Model Portfolio athompson:TPSNX

VSE Corp. (VSEC) was responsible for much of the decline in the value of my model fund yesterday. I have a fairly large position in VSEC, 6.5% even after yesterday's decline, and it fell by 45% yesterday.

VSEC provides a variety of services (engineering, IT consulting, maintenance) to the U.S. Federal Government, primarily the Department of Defense.

The reason VSEC fell was that it announced last Friday that it had not been awarded a renewal of a large contract with the Army, the "Rapid Response" contract. The failure to renew this contract is certainly significant for VSEC; the contract was responsible for approximately 41% of VSEC's revenues for the first three months of 2008.

However, I think the market may have significantly overreacted to this news. Work under the contract will begin to diminish in the next few months. But some work will continue until 2010. Overall, VSEC has a funded backlog of $706 million, equivalent to about 8.5 months of revenue. Over the next eight months, it will undoubtedly gain new contracts. VSEC has been expanding its non-DoD services, contracting to agencies including Energy, Homeland Security, and Treasury. VSEC has historically been very successful at gaining new contracts and increasing revenue.

While failure to extend the Rapid Response contract is disappointing, I suspect that it will turn out to be a bump in the road of VSEC's long history of increasing revenue. Also, while VSEC has lost the prime contract for Rapid Response, it is possible that VSEC will be a subcontractor for work under the Rapid Response contract.