Does Kratos Defense & Security Solutions (KTOS) Have Potential for Significant Growth and Margin Expansion?

ClearBridge Investments, an investment management company, released its “ClearBridge Small Cap Growth Strategy” third-quarter 2025 investor letter. A copy of the letter can be downloaded here. The third quarter continued the market rally in May and June following waning policy uncertainty, a Fed rate cut, and animal spirits fueled by retail enthusiasm for high-growth potential markets, resulting in another double-digit gain. However, the strategy underperformed the benchmark, the Russell 2000 Growth Index, which gained 12.2%. The smallest market caps, the lowest returns on equity, and the highest beta names led the underperformance. In addition, you can check the fund’s top 5 holdings to determine its best picks for 2025.

In its third-quarter 2025 investor letter, ClearBridge Small Cap Growth Strategy highlighted stocks such as Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS). Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) is a technology company that offers mission-critical products, services, and solutions. The one-month return of Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) was 45.64%, and its shares gained 300.58% of their value over the last 52 weeks. On October 9, 2025, Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) stock closed at $98.55 per share, with a market capitalization of $16.997 billion.

ClearBridge Small Cap Growth Strategy stated the following regarding Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) in its third quarter 2025 investor letter:

“We continued to deliver strong new idea generation, adding seven new investments in the quarter. Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) is an aerospace and defense supplier focused on unmanned aerial drone systems, hypersonic missiles and missile defense, propulsion and space. With key exposures to high-priority areas of the defense budget, a nimble first-to-market manufacturing strategy and proactive capacity investments, we see the potential for significant growth and margin expansion in the coming years.”

Kratos Defense (KTOS) Drops 7.3% as Traders Pocket Gains After All-Time High

Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) is not on our list of 30 Most Popular Stocks Among Hedge Funds. As per our database, 33 hedge fund portfolios held Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) at the end of the second quarter, which was 17 in the previous quarter. While we acknowledge the risk and potential of Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) and that has 10,000% upside potential, check out our report about this cheapest AI stock.

In another article, we covered Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) and shared the list of best military drone stocks to buy according to hedge funds. In addition, please check out our hedge fund investor letters Q3 2025 page for more investor letters from hedge funds and other leading investors.

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Disclosure: None. This article is originally published at Insider Monkey.