2 Defense Stocks Worth Buying as Global Tensions Continue

The U.S. is boosting its defense budget by 44% to $1.5 trillion in 2027, with spending targeted at new military technologies and missile defense. Kraken Robotics is benefiting from rapid subsea drone growth, with $87 million in new orders in early 2026 versus $74 million of total 2025 revenue, while Leidos secured a $2.7 billion hypersonic contract and trades at a relatively low 11.5x P/E. The article is broadly positive for defense contractors and highlights ongoing buybacks at Leidos, including an 11% reduction in shares outstanding over five years.

Analysis

The market is likely underestimating how lumpy defense spending becomes once a new procurement cycle starts: underwater drones and hypersonics are not incremental maintenance budgets, they are multi-year platform buildouts that create follow-on demand for power systems, sensors, software integration, spares, and field support. That matters because the first-order winners are not always the platform primes; the higher-multiple opportunity often sits in niche suppliers with low qualification risk and switching costs, where backlog can compound faster than headline defense budgets.

KRKNF looks like a classic “small base, big contract” setup: even modest conversion of defense R&D into procurement can re-rate revenue multiple expansion more than absolute earnings growth. The key second-order effect is that a constrained supply chain for deep-sea batteries and sensors can force primes and integrators to pre-book capacity, improving visibility and reducing cancellation risk; but the flip side is execution risk is high, and any slip in production qualification or integration testing would hit a thinly traded name hard. This is a 12-24 month story, not a quick catalyst trade.

LDOS is more interesting as a capital-returning defense software compounder than as a pure hypersonics torque play. If the hypersonic program scales, the real upside is not just the initial contract size but the installed-base economics: integration, sustainment, and software refreshes can turn a program award into recurring revenue with better margins than traditional services. The contrarian miss is that the market may be treating defense software as fully mature, when in reality a shift toward mission-critical, AI-enabled battlefield software could extend the growth runway and justify a higher multiple than the current low-teens P/E.

The main risk is timing: budget authorization is not the same as budget realization, and defense names can stay cheap for quarters if appropriations, testing milestones, or procurement schedules slip. Geopolitical escalation is supportive in the medium term, but a de-escalation headline or a broader fiscal squeeze could compress the thematic trade quickly, especially in names without deep liquidity or diversified revenue.

Key Decisions for Investors

• Long KRKNF on a 12-24 month horizon; use small sizing because upside is driven by backlog conversion and re-rating, but downside is amplified by liquidity and execution risk. Best entry is on pullbacks or post-order digestion rather than chasing after contract headlines.
• Long LDOS for a 6-18 month hold as a quality defense compounder with buybacks cushioning downside; expected risk/reward is better than pure-play hardware names because capital returns reduce multiple compression risk.
• Pair trade: long LDOS / short a basket of lower-quality defense services names with weaker margins and less capital return, to isolate hypersonics and software upside while reducing beta to broad defense sentiment.
• For higher-conviction traders, buy 6-12 month call spreads on KRKNF rather than outright equity to express procurement upside with defined downside in a thin OTC name.
• If the defense budget theme gets crowded, take profits selectively on any sharp outperformance in KRKNF first; it has the highest narrative beta and the fastest reversal risk if execution stalls.