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It's All Quiet on the Western Front this week in the market. The most current BLOG entry is on Datascension (DSEN), which I posted last Thursday. Check it out if you have an interest in this stock. We are closing in on the best time of the year for stocks- October to January. This year's conditions will depend on lot on the actions of the FED next week. Many argue high energy prices are doing the FED's job for them, and they won't have to raise interest rates. This may in fact be the case. I believe it will be a positive for the market if they leave interest rates alone at next week's FED meeting. 

When microcaps we own trade up from the typical summer sell off, we will re-evaluate them individually as they get into more favorable ranges, and I will suggest taking money off the table where appropriate. 

To use the BLOG, simply go to the home page at www.otcjournal.com - the BLOG will scroll down automatically on the right side of your screen. The most current journal entries appear in the middle of your screen. Check back frequently for updates particularly when stocks are moving to overbought or oversold levels or in volatile markets. Your questions and postings do not automatically appear, so don't bother posting the same question multiple times. I personally go through to moderate and respond to every question.
 

Homeland Security Stocks: A Beleaguered Group

I'm 1 1/2 out of 3 in the Homeland Security Sector. We have published three ideas- Global ePoint (NASDAQ: GEPT) which has been a huge win twice, Virtra Systems (OTC BB: VTSI) which we get a 1/2 win out of as it was up about 300% in our first six months of coverage but has been a problem ever since, and Aegis Assessments (OTC BB: AGSI), which has been a complete loser for subscribers.

As many of you know, I suggested locking in profits on GEPT in the $7 to $8 range. The stock is getting attractive again at the current $5 level, but I'm having a hard time seeing the upside with the failed acquisition of Astrophysics. Their video surveillance offerings are getting traction, but the cargo screening business was the proverbial Holy Grail.

Small companies with unique technologies in the homeland security sector have fallen on hard times. Post 911 we were all convinced there would be huge capital flows into this sector. It's not the case. 

Homeland Security companies are not experiencing order flow. There is no money for new ideas or new technologies because our entire homeland security effort is being spent in the form of $1 billion per day in Iraq. Technologies that were developed in the last generation are being put to use, but the money being put into the war effort is choking capital for new ideas. Hurricane Katrina will drain government accounts as well, leaving even a bleaker picture.

Were it not for the War in Iraq these companies would have a fair shot. I'm inclined to give up on one, and hang in there on the other. Right now, I'm neutral GEPT for the time being.

VirTra System (OTC BB: VTSI) is on the verge of making new multi year lows. There are two other companies who compete in their "Judgemental-Use-Of-Force" space, and both stocks are also making multi year lows.

VirTra is a classic right idea at the wrong time. Their virtual reality training simulators have met with critical acclaim every where they have been shown, and the company has been promised huge order flow from one branch of the US Military.

In the last quarterly conference call, CEO Kelly Jones was extremely optimistic about military order flow in the near term, and has been disappointed. Anecdotally, I know purchasing agents of several branches of the military have verbally promised orders, and were denied when filing the requisition simply due to lack of available funds.

They have a fantastic product which is desperately needed to prepare our troops for the war on terrorism, but there is no money to order them right now.

Shares of VirTra are accurately reflecting the current state of affairs at the company. When order flow picks up, the stock should as well. In the interim the company is receiving random orders from a variety of sources, both international and domestic. They also have a very reasonable financing structure in place to meet their negative cash flow needs with minimal dilution. 

This company will bear watching after we get past October 1st. The fiscal '06 military budget will be available at this time. If they get the promised order flow, the ship will be righted. If they are passed over again, it will take a lot longer for this one to get on track. I believe this stock is worth holding due to the extraordinary pent up demand for their simulators.

Aegis Assesments (OTC BB: AGSI) has similar difficulties, but I'm less optimistic here. There is no anecdotal evidence of pent up demand in the case of AGSI. 

The company signed on with GTSI Corp (NASDAQ: GTSI) to distribute their unique first responder radio bridge product. GTSI enjoys nearly $1 billion in annual sales. Thie Radio Bridge is an inexpensive technology for enabling first responders to communicate with each other at emergencies.

The radio bridge is a low ticket item and is simple to use. It runs in the neighborhood of $10 to $12 thousand dollars per unit. 2,000 units per year in sales makes the company very profitable.

GTSI signed on to distribute their product last March. To date, there has been on pubic disclosure that any orders have materialized from that relationship. It has been nearly six months.

The company got some publicity last week. They were in the news for providing radio bridges for relief work in the gulf states. The stock traded up on big volume, and shareholders used the volume surge to liquidate positions.

In light of its low cost and excellent functionality I expected it to be an easy sell. I was wrong. There was a recent glimmer of hope when the company announced the LA Police department was purchasing multiple units, but no follow up since.

I don't understand why this product has not sold. Perhaps the sales cycle is extremely long, and I don't know if the company has the capital to last it out.

I am a little more optimistic about VTSI. AGSI looks excessively challenged to me. I could be wrong. AGSI could begin experiencing significant order flow, and VTSI could fade into oblivion. As long as we continue to spend $1 billion per day in Iraq, both companies will experience sales challenges. 

I intend to ratchet down our exposure in AGSI in the coming weeks and probably won't have much more to say about the company unless order flow increases. I will hold VTSI through to the end of this year and re evaluate. If you are holding positions in one or either, the choice is yours.

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