Cramer’s Top 2010 Investing Themes: Homeland Security

Cramer on Tuesday served up the second installment of his weeklong series on 2010’s biggest investing themes. While Monday’s focus was the energy shortage and how that would boost the visibility of natural gas, today he put the spotlight on counterterrorism.

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Cramer, of course, wishes this trend wasn’t worth watching. But the Christmas Day attempted bombing of Northwest Flight 253 proved that serious threats still exist to US security. You can bet Washington will beef up our defenses to make sure that future system failures don’t happen. And that means more business for the related companies.

Mad Money first highlighted its top homeland-security stocks last October, but Cramer decided to update the list in light of recent events. He now endorses American Science & Engineering, FLIR Systems, OSI Systems , Cogent and L-1 Identity Solutions . Given their bump in price following the Flight 253 incident, he recommended starting a position now and then waiting for a dip to buy more.

First there’s American Science & Engineering, a pure play on X-ray machines, including mobile X-ray-equipped vans that scan for bombs, drugs and weapons. On a pros-versus-cons list of reasons to like this company, the pros side is very long: ASEI’s products are proprietary, there’s a huge backlog of business, new contracts are flooding in, and the US government has awarded the firm a number of sizable contracts. Also, Cramer said the addressable market for ASEI’s products is about 10 times the size of the company’s current annual revenues. The stock has run 20% since Cramer’s Oct. 16 call.

OSI Systems has a similar X-ray technology to ASEI that checks for explosives that are hidden under clothing, which is how the alleged Flight 253 bomber got through security. This is a small, speculative pick, with the company’s market cap under $500 million. But Cramer praised the fundamentals, pointing specifically to OSI’s strong backlog.

One stock that escaped the post-Flight 253 hype was FLIR Systems, which has barely moved since Christmas. But the share price is up a healthy 15% since Cramer gave the thumbs-up on Oct. 14. FLIR makes infrared cameras and night-vision systems to detect threats that aren’t visible to the naked eye, track and locate terrorists and aid US soldiers in nighttime operations. All of New York’s major airports use FLIR cameras, as do Dallas/Fort Worth and Logan in Boston. Also, the company’s technologies help to protect petrochemical and nuclear facilities, in addition to US bases in Afghanistan.

The last two homeland-security recommendations deal in biometrics, Cogent for fingerprints and L-1 Identity Solutions for eye and facial recognition. Cogent’s main revenue source is the US-VISIT program, which helps to identify foreign visitors in the country. But the company also won three significant contracts near the close of 2009: with the US Army, the UK Post Office and the Belgian police.

L-1 meanwhile shares its founder, Robert LaPenta, with L-3 Communications. Aside of the good bloodlines and the biometrics, L-1 also produces hard-to-copy IDs. Cramer admitted that the stock hasn’t performed as expected, but he thinks that is about change.

“Stick with counterterrorism winners” like ASEI, OSIS, FLIR, COGT and ID, Cramer said. “But, remember, this is a long-term theme, and all of these stocks look even better on a pullback.”

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