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Wednesday, September 18, 2013 - 13:00

Invest In The Future Of Security With 2 Pure-Play Stocks

Wednesday, September 18, 2013 - 1:00pm

It seems like every week there's news of another mass shooting or terrorist attack. It also seems like every week brings fresh news of new security technology or government surveillance programs.

Let's face it: More than ever, surveillance technology is a fact of modern life.

One technology in particular could change how law enforcement agencies go about their work of protecting private property and keeping us all safe.

Facial recognition technology is being embraced by government agencies and industries across the board for that potential, be it for spotting terrorists or criminals or missing children.

The U.S. government has invested a lot of money in this technology and will likely continue to do so, which is why facial recognition technology is expected to become a $6.5 billion industry by 2018.

This technology isn't new. Cameras are popping up in all kinds of places: police stations, border checkpoints, courthouses, grocery stores, banks, military bases, casinos and sporting events. Cameras scanned all the fans walking through the turnstiles at Super Bowl XXXV, the so-called Snooper Bowl, against a database of criminal mugshots.

And public support for facial recognition technology is rising. According to a recent CNN/Time poll, 79% of Americans are in favor of using facial recognition at various locations and public events, and 81% support expanded camera surveillance on streets and in public places. Consider:

  • The FBI has spent more than $1 billion on its Next Generation Identification program, which includes facial recognition technology and could be deployed as early as next year. It will contain at least 12 million searchable photos.
  • Thirty-seven states permit facial recognition software to search driver's license photos.
  • The Department of Homeland Security put out a $5.1 million contract to create the Biometric Optical Surveillance System (BOSS), an attempt to improve the accuracy of long-distance facial recognition.
  • In gearing up for the 2014 Winter Olympics, the international airport in Sochi, Russia, plans to install a 3-D facial recognition system as part of the latest generation of airport security systems. Unlike other methods, this system isn't hampered by changes in lighting or camera angles.

Who has the largest databases? The U.S. State Department has one of the biggest facial recognition databases with more than 75 million photographs, but it doesn't come close to Facebook (Nasdaq: FB), with over 140 billion photos (with another 70 billion expected to be added this year). That's up from 10 billion in 2008 and represents 4% of all photos ever taken.

So you get the picture about the growing facial recognition market. The tricky part is finding ways to invest in it.

This technology has piqued the interest of many companies, which has triggered an increase in mergers and acquisitions. The usual suspects -- Apple (Nasdaq: AAPL), Google (Nasdaq: GOOG), IBM (NYSE: IBM), Cisco (Nasdaq: CSCO), Intel (Nasdaq: INTC), Microsoft (Nasdaq: MSFT) and Amazon.com (Nasdaq: AMZN) -- either already have or are on the lookout to acquire the smaller players.

However, revenue from facial recognition technology would be mere drops in the bucket for these huge companies and wouldn't give us a pure investment play. Here are two companies doing business in this specific biometric space.

NXT-ID (OTC: NXTD)
NXT-ID began trading on the NYSE on Aug. 15. While its stock is new, this $66 million company's technology portfolio dates to 1995. NXT-ID's licensed biometric technologies have won awards of more than $30 million from various federal agencies.

NXT-ID's wholly owned subsidiary, 3D-ID, has 22 licensed patents in the field of 3-D facial recognition. This includes MobileBio FaceMatch, a modular facial recognition system for smartphones and computers, and 3D FaceMatch Biometric Identity Systems, which combines 3-D and 2-D facial recognition technology and fingerprint biometrics.

A pilot program of its FaceMatch system is creating a 3-D database of inmates that may help identify suspects. The pilot program is expected to expand to include inmates booked by other law enforcement agencies, which will allow those agencies to search from a common 3-D database. Further expansion is expected to include images from surveillance cameras and mobile devices.

ImageWare Systems (OTC: IWSY)
ImageWare's products are used to manage secure identification credentials, including national IDs, passports, driver's licenses, smart cards and access control credentials. The $165 million company's patent portfolio consists of nine U.S. patents and four overseas patents, and it completed a $10 million equity financing last year that allowed it to eliminate all long-term debt and existing Series C and D preferred stock.

Flickr/The U.S. Army
Different branches of the military are taking advantage of new biometric technologies.

ImageWare was recently awarded a $2.2 million contract by its largest customer, the U.S. Department of Veteran Affairs, to expand its personal identity verification capabilities across federal, state and local lines. The U.S. Navy said last week that it has deployed a mobile biometric solution supplied by ImageWare as part of the Navy's Identity Dominance program.

ImageWare also has a contract with Ecuador's main port to use its biometric software platform to credential port employees, contractors, vendors and visitors who have access to cargo areas. The seven-year contract is expected to generate over $3 million.

IWSY is up an astronomical 122% this year. It currently trades at about $1.80 a share, with analyst projections as high as $3.50.

Risks to Consider: Obviously the biggest risk is the uncertain future of the facial recognition industry. By virtue of their size, both NXT-ID and ImageWare are susceptible to volatility. These stocks aren't for the faint of heart.

Actions to Take --> Considering it has ties to government entities and its products are being tested in law enforcement, NXTD may be worth a small position in your portfolio. Take it slow and add to it as the business develops. Considering IWSY's potential double-digit upside for the rest of this year, I'd buy in small increments.

P.S. -- The next privacy threat won't come from the IRS, the Department of Justice or the NSA. Instead, the government's own data suggest it could come through a device President Barack Obama's been using since the day he took office. Get all the details by clicking here.

Karen Canella does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.