Security Stocks Take Roller Coaster Ride in 2001

2001 will forever be etched in our minds as the year when one day—Sept. 11—changed our world. The security industry and its investors were no less affected.

In the aftermath of the destruction of the World Trade Center and damage to the Pentagon with the loss of thousands of lives, investors drove up stock prices of explosive detection, biometric and other highly visibile security companies.

The effect of America’s worst-ever homeland terrorist attacks was so powerful that the security stock market story for 2001 should be divided into two parts—before Sept. 11 and after.  Investors Notice Security Industry’s Profit Potential

In the first eight-plus months of 2001, many security companies’ stocks were moving up at a brisk—but not particularly dramatic—pace. But then came Sept. 11 and the security industry was suddenly thrust onto the radar screens of investors around the world.

By the end of a numbing year, some security stocks registered spectacular gains. Invision Technologies (NASDAQ/VISG), a bomb detection equipment manufacturer, and Viisage Technologies (NASDAQ/ VISG), a leader in facial-recognition technology, realized phenomenal quadruple-digit gains of 1,976 percent and 1,014 percent, respectively.

Not all of the security companies, however, were swept up with significant gains in the industry overall. For instance, Tyco Int’l (NYSE/TYC), which closed two major industry acquisitions in 2001, Sensormatic and privately held Simplex, registered a tepid 6-percent stock appreciation for the year.

A new entrant into the security sweepstakes last year was mammoth General Electric (NYSE/GE), which made an unsuccessful move on Honeywell (NYSE/HON) and a winning offer for Interlogix (NASDAQ/ILXI). Honeywell’s stock plunged 28 percent for the year, while Interlogix soared 105 percent. This gain was primarily driven by the $777 million bid from GE. With $126 billion in annual sales, GE had a so-so year. Its stock dropped 15 percent.

Security Industry Stocks Up 69% Overall

In total, the Mallon Global Security Index, which consists of 175 publicly traded security companies on stock exchanges around the world, was up a resounding 69 percent.

In sharp contrast, however, was the performance of the overall market. The Dow Jones recorded a drop of 7 percent, the Standard & Poor’s 500 was off 13 percent and the NASDAQ Composite plunged 21 percent for 2001. The small cap Russell 2000 was the only major index that registered any gain. It squeaked up 2 percent for the year.

Security was one of the few positives in an otherwise dismal stock market and economy. Of the 17 separate security sectors covered in the Mallon Security Index, 16 were positive for 2001 and only one was negative. As expected, the bomb, explosives and drug detection sector, which consists of seven companies, led with a whopping gain of 351 percent for the year. Closely behind was the biometric sector (also with seven companies), which was up dramatically by 255 percent. Results for these sectors were, of course, driven by the events of Sept. 11.

CCTV Fortunes Climb 54%

Other security sectors with only a remote connection to Sept. 11 also rose. CCTV/video products were up 54 percent, investigations were up 48 percent, EAS/tracking was up 52 percent and security systems integration was up 58 percent. Auto security/recovery, which dipped 5 percent, was the only sector that was down in 2001.

When the stock market opened Sept. 17 after a five-day hiatus, explosive detection and biometric security stocks took off.  Invision stock soared 165 percent for the day. Viisage’s stock was close behind, skyrocketing 142 percent.

Other major one-day gainers, all tied to anti-terrorist security, included ICTS Int’l (NASADQ/ ICTS), a passenger screening company operating in airports around the world. Its stock went up 113 percent. Other gainers included Firearms Training (NASDAQ/ FATS), up 107 percent; American Science and Engineering (AMEX/ ASE), up 97 percent; and Visionics (NASDAQ/ VSNX), another facial-recognition company, up 93 percent. These were phenomenal one-day gains.

Aside from security and the defense stocks, the rest of the market went into a swoon, with the Dow Jones plunging.

The momentum of the security stocks was driven by a series of disquieting events, including the launching of the war against al Qaeda in Afghanistan; anthrax attacks through the mail, which took five lives; the roundup of Middle Eastern suspects and illegal immigrants; and an attempted bombing of an American Airlines flight by a would-be shoe bomber. Interspersed with these events were a series of bomb scares, airport shutdowns and terrorist sightings. Thus, security remained in the forefront of public consciousness.

Top Companies Record 4-Digit Growth

Invision Technologies, an explosive detection equipment manufacturer, was far and away the biggest security stock gainer for the year, and was the biggest gainer of all the stocks listed on the NYSE, the Amex and NASDAQ.

With security regulations being upgraded at the nation’s airports and millions of dollars committed for security expenditures by the government, Invision obviously was in a position to benefit dramatically. Only 161 baggage-screening units were in position at U.S. airports and approximately 2,000 would be needed to meet legislative mandates to check all baggage by the end of 2002.

In the No. 2 position was Viisage Technologies, which was close behind with a whopping 1,014-percent gain for 2001. It also had a dip in its sales in 2001—with revenues dropping 2 percent to $19.4 million for the first nine months. Its net income for the period, however, rose 67 percent to $628,000, as compared to $377,000 for the comparable period in 2000.

Companies From Varied Sectors Post Gains

Corrections Corp. of America was another one of the pre-Sept. 11 security stock performers that kept its first eight-month gains, and continued its momentum during the post Sept. 11 period.

The company is not quite out of the woods yet and reported a $20 million loss for the first nine months of 2001. With consolidation of its privately operated companies, it had sales of $734 million for the period—up from a meager $72 million for the same period in 2000.

However, Corrections Corp. of America led the private corrections group in its comeback with other big winners, including Ramsay Youth Services, up 291 percent, and Cornell Companies, up 222 percent.

Visionics, another high-profile biometrics company, posted a gain of 383 percent. Visionics, like its competitor Viisage, was propelled into the spotlight by the terrorist attacks and the public’s perception that its facial-recognition technology would be a valuable tool in the upcoming mobilization of the country.

For its fiscal year ending Sept. 30, 2001, Visionics reported an increase in its sales of 19 percent to $31 million. Net losses rose from $868,000 to $4 million for the year. The loss was attributed to higher sales, marketing and product development costs and also for merger related expenses of $2 million.

Orders for Equipment by FAA Entice Investors

American Science and Engineering (AMEX/ ASE) develops and markets X-ray inspection equipment, which is used at national borders to thwart the smuggling of drugs, contraband and even illegal immigrants. Its backscatter technology detects objects that often are not picked up by other devices.

Although its products were not being used to any great extent at the nation’s airports, Sept. 11’s events caused attention to be focused on the company. As a result, its stock soared. Despite starting the year with its stock selling at $4.62 a share, it closed out 2001 at $20.13 for an appreciation of 336 percent.

The stock of the Israel-based Magal Security (NASDAQ/ MAGS), which de

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