Security Stocks Post Double-Digit Gain in 2006

Security services and equipment stocks, in general, easily outperformed the market the past couple of years. This may reflect investors’ belief that the homeland security imperative and the war against terrorism will be long and sustained, and the growth of commercial technology and services will continue.

A combination of new technologies, the convergence of physical and logical security, and long-overdue rollouts of homeland security programs has instilled the security industry with exciting investment opportunities. Security is a $150 billion industry, but Wall Street has not consistently looked at the whole group, preferring to go after “hot” niches such as alarm monitoring in the late 1990s or “homeland security stocks” after 9/11.

Global finance leader Lehman Brothers, headquartered in New York, maintains an index of security industry stocks that has appreciated 169 percent since Aug. 31, 2001, compared with a 35-percent rise in the S&P 500 during the same period. During 2006, this security index was up slightly over 10 percent, compared with 19 percent for the overall market (thanks to a 13-percent swoon by security during the summer months, courtesy of delays in large government security projects and consequent investor impatience).

In addition, a combination of low interest rates and continuing moderate growth in the economy propelled a number of large capitalization stocks that make up the S&P 500 index. Indeed, had some of these companies that also have significant security presence been included in Lehman Brothers’ index (i.e. GE, Honeywell, United Technologies, Stanley Works), the security list would have actually beaten the S&P 500 in 2006 for the fifth year in a row.


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