Dear Reader,
This is Dylan Jovine with Behind the Markets.
Happy Monday. Today is Monday, June 29th. Two days left in the month — July starts Wednesday.
Today I want to talk about a sector that has gotten its butt kicked.
A sector we've been long in, with a lot of positions in, and where the pain has been real.
A Tale of Two Cities
While AI and tech stocks have been printing money, defense stocks — particularly the smaller names — have gotten hammered.
It's the best of times and the worst of times depending on where you look.
The big legacy defense contractors — L3Harris, Northrop Grumman, Leidos — are killing it.
But the smaller, next-generation companies in our model portfolios?
They've given back a lot of what they made.
And you know me — I'm not the type to ride something all the way back up and then all the way back down without asking hard questions about why.
What's Happening With the Specific Names
AeroVironment — their Switchblade loitering munitions and counter-drone technology is genuinely hotter than anything in modern warfare right now.
Revenue is up 143% because of their BlueHalo acquisition, which brought in a lot of next-gen drone capability.
And yet the stock is still down.
The challenge is that the revenue growth isn't yet flowing through to the bottom line the way it needs to.
They have balance sheet issues they're working through, and I'm looking forward to the next earnings call to see how they're addressing them.
Kratos is essentially an emerging Lockheed Martin.
Drones, hypersonics, Golden Dome adjacent — all the right places.
The Trump administration just tested elements of the Golden Dome this week.
Kratos is incredibly well positioned.
But the stock got euphoric, ran hard, and has since been cut in half.
It's still the same company — actually a much stronger company than a year and a half ago.
But the herd moved in, got spooked, and moved out.
Why This Is Happening
Trump proposed a $1.5 trillion defense budget.
That is an extraordinary number and it is genuinely great for the companies we follow.
But here is the issue.
After the Iran war, there is a serious debate happening in Congress and in the military about where exactly that money should go.
There's a big contingent that wants it to go to old platforms — legacy weapons systems, the stuff that's always been funded.
There's another contingent — the people who have actually studied modern warfare — who understand that the military needs to be completely redesigned around AI, drones, and networked systems.
That debate is not resolved.
And until it is, a lot of the money sits in limbo.
You can't just junk your entire military and go all-in on drones overnight.
You have to manage a complex transition — preparing for the weapons your adversaries are fielding today while building toward what wins wars tomorrow.
That negotiation is happening right now in the think tanks, in Congress, in the Pentagon.
And it is creating uncertainty around exactly which companies get the contracts.
Where I Stand
My thesis for every one of these businesses has not changed.
Long-term defense spending in the West is going up.
Even Europe — that basket case of a continent that can't agree on direction — is reindustrializing.
And if they can't figure out their own direction, that money likely flows back into American contractors anyway.
The secular bear we're in right now is painful.
But I have not seen a breakdown in the fundamentals of any of these companies.
These are ones I'm married to for the long term.
JP Morgan just came out and said Kratos is getting ridiculously cheap.
Other firms are saying the same thing.
I'm being patient.
That's all I have for today.
Have a wonderful day.
I'll see you tomorrow.
“The Buck Stops Here,”
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Written by Dylan Jovine