An increase in spending by the U.S. Department of Defense over the next several years
is providing opportunity for a number of small-cap companies offering technology and
other services to the government.
The U.S. defense budget is transitioning from a period of decline to a period of multi-year growth. 2013 was the inflection point
in the overall budget and we think this trend should continue as the past two “up cycles” have lasted 10+ years each. Technology
and cyber spending within the budget is growing faster than the overall budget. In addition, the competitive environment within
Federal IT Services is also improving as many of the large prime contractors are either exiting the business or de-emphasizing
this area, which is allowing smaller companies to gain market share. As a result, we are seeing record backlogs (which represents
orders) for small-cap IT service companies.
Investable Theme in Action: Ivy Small Cap Growth Fund
The Ivy Small Cap Growth Fund portfolio management team believes the increased spending in the U.S.
defense budget is just one of a number of tailwinds helping today’s small-cap companies in the technology
and services sector.
A closer look at the Ivy Small Cap Growth Fund
Below are three examples of technology and services companies that we believe may benefit from increased
U.S. defense spending.
Booz Allen Hamilton Holding Corporation (BAH)
- Provides management, technology and
engineering consulting services to the
- U.S. government is the company’s
primary client, with agencies accounting
for 97% of revenues. We believe it is
positioned to benefit from increased
- Contract backlogs are strong and at record
numbers. Total backlogs were $13.5 billion,
which signifies an increase of 12%.
- We believe in BAH’s ability to deliver
sustainable quality growth while also
maintaining solid cash flows. Also, the
company recently paid out an annualized
dividend yield between 1.79% and 2.27%.
- BAH supports critical missions for a diverse
base of federal government clients, as well
as top-tier commercial and international
clients. Areas of support include: combating
global terrorism; improving cyber
capabilities; transforming the health care
system; improving efficiency and managing
change within the government. It also
has U.S. commercial clients primarily in
the financial services, health care and life
sciences, energy, high-tech manufacturing,
retail and automotive industries.
Mercury Computer Systems Inc. (MRCY)
- Provides high-tech commercial defense
- Pure play of a defense electronics company
benefiting from the key growth programs
aligned to U.S. Department of Defense
- Bookings and contract backlogs are strong,
reaching record levels. Mercury’s fiscal 2016
bookings and revenue increases represent
growth rates well in excess of defense
industry average growth.
- MRCY is experiencing double-digit revenue
growth with strong profitability coupled with
a conservative balance sheet and strong
cash flows to support growth.
- MRCY’s strives to meet rapidly evolving
next-generation defense challenges. Areas
of expertise include: secure sensor and
mission processing; RF and microwave
subsystems; radar subsystems and
solutions; electronic warfare subsystems
and solutions; and intelligence, surveillance
Woodward, Inc. (WWD)
- Provides energy control technologies that
are at the core of growing global markets
(power generation, transportation, process
industries, and aerospace). Its technologies
work to ensure that customers’ engines,
turbines, and other power equipment are
dependable, efficient and clean burning.
- For nearly 150 years, Woodward has
developed innovative products for control
of water, wind, and gas turbines, as well as
steam, gas and diesel engines. Woodward’s
aerospace systems and components
optimize the performance of fixed wing and
rotocraft platforms in commercial, business
and military aircraft, smart weapons, ground
vehicles and other equipment.
- Woodward’s aerospace segment is driven by
record commercial order backlogs, growing
passenger and freight traffic and solid
- In the company’s industrial segment, the
long-term dynamics of the markets continue
to be attractive as the demand for lower
emission, higher efficiency turbines, engines
and renewable power is projected to
substantially increase over the next decade.
- Strong future organic growth for the
company should be driven by market
expansion, favorable content/technology
shifts and share gains.
Past performance is not a guarantee of future results. The opinions expressed are those of the Fund’s portfolio managers and are not meant as investment advice or to predict or project the future performance
of any investment product. The opinions are current through December 2018, are subject to change based on market conditions or other factors, and no forecasts can be guaranteed. The holdings discussed are for
illustrative purposes only and are not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment return and principal value will fluctuate, and
it is possible to lose money by investing.
BAH: 2.0%, MRCY: 2.2%, WWD: 1.7% of net assets as of 12/31/2018. Holdings are for illustrative purposes only to demonstrate the Fund’s security selection process. This information contains the opinions
of the firm, which are subject to change without notice and should not be considered as investment advice or a recommendation to purchase or sell a specific security. It should not be assumed that any securities
holdings discussed will prove to be profitable or that investment decisions we make in the future will be profitable.
Risk factors: The value of the Fund’s shares will change, and you could lose money on your investment. Investing in small-cap stocks may carry more risk than investing in stocks of larger, more well-established companies. The Fund may invest in Initial Public Offerings (IPOs), which can have a significant positive impact on the Fund’s performance that may not be replicated in the future. Not all funds or fund classes may be offered at all broker/dealers. These and other risks are more fully described in the Fund’s prospectus.