If This Stock Doubles, Thank North Korea

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When I was growing up, my Dad used to tell me that "things never get as bad as you think they could."

But he also always counseled me to never take a risky situation for granted, and to always be prepared. 

With the flurry of menacing threats coming out of North Korea lately, I'd call that timely advice these days.

Of course, bellicose rhetoric from the Democratic People's Republic of North Korea (DPRK) is really nothing new. Pyongyang has repeatedly threatened to strike at "the heart" of the United States. And a propaganda poster that's popular in that country shows a shredded American flag and an exploding Capitol Hill dome being struck by additional North Korean missiles.

But I have to tell you, the threats all took on an entirely different tone last week as the U.N. Security Council pushed for brawny sanctions.  The hyper-militant North Korea actually threatened to launch a "pre-emptive" nuclear strike against the United States – and anyone else it views as an "aggressor."

In a statement carried by the Korean Central News Agency (KCNA), a North Korea foreign ministry spokesman said "now that the U.S. is set to light a fuse for a nuclear war, (our) revolutionary armed forces… will exercise the right to a pre-emptive nuclear attack to destroy the strongholds of the aggressors."

To top it all off, that spokesman also warned that a second Korean War was now "unavoidable."

Here's why you should be more than a little bit concerned…

The DPRK recently conducted its third nuclear test, and used a long-range missile to put a satellite into orbit.

Seismic activity from North Korea's Feb. 12 nuclear test suggested a device of six to seven kilotons – an advance over the tests of 2006 and 2009, but only 40% of the strength of the 16-kiloton "Little Boy" bomb that was dropped on Hiroshima in 1945.

But a recent report by The Economist says that Pyongyang's claim that the blast came from a "smaller and lighter" bomb made a lot of folks around the world very nervous.

The reason: That claim has analysts wondering if North Korea has developed a device small enough to put aboard the three-stage Unha-3 rocket it used to put a satellite into orbit in December (the satellite subsequently failed).

"Unha-3 can reach at least Guam now and most likely will be able to reach Alaska and Hawaii and the West Coast of the continental United States within the coming year or two," Patrick M. Cronin, senior director of the Asian-Pacific Security Program at the Center for New American Studies, wrote in a January Op-Ed essay for CNN. "Adding a workable nuclear warhead will take a bit longer, perhaps three or more years, based on available information."

That's chilling stuff.  Especially when you consider that, back in October, North Korea specifically stated that its missiles could reach the U.S. mainland, as this Oct. 9, 2012 New York Times excerpt shows:

"The North Koreans "do not hide' that their armed forces, "including the strategic rocket forces, are keeping within the scope of strike not only the bases of the puppet forces and the U.S. imperialist aggression forces' bases in the inviolable land of Korea but also Japan, Guam and the U.S. mainland,' a spokesman at the North's National Defense Commission said in a statement. North Korea often refers to the South Korean military as "puppet forces,' a reference to the South's alliance with the United States."

Now many experts worry that a near-perfect mix of accelerants are in place for an accidental incident or some other small flashpoint that could explode into something far worse.

And that doesn't include the possibility the cash-strapped nation could sell these weapons to other countries that mean to do us harm.  There's a reason North Korea is known as "Missiles "R' Us" in intelligence circles.

And the sanctions that are being referred to as a possible solution? Well David Kang, an expert on North Korea at the University of Southern California, recently told the Christian Science Monitor that "there is zero chance that this new resolution will have any effect on North Korean behavior … Pressure does not work on North Korea."

So what's the answer?

As cliché as it sounds, the best one is to be prepared.

That's why, even in the face of big defense cuts, companies that are in the missile defense business can expect to continue to do well.  And thanks to North Korea, I've found a stock that could double in price from where it's currently trading.

I'm talking about aerospace player GenCorpInc. (NYSE: GY).

Here's why.

As our military continues to develop anti-missile systems to guard against missile threats, it's highly probable that GenCorp's Aerojet propulsion systems will occupy a very high spot on the Pentagon's shopping list.

On Feb. 13, in fact, Aerojet announced that its propulsion systems supported a "successful intercept test" of a Raytheon SM-3 guided missile off the coast of Hawaii. Meanwhile, Aerojet motors also provided propulsion for the SM-3's first and second stages.

The SM-3 can be based on land or at sea, and is a key element of the Obama administration's "Phased Adaptive Approach," which focuses on protecting the U.S. mainland from first-generation ICBMs. It will also protect American allies and U.S. "assets" around the world.

"Aerojet's propulsion systems have performed successfully on every SM-3 flight and intercept test to date," said John Myers, Aerojet's vice president of tactical programs. "This test further demonstrates the reliability of our tactical missile product line."

At present, Aerojet is the only U.S. propulsion firm that makes both solid rocket motors and liquid rocket engines. And the company wants to make certain that Aerojet remains the sector's Top Gun.

That's why, just last year, for instance, GenCorp dropped $550 million to acquire Pratt & Whitney Rocketdyne from United Technologies Corp. (NYSE: UTX).

Rocketdyne makes space-launch vehicles, missile-defense systems and advanced hypersonic engines. To date, it has powered nearly all of NASA's manned spacecraft, as well as the space probes that have traveled to nearly every planet in our solar system.

But I'm not the only one who thinks that GenCorp offers investors one heck of a profit upside. In a mid-February  appearance on CNBC's popular Squawk Box program, billionaire investor Mario Gabelli  named  it as one of his two "stocks-that-would- double."

In making his case for GenCorp – in addition to the Rocketdyne deal-  Gabelli cited a second stock-price catalyst … though this one was decidedly terrestrial in nature.

I'm talking about real estate.

By engaging in such activities as re-zoning, entitlement, leasing and outright sales, GenCorp is monetizing its excess-real-estate assets.

As Gabelli told his CNBC audience (which included me), GenCorp also has "significant acreage" in the Sacramento, Calif. area.

"And real estate is booming," he said.

So with GenCorp, there appear to be several potential "triggers" – including the burgeoning-real-estate segment, the Rocketdyne acquisition, and climbing revenue, which Gabelli said has increased 18% to reach $298 million.

"They bought Rocketdyne and they're closing on that," Gabelli said. "And that business – the basic manufacturing business, which has short-term hiccups – will earn about 70 cents in three or four years."

And let's not forget North Korea's saber-rattling.  The more you learn about it, the more you realize how dangerous the world continues to become. Thankfully, because GenCorp's anti-missile technology is protective in nature, we don't have to wait for something bad to happen to our country before this particular catalyst ignites this stock.

And, again, it's not the only catalyst.

Indeed, when you consider these ingredients en masse, there's a very clear recipe for this $769 million small-cap firm to double in value over the next few years.

[Editor's Note: This report originally appeared in Private Briefing, the premium edition of Money Morning that also provides access to some of the recommendations made in our most-expensive research services. Private Briefinghas also highlighted profit opportunities from the Cyber-Hacking of America. Check it out here.]

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About the Author

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.

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  1. Will Harden | March 15, 2013

    The problem with North Korea was summed by someone who said that NK was China's " Pit Bull." But since China owns so much of our debt, we do not want to offend them.

    And then I have to say that Kim Jong Un is doing us a great favor in showing us how divine a Communist state can be. Back in the sixties at FSU there were all these guys carrying around the little red books of Mao and reading them like the bible. I was attacked because I read "Gulag Archipelago." But since the stelar performance of several countries like NK and others with their human rights and economics, there is isn't much of that anymore. Communism just sounds so good.

  2. Tono Fonseca | March 15, 2013

    "Missiles R Us", hahaha… I thought that was Iran?

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