Research done by several analysts over the years shows that defense stocks represent the safest bet for investors when markets are moving downwards. That’s because the news, events or sentiments that drive most stocks lower generally doesn’t have much effect on defense stocks, rather they fare much better than the broader market during times of uncertainty and turmoil. Even during times of peace, the sector displays consistent growth because military technology is constantly evolving and governments need to keep up pace with it by updating the arms and ammunitions used by their security forces. Most governments allocate a signification portion of their budget every year towards military spending. The U.S. for instance allocated over 15% or roughly $640 billion of its budget towards defense spending last year and a large chunk of it was spent on buying new equipments and services from defense companies.
So far, 2016 has acted as a perfect example of why one should buy defense stocks during times of uncertainty. While the broader market is experiencing negative momentum this year, most defense stocks are trading flat or in the green year-to-date. Considering the likelihood of the broader market failing to generate positive returns in the coming months, we thought it might be the right time to come up with a list of defense stocks that investors should buy right now. To compile the list, we scanned the portfolios of the over 800 hedge funds and investors we track and identified the defense stocks that were most popular among them going into 2016. In this post, we are going to reveal and analyze the five defense stocks that topped our list.
We track prominent investors and hedge funds because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 15 most popular small-cap stocks among a select group of investors delivered a monthly alpha of 80 basis points between 1999 and 2012 (see the details here).
#5 Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS)
– Investors with Long Positions (as of December 31): 6
– Aggregate Value of Investors’ Holdings (as of December 31): $30.38 million
The number of investors tracked by us with long positions in Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS) inched down by one and the aggregate value of their holdings declined by 13.7% during the fourth quarter. Chuck Royce‘s Royce & Associates was the largest shareholder of the company in our database; it owns 3.6 million shares of Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS), as of December 31. Though shares of the company have been on a gradual decline in the past two years, they are trading up by 11.47% year-to-date. On March 10, Kratos Defense & Security Solutions surprised the Street by declaring EPS of $0.02 on revenue of $177.50 million for the fourth quarter, when analysts were expecting a per share loss of $0.11 on revenue of $163.75 million. Since the company is into development of drones, analysts feel that it has potential to do well in the coming years, but at the same time they are also concerned about its declining revenues, negative cash flows and the high level of debt on its books.