India to bring biometrics there. And get this: L-1 has a $1.1 billion backlog – nearly twice the company’s size.

As for Cogent, that company won a contract to supply a fingerprint ID system to Ohio and another for the US Census. It also landed deals with the Army, UK Post Office and the Belgian Police. The main breadwinner is Cogent’s US-VISIT program, which verifies the identities of foreign visitors and accounts for half revenues. There’s been some speculation that another company could steal the contract, but Cramer called it unlikely. Such a move would be cost prohibitive, requiring Homeland Security to switch to an entirely new system.

Products aren’t the only things to differentiate these companies. The balance sheets tell different stories as well, though one isn’t necessarily better than the other. Cogent carries $530 million in cash, or about $5.86 of cash a share, and no debt. That’s more than half the value of this $9.64 stock. L-1, though, has $16.9 million in cash and $463 million in debt. The company said it expects significant cash flows in the second half of 2009 and will accelerate its debt repayments next year. Cramer didn’t seem concerned, but it is something that investors should note.

Cramer thinks there could be “some serious upside” for both COGT and ID, but the question is how investors want to trade it. Do they want a pure play like Cogent and its clean balance sheet? Or would they rather go with the hybrid L-1 and take a chance on its debt?

“Choice is yours,” Cramer said.

Call Cramer: 1-800-743-CNBC

Questions for Cramer? madmoney@cnbc.com

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