2 Defense Stocks Worth Buying as Global Tensions Continue

The U.S. defense budget is set to rise 44% to $1.5 trillion in 2027, creating a favorable backdrop for defense suppliers tied to underwater drones and hypersonic systems. Kraken Robotics has already booked $87 million of new orders in early 2026 versus $74 million of revenue in 2025, while Leidos secured a $2.7 billion Army contract and trades at a low 11.5x P/E. The article is constructive on both names, highlighting steady buybacks at Leidos and a long growth runway for Kraken.

Analysis

The market is likely underestimating how asymmetric the early-stage underwater-drone supply chain is relative to headline defense primes. Kraken’s moat is not just product scarcity; it sits in a bottleneck category where qualification cycles are long, switching costs are high, and failure rates in harsh environments create a natural oligopoly. That combination can translate into above-cycle margins and multi-year order visibility, but it also means revenue can arrive lumpy as procurement moves from R&D to serial production.

Leidos is a different animal: this is less a pure “growth” story than a re-rating story if hypersonics converts from development to repeatable production. The real second-order benefit is that a successful prime position can pull through higher-margin software, integration, and sustainment work for years, while reinforcing leverage with the Army on adjacent programs. The market may be too focused on near-term earnings multiple compression and missing that defense software franchises often deserve a higher multiple when backlog quality and recompete risk improve.

The key risk is timing. Defense budget headlines can support the group for months, but procurement awards and budget execution drive the actual earnings inflection, and those can slip 2-4 quarters. Kraken is also vulnerable to valuation disappointment if order growth slows after the current surge, while Leidos faces contract concentration and execution risk if hypersonic transition costs escalate before production revenue scales.

Contrarian take: this is not broadly bullish on all defense names. The bigger opportunity may be in niche suppliers and systems integrators with scarce capabilities, not the large diversified primes already owned for “defense exposure.” If the budget increase is as large as expected, the winners will be companies with bottlenecks in batteries, sensors, software, and integration—not necessarily the names with the largest revenue bases.

Key Decisions for Investors

• Long KRKNF on pullbacks over the next 1-3 months; thesis is a multi-year capacity bottleneck with optionality on subsea drone procurement, but size modestly because the stock can re-rate quickly before revenue catches up.
• Long LDOS as a 6-12 month compounder; the setup is attractive if investors focus on the low multiple and buyback support, with upside from a hypersonics conversion that could lift both growth and margin mix.
• Pair trade: long KRKNF / short a diversified defense prime basket over 3-6 months; this expresses the view that niche suppliers will see more multiple expansion per dollar of budget growth than already-owned incumbents.
• Buy LDOS call spreads 6-9 months out if you want convexity to a hypersonics award re-rating; limited downside versus stock, with upside if the market starts capitalizing the contract pipeline at a higher multiple.
• Avoid chasing the broader defense complex after headline budget enthusiasm; wait for procurement evidence, because the most favorable entry points usually come after the first wave of optimism fades and awards are still being digested.