Friday, May 15, 2009

Volume 3, Issue #38

Also in Today's Issue...

Read much about investments and you're bound to run across the word "skyrocket." I know I use it every now and then. Maybe you have, too. It's a good metaphor -- the perfect visual for what we all hope will happen to the stocks we buy.

This morning was the first time I've ever used it literally.

DigitalGlobe (NYSE: DGI), which operates satellites that provide images to U.S. intelligence agencies, went public today, the fifth IPO of the year and only the third high-tech offering. Though most would concede it's a lousy time to launch a new offering, the shares did indeed skyrocket, gaining +13% on their first day of trading. The stock opened at $19, a buck above its anticipated range of $16 to $18 a share. They closed at $21.50.

What's driving this? One thing and one thing only.

Government action.

In early April, U.S. intelligence directors decided to increase the number of satellite images the government buys. Now, I always figured this was handled by the military. But it's not. Two private-sector vendors that operate spy satellites. One is DigitalGlobe, the other is GeoEye (Nasdaq: GEOY).

Now, the thing is, there's already more business than these two companies can accommodate -- they're hard-pressed to take all the pictures Uncle Sam needs as it is. Now with the government deciding to buy even more images, DigitalGlobe decided it was time to go public.

DGI -- the first private outfit the federal government licensed to operate these critical intel-gathering assets -- is going to experience the same growth that its rival did. GeoEye's shares are up more than +42% this year. That bodes pretty well for DigitalGlobe. Remember, these are the only two companies the government uses to provide these crucial images, the market for which will likely exceed $10 billion by 2012.

Both of these companies' businesses are protected by insurmountably high barriers to entry. In the first place, it takes a half a billion dollars to launch a spy satellite. And even if an upstart could get the financing for such a venture -- and the odds are against that -- such an enterprise would still fail because it would lack a strong relationship with the U.S. government.

Those high barriers not only protect the business, they ensure a high margin: DigitalGlobe had revenues of $275 million last year -- an +81% increase from the year before -- and an operating profit of $92 million. That puts it among the top 1.5% of U.S. publicly traded U.S. companies.

DigitalGlobe is going to skyrocket in every sense of the word. Its going to launch its third satellite, and its shares are going to take off. At one point they'd piled on +33% today. That's just a warm-up for what they will do in the future.

Here's my prediction: DGI's initial $275 million market cap will balloon to more than $1 billion in less than two years -- it will double and then double again. I think these shares will easily reach $50 -- possibly within weeks, certainly within months They're a beautiful long-term term play.

Why? Because our government is going to continue to put pressure on Afghanistan, and there's no way to win the war there without the constantly updated satellite images. In addition to Afghanistan, there are certainly other areas that our intelligence leaders need to keep up with, from Israel to Iran to North Korea. In fact, there's really no place on earth where the United States doesn't have an interest. Intelligence agencies have to keep an eye on the whole world.

To that end, senior officials have already directed the procurement of additional imaging. Digital Globe is well positioned to take full advantage of the huge government-driven opportunity. And now, with its shares available to investors, you can position yourself to profit, too.

Let me be clear: The federal machine that's lifting DGI shares into orbit is the most powerful financial force on the planet. Since the bailout began, Uncle Sam has spent, lent or committed $13 trillion to get the economy back on track. Every time one of those public dollars is spent, a private profit is realized.

To learn more about how government spending can boost your portfolio's returns, click here.

-- Andy Obermueller
Chief Investment Director
Government-Driven Investing

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