2 Defense Stocks Worth Buying as Global Tensions Continue

Kraken Robotics revenue rose 60% y/y to $31M driven by subsea battery sales, with recent orders of $24M and a prior $35M announcement, an acquisition of Covelya, and a $1.5B market cap positioning it as a high-growth supplier in underwater drones. Lockheed Martin reported $75B in revenue last year, a record $194B backlog, projects growth for 2026, trades at a $139B market cap with a forward P/E of 20, and stands to benefit from the proposed $185B Golden Dome missile-defense program and broader increases in defense spending.

Analysis

The market is conflating tactical demand shocks with durable structural demand; primes will capture the lion’s share of program-level margin while small specialized suppliers face a binary path: scale fast or become acquisition targets. Subsea battery economics are highly sensitive to cell chemistry inputs and qualification cycles — successful lab-to-field scale requires multi-node manufacturing and naval-grade QA that typically takes 18–36 months and meaningful pre-production cash burn.

A second‑order supply-chain lever is raw-material concentration: a supplier that vertically integrates procurement and tightens relationships with Tier‑1 primes can widen gross margins and shorten lead times, but it invites counter‑measures like primes bringing assembly in‑house or imposing price caps in contract renegotiations. Concurrently, export controls and ITAR-like restrictions raise the value of domestically domiciled suppliers for U.S. bids, creating asymmetric acquisition optionality for Canadian and other allied vendors.

On timing and cashflow: aftermarket services (spares, maintenance, battery replacements, software updates) are where small suppliers convert lumpy program wins into recurring revenue — expect materially higher margin contribution after the first 2 program years if fleet deployments exceed prototype trials. For large primes, backlog visibility cushions downside but limits immediate multiple expansion; upside comes from program ramp execution, not narrative re-rating.

The biggest contrarian clean‑up is balance—position sizes should reflect binary outcomes (fast scale or write‑down). Monitor three near‑term catalysts that will resolve uncertainty: (1) multi-year production contracts awarded by major navies, (2) raw-material cost stabilization for high‑reliability cells, and (3) any prime acquisition chatter which typically arrives 6–12 months after demonstrated flightline deployments.

Key Decisions for Investors

• Buy a tactical, size‑capped equity position in KRKNF (0.25–0.5% NAV) with a 24–36 month horizon; set a hard stop at -35% and take-profit targets at +150% and +400% tied to announcements of multi-year production contracts or demonstrable manufacturing scale-up.
• Overweight LMT via a covered‑call (buy stock / sell 12‑month call ~10–15% OTM) to harvest yield while capping near-term upside; expected carry improves annualized return if program ramps are steady but macro multiples stay flat — downside remains standard equity risk (~market beta).
• If options/liquidity permit, construct a pair: long KRKNF (small size) financed by shorting a broad defense ETF exposure (size such that net beta ~0) to isolate idiosyncratic subsea battery upside while hedging sector cyclicality; rebalance on material news every 4–8 weeks.
• Event‑driven M&A play: scan for bid signals (large prime supplier contracts, NAVY awards, or domestic preference rulings). If detected, add to KRKNF size to 1.0% NAV with a contingent trailing stop; M&A premium scenarios imply 30–100% upside within 6–12 months.
• Risk control: maintain portfolio exposure to battery raw‑material deflation via long positions in diversified lithium/nickel exposure only if subsea battery adoption evidence turns from pilots to fleet orders; otherwise keep raw‑material exposure minimal to avoid margin compression surprises.