3 Stocks To Buy In An Increased Global Threat Environment

In the government agencies sector, Wells Fargo upgraded CACI International Inc CACI, Leidos Holdings, Inc. LDOS and Science Applications International Corp SAIC from Market Perform to Outperform on Wednesday, with a price target of $158, $69 and $80 respectively.

Analyst Ed Caso is bullish because of improving fundamentals — especially funding levels and pricing, he said. (See Caso's track record here.)

A rising global threat environment could have a positive impact on these stocks, Caso said. The analyst projects an increase in national security funding above the current caps set under the Budget Control Act of 2011. There are also expectations of stronger-than-normal federal government fourth quarter book-to-bill.

The sector could benefit from a reduction in the U.S. corporate tax rate, because most are near the margin tax rate, Caso said. A 5-point reduction in the federal corporate rate would increase EPS by 8 percent, while a 10-point decrease would increase EPS by 16 percent, according to Wells Fargo.

The sector has a reasonable valuation according to free cash flow yield, but it is not inexpensive relative to a long-term view of enterprise-value-to-EBITDA, Caso said. The valuation has eased since the election, the analyst said.

The sector is lagging behind the aerospace sector, the defense sector and the market as a whole, Caso said; it has a defensive nature, which could be important in case the market pulls back.

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