While the aerospace and defense sector offers much relevance amid the current volatile geopolitical environment, speculative investors may want to consider small but promising players such as Kratos Defense (KTOS). With modern warfare tactics having changed dramatically over the past two years, KTOS stock will likely be a relevant asset for years to come.
Fundamentally, Kratos’ XQ-58 Valkyrie drones have found themselves at a critical juncture in the broader defense discussion. Following Russia’s initial invasion of Ukraine, Ukrainian defenders relied heavily on drones not only as surveillance tools but as offensive weapons. This radical change in military tactics and strategies has bolstered names like AeroVironment (AVAV).
It’s now time for KTOS stock to benefit as the underlying enterprise asserts itself. To be sure, AeroVironment has enjoyed an upswing in momentum this year because its drones have actually been used in combat. The same can’t be said for the Valkyrie, though the progress is encouraging.
However, what’s most important for the long run is again the pivot in military doctrine. Unmanned drones have now played a significant role in the conflict in Gaza. Future military campaigns will almost surely involve unmanned aircraft, putting a positive spotlight on KTOS stock. What’s more, reports from the field have described Valkyrie as a “loyal wingman.”
Financially, Kratos is moving in the right direction. In February, the company released fourth-quarter numbers that beat expectations. Specifically, it generated earnings per share of 12 cents, outpacing the expected target of 9 cents. Also, revenue landed at $273.8 million, above the consensus view of $254 million.
To top it off, management expects 2024 revenue to land between $1.125 billion and $1.15 billion, above Wall Street’s consensus estimate of $1.11 billion. With so much working in Kratos’ favor, it’s not surprising to see KTOS stock as a compelling options play.
Unusual Options Activity Targets KTOS Stock
Following the close of the April 8 session, KTOS stock represented one of the highlights in Barchart’s screener for unusual stock options volume. This indicator provides a snapshot of the ideas that the smart money is focused on.
Specifically, total volume for Kratos derivatives reached 11,554 contracts against an open interest reading of 33,576. Further, Monday’s volume was 568.25% greater than the trailing-month metric. Drilling down, call volume hit 10,420 contracts over put volume of only 1,134. On paper, this pairing yielded a put/call volume ratio of 0.11, significantly favoring the bulls.
To be fair, options sentiment based purely on the put/call ratio can be tricky because traders can also sell options, which can lead to differing tactical pursuits. However, Barchart’s options flow screener – which exclusively focuses on big block transactions likely placed by institutions – reveals that there were more transactions involving bullish sentiment than bearish.
Subsequently, investors have greater confidence in assessing the put/call ratio at face value; that is, smart money traders believe there is a greater chance that KTOS stock will rise in the near term. Several of the derivatives call for KTOS to hit $20 prior to the April 19 expiration date. However, there are also call options seeking the same price target but with expiration dates in July and August.
Technically speaking, the $20 price forecast is an intriguing idea. Psychologically, the market features a tendency to aim for round numbers and $20 would be a naturally satisfying milestone. Also, while there are resistance barriers between $19 to $20, the strong fundamentals could help push KTOS stock higher.
Again, modern warfare is changing – and it’s changing in favor of Kratos. While it’s a big question whether the Valkyrie would be utilized in present military campaigns, the current geopolitical flashpoints have offered a wealth of intelligence for U.S. and western military forces. Undoubtedly, there is greater attention on unmanned aircraft given their effectiveness, especially in the defense of Ukraine.
That’s a huge catalyst for KTOS stock that can’t be ignored.
Speaking to the Understandable Criticism
Invariably, whenever the discussion of defense stocks comes up in the context of hot conflicts, the criticism of profiteering comes up. In this case, buying KTOS stock may give the impression that investors are hoping for chaos and carnage.
Granted, it’s impossible for me to speak on the motivations of every investor. However, the way I approach KTOS stock and similar ideas is the inevitable nature of humanity. At the core, I would like to think that most people are good. However, power is a corrupting attribute, which is why the U.S. government is built on checks and balances.
Unfortunately, other nations don’t necessarily follow such self-correcting protocols. So, it’s simply a matter of time before evil men threaten the freedom and stability of others. In order to preserve the peace, we must be ready for war.
Or, in the words of Teddy Roosevelt, “speak softly, and carry a big stick.” Kratos could very well be this stick, making KTOS stock a compelling buy.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
