Start the conversation
In our Feb. 22 Private Briefing, "If This Stock Doubles, You Can Thank North Korea," we told you that outlays for anti-missile systems would be one piece of the U.S. defense budget to escape the budgetary scalpel.
And we recommended an aerospace stock that's poised to be a big beneficiary from the threat. That stock – which we'll look at again in a minute – is already up 11%.
Indeed, we told you it has the potential to double in price.
It's all playing out just as we said it would.
Late last week, the Pentagon announced a plan to add 14 interceptors to the 26 it already has at an Alaska missile-defense site.
This is a huge move. It marks a total reversal for the Obama administration, which had halted additional deployments just after it took office back in 2009.
And the catalyst for the decision is obvious: It's a direct response to North Korea's recent threat to launch a nuclear missile strike on the U.S. mainland.
And it's the precise response we told you to expect.
In its public statements, Washington has been largely dismissive of Pyongyang's bellicose rhetoric, telling us the hermit-like Asian nation doesn't have the technology to hit Mainland America. But that country – also known as the Democratic People's Republic of Korea (DPRK) – recently conducted a successful nuclear test and launched a satellite into orbit with a three-stage rocket.
The bottom line: North Korea's nuclear-weapons and ICBM technologies were more advanced than our leaders were letting on.
That's the conclusion we shared in our March 11 follow-up story "What You Need to Know About "Missiles 'R' Us." And after reviewing what some top U.S. military and intelligence leaders had to say late last week, it's clear they now take the potential threat as seriously as we do.
Admiral James A. Winnefeld Jr., vice chairman of the Joint Chiefs of Staff, told reporters that Pyongyang's missile and nuclear programs were more advanced than previously thought and said "the Korean threat went just a little bit faster than we might have expected."
And while conceding that North Korea's problem-plagued Taepodong-2 missile probably has the range to strike some parts of Alaska – but not the "lower 48" – Adm. Winnefeld said a newer and larger missile known as the KN-08 "probably does have the range to hit the United States."
We told you to keep tabs on the KN-08 in the March 11 Private Briefing.
Adm. Winnefeld declined to tell reporters whether U.S. intelligence agencies believe this missile is operational. Six of the big rockets were shown in a Pyongyang parade last April, though officials at the time said they were probably non-operational mockups.
But defense officials are actually very worried about this new missile, which has a long range and can be fired from a mobile launcher. According to a Jan. 17 report by The New York Times, U.S. intelligence analysts discovered that Pyongyang was dispersing missile launchers around the country – so they could be easily hidden. And that was forcing "the White House, the Pentagon and intelligence agencies to reassess whether North Korea's missile capabilities are improving at a pace that poses a new challenge to American defenses," the newspaper stated.
And that's just what's happening. Last week, Director of National Intelligence James Clapper told Congress that the DPRK is close to deploying this new road-mobile intercontinental missile.
"We believe North Korea has already taken initial steps toward fielding this system, although it remains untested," Clapper said.
That depends on how you define "untested." In North Korea's Feb. 12 nuclear test, Pyongyang tested an engine that would extend the KN-08 missile's range to 3,100 miles, South Korea's Yonhap news agency reported. Both of North Korea's missile launch sites are also being upgraded, Seoul has claimed.
"If the North decides the test is successful, it is expected to operationally deploy the new long-range rocket," an anonymous South Korean government source told Yonhap.
Because it's mobile, the KN-08 is potentially more troublesome than its static-launched Taepodong-2 counterpart. The mobile capability allows the KN-08 to be moved covertly, and makes them infinitely tougher to target. They can even be hidden in caves, or other structures, meaning the preparations for launching can be made undetected.
The biggest worry: Because it can stay hidden until right before launch, this missile can be fired with almost no warning.
And North Korea isn't the only adversary to worry about: Pyongyang has already sold missile technology to other countries – and its willingness to deal has earned it the nickname "Missiles "R" Us" in defense circles. Iran's Shahab-3 medium-range missile was based on North Korea's Nodong rocket – the same missile the KN-08 is based on.
The bottom line here is that spending on anti-missile systems is going to continue. The expansion in Alaska is conditioned on a successful test, which the Pentagon expects to achieve. With that deployment, there would be 40 anti-missile systems in Alaska and four more at Vandenberg Air Force Base in Lompoc, Calif. That total of 44 would mean there's plenty of business for system suppliers, including GenCorp. Inc. (NYSE: GY), the company that we recommended.
(Early this week, in fact, the Pentagon revealed that it's looking at establishing an anti-missile site in upstate New York – to protect the East Coast. So the Alaska expansion won't be the last.)
Thanks to its Aerojet propulsion systems, GenCorp will remain a preferred Pentagon vendor. Aerojet is the only U.S. propulsion firm that makes both solid rocket motors and liquid rocket engines. And GenCorp wants to make certain that Aerojet remains the sector's Top Gun. That's why, just last year, for instance, the parent company dropped $550 million to acquire Pratt & Whitney Rocketdyne from United Technologies Corp. (NYSE: UTX).
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. In fact, Aerojet motors 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 bases around the world.
We're not the only folks who like this stock.
In a February appearance on CNBC, billionaire investor Mario Gabelli – a prototypical value guy and a Graham & Dodd disciple – identified GenCorp as one of two "stocks that will double." GenCorp's aerospace business was cited as one of the key catalysts – and that was before North Korea threated to nuke America.
We'll keep you posted.
[Editor's Note: Unless we otherwise specify, we recommend investors employ a 25% "trailing stop" on all holdings.]