An Undiscovered Growth Stock to Consider This Year

Finding a potential leading growth stock before most of Wall Street can generate some of the biggest gains of your investing career. One of the best ways to do this is to find a company that stands in the path of a substantial spending trend that is unrecognized by the institutional money mangers. One such stock right now is Kratos Defense and Security Systems (KTOS). While the traditional perception is that defense spending cutbacks will hurt most defense companies, the truth is that money will still be spent, but it will be spent on more modern forms of defense and warfare. That change in spending will likely send a lot of money flowing in the direction of Kratos Defense in the years ahead. When the large institutions finally catch on to these powerful spending trends, their buying pressure could send the shares of this small cap company drastically higher.

Kratos offers technology and products supporting national security programs, using the technology of today and tomorrow rather than old school approaches to national defense. They are a leading provider of things like unmanned vehicles, aerial drones and target systems, satellite ground systems for intelligence gathering and monitoring, and cyber warfare solutions. They also provide products used in protecting critical infrastructure such as airports, hospitals, power plants and communication systems. Kratos also has business segments that provide ballistic missile testing and command and control of communications and reconnaissance satellites. Finally, the company offers training simulators for aircraft and ground fighting vehicles, including the Bradley fighting vehicle and Abrams tanks. These are all areas that should see increased spending by defense agencies and homeland security and will not see any substantial decline as a result of defense cutbacks.

Preparing to Grow

The company has been taking steps to improve its balance sheet and prepare for the growth that management foresees. It just completed the sale of the U.S. and U.K. operations of its Electronic Products Division to Ultra Electronics Holdings PLC for $260 million in cash. The company is using the cash to conduct a tender offer for up to $175 of its 7.000% Senior Secured Notes due 2019.  also paid down all of its outstanding balance due under its $110 million line of credit. This will reduce interest expense and give Kratos a great deal more financial flexibility going forward.

Kratos has been growing at a decent 13.3% annual pace over the past five years and there are signs that earnings growth is about to accelerate. In the most recent quarter, earnings grew by 67% year over year, and the Wall Street analysts that cover the stock expect to see earnings soar by more than 300% in 2016. The company has been outperforming expectations and Kratos has posted three consecutive earnings surprises in the past year. As they continue to win contracts, earnings should grow nicely over the next few years.

Positioned for the Military of Tomorrow

This company is perfectly positioned for the defense needs of the future. We have already seen extensive cyber-attacks that many attribute to China and Russia. Cyber warfare will be a big part of future conflicts and enormous amounts of money will be spent to protect our cyber assets and to counter attack efforts to invade our systems. Arial drones and unmanned ground vehicles are already a big part of current military operations and the usage of both ground and air unmanned craft is only going to increase.

Wall Street Might Not See It Yet but Insiders Do

Most of Wall Street is paying very little attention to the impressive collection of military and homeland security related businesses at Kratos Defense and Security. Institutional ownership is just 51% and much of that is in all market and small cap index funds. It is worth noting that two very smart small cap value managers, Heartland Funds and Royce Funds own the stock, but most of the big funds and institutions have not yet discovered it.

Wall Street might not yet recognize the potential of this company, but one other group seems convinced that the future of the company is quite bright: Officers and Directors of Kratos, including both the CEO and CFO, opened their checkbooks and bought stock in August.

The Bottom Line

Kratos Defense and Security Solutions has perfectly positioned itself to rack in its share of the money that will be spent on new technologies to modernize the military and improve homeland defense over the next decade.

By Timothy Melvin

Source: http://www.investopedia.com/articles/investing/092415/undiscovered-growth-stock-consider-year.asp