ATK Playing Defense

North Korea News Supports Holding ATK Calls

Dear Bottarelli Research Member,

The news of North Korea’s missile-test program continues to escalate…

I’m sure you heard how North Korea test-fired as many as seven missiles yesterday without success. In its first statement on the launches, North Korea’s Foreign Ministry released a statement that said "The successful missile launches were part of our military’s regular military drills to strengthen self-defense. As a sovereign country, this is our legal right and we are not bound by any international law or bilateral or multilateral agreements.”

Today, a defiant North Korea threatened to test even more missiles — warning of stronger action if opponents of the tests put pressure on the country. Secretary of State Condoleezza Rice called this show of bravado “a puzzling provocation” amid heavy diplomatic jockeying by the United States and its allies. What’s worse, now Taiwan has said they’re ready to test-fire a missile. As much as I hate to say it, this tells me that things will get worse before they get better.

I’m not here to talk politics, but the United States is making a very appropriate response, as President Bush has already held separate telephone talks with the leaders of Japan, South Korea and China. In one way of another, all the world leaders seem to be on the same page.

Although North Korea does not appear to have any of the long-range ballistic missiles ready for imminent launch, their Taepodong-2 missile is believed to be capable of eventually reaching the United States with a light payload. This is the primary reason I chose to own longer-term calls on (what I feel) is the best mid-cap defense stock on Wall Street: Alliant Techsystems (ATK – NYSE).

You already know that ATK is the nation’s largest producer of ammunition — providing ammo to nearly all of our troops in Iraq. But what you may not know is that ATK also is the world leader in the production of rocket motors for strategic missile defense applications.

Now, more than ever, ATK’s military rocket motors are critical to our national security. The U.S. Air Force uses ATK’s Minuteman III strategic missile and the U.S. Navy uses ATK’s Trident ballistic missile for ground and sea-based missile defense interceptors.

With the North Korea news getting scarier and scarier by the day, it’s a good idea to have a long-standing position in ATK — a company who looks like the primary beneficiary of increased missile defense spending.

A quick look at the ATK chart shows that the stock is using the 200-day moving average as a support point — which has recently sparked an upside move that’s trying to break through the 50-day moving average above $78.00. With the rest of the markets lower yesterday, ATK was one of the lone stocks showing a gain, as defense-oriented investors got positioned in ATK as the news about North Korea hit the newswires.

Right now, we’re holding the ATK November 80 Calls (ATK KP) foran average entry price of $4.65. They’ve traded as high as $4.00 today, which means you can still enter these longer-term calls for a great price. I continue to rate this position as something you should definitely have in your trading ledger. If you don’t yet own this position, consider it a “buy” at current levels. As for all of your other positions, continue to hold them until further notice. Until then…

Lock and load!

Sincerely,