Chit Chat Stocks - A US Defense Spending Supercycle? 7 Top Stocks For The Coming Spending Boom

Episode Date: January 14, 2026

On this episode of Chit Chat Stocks, Brett and Ryan dive into a secular theme: defense spending. We look at seven different stocks -- both small and large -- as ways to play the defense spending boom in the United States. We discuss: (00:00) Introduction (01:59) Exploring the Defense budget increase (10:45) Leidos (Ticker: LDOS) (19:20) RTX Corp (Ticker: RTX) (25:25) CACI International (Ticker: CACI) (33:26) L3 Harris (Ticker: LHX) (36:11) BWXT Technologies (Ticker: BWXT) (42:18) Kratos Defense (Ticker: KTOS) (50:08) Black Sky Technologies (Ticker: BKSY) (54:24) Concluding thoughts on defense sector ***************************************************** Sign up for our stock research service, Emerging Moats: emergingmoats.com  ********************************************************************* Chit Chat Stocks is presented by Interactive Brokers. Get professional pricing, global access, and premier technology with the best brokerage for investors today:  https://www.interactivebrokers.com/  Interactive Brokers is a member of SIPC.  ********************************************************************* Fiscal.ai is building the future of financial data. With custom charts, AI-generated research reports, and endless analytical tools, you can get up to speed on any stock around the globe. All for a reasonable price.  Use our LINK and get 15% off any premium plan: ⁠https://fiscal.ai/chitchat  ********************************************************************* Disclosure: Chit Chat Stocks hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chit Chat Stocks is a CCM Media Group podcast. Anything discussed on Chit Chat Stocks by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. Welcome into the Chit Chat Stocks podcast, a podcast to help you find your next great investment. My name is Brett Schaefer and I am joined today by my co-host Ryan Henderson. We have an episode that I think will hope spice things up for the audience. It is a new type of episode that we're going to be doing in 2026. We are exploring our first thematic sector,

secular trade, however you want to call it, thematic investing. We're going to look at a specific sector to potentially invest in for 2026 and the long term after listening to this episode we hope you better understand the industry or sector at large and maybe a few stocks to your arsenal watch list would have you learn about a couple new companies these episodes are taking a look at a secular theme not trying to find or excuse me we are trying to find some potentially interesting companies but the stocks that we talk about today are not going to be direct recommendations. They are simply some ways to illustrate said theme. You might find some of them viable, watch this material, maybe even potential shorts, but we're going to look at

the sector and try to answer after, all right, are we more interested in studying these businesses further, doing some deeper research outside of a cursory dive? Let's see, as always, some housekeeping items. Any listener, please give us a review on Spotify or Apple Podcasts. I think of it is the best way to give thanks back to us. It is completely free. If you have somebody you think would enjoy this episode, don't hesitate in sending them a link as well. So without further ado, today we are just studying the defense sector. We're calling this maybe ranking top stocks to buy for a defense spending boom. We're calling it the defense spending super cycle. We haven't decided the title yet. Maybe Ryan can throw out some ideas as well. We'll decide that

after the episode for the final title. But why are we doing this? Because, well, the defense budget in the U.S., as well as Europe, East Asia, other U.S. allies, is really starting to rise again. Quote, U.S. defense companies rallied after President Trump called for a $1.5 trillion defense budget, more than $500 billion more than the Pentagon is expected to receive this fiscal year. Trump said the increased budget was necessary, quote, especially in these very troubled and dangerous times we'll take that last part hey you could have those conversations uh i guess not on this podcast about the political news geopolitical stuff war stuff what have you we're going to be talking investing themes on this episode but ryan

before i kind of give an introduction to the sector what do you know about defense stocks do you own any defense stocks what are your thoughts on the sector before we go through this episode i don't think i own any at the moment maybe some that are like ancillary to it uh but no uh i i don't have a ton of experience investing in the industry but i really like the secular trade here it seems to me like or i mean the sector trade where you don't necessarily have to be a specialist to make money in this case like a 500 billion dollar budget increase is a tide that lifts all boats i imagine for most of the prime contractors and a lot of defense contractors in the u.s so we'll get into it and i think you've got some more data around just how

much spend is going on globally for some of these contractors but i think there are some interesting companies to look at. I've got three today that I found pretty intriguing that could be big 2026 winners. Yeah, but we're not just looking for anyone that just thinks, oh, they're going to look at Lockheed Martin, General Dynamics, whatever. We're not just looking at the big five primes. We're looking at some smaller companies as well. But yes, for some context on the sector as a whole, a $500 billion increase would be massive if you combine this with the $600 billion roughly in defense spending from U.S. allies, which I would include Europe, Australia, East Asia, and Israel. You have $2 trillion in global defense spending in 2027 and beyond.

I should note that 75% of that will still be driven by the United States. When I think about this in context with, you have things such as the recent Venezuelan operation, the Iranian threatened uprising, the Russian war in Ukraine and China. Honestly, maybe this is my patriotism speaking, but I would be worried about defense spending without China in the mix because If you look at the Venezuelan operation, there was just no stopping that at all. The Iranian stuff, they seem like a very weak country. Russia is in a longer war with Ukraine, a tiny country, than it was with Nazi Germany. And then the Iranian government, maybe after we publish this, will have fallen.

Cuba's also toast. There's a lot of other stuff we go on there where China seems like the one threat that the U.S. is really investing towards not, I guess, matching and making sure they're on par with them. China is spending around $500 billion a year on defense when adjusted for purchasing power parity. It's not nearly as much as the $2 trillion from the US and its allies, but it's sizable. And of course, it keeps talking about openly about, quote unquote, retaking Taiwan, which is a very complicated story. I would say it's never actually was under the Chinese rule. Sorry to any

Chinese listeners, the Dutch and the Spanish, I guess, have much of a clan to it as that, or the Japanese or the Koreans, but it is leading to increased investments from the United States if that threat grows and grows and grows. Again, the list of geopolitical concerns could go on and on. There seems like a million reasons right now that citizens all over the world should be cautious. And I think that's reflected a lot in the news, maybe amplified more than it should be in the news but i saw a viral post on on twitter and hopefully this is true i hate to share some of these things because i want to make sure they are true i'm not totally sure just to be clear so this maybe anyone that's listening fact check me

but it was uh someone from the venezuelan uh security team i guess and it was like an interview with them around basically what happened like what what did they experience when uh last week and if you read through it it basically sounds like a pitch for u.s defense contractors because it sounded like a very technologically advanced operation where it wasn't uh there weren't a lot of casualties in the process which you can't really think of a better i guess process zero casualties on the u.s side yeah so anyway i recommend people reading it and that was kind of i think what part of what inspired me to want to look into this sector a little more uh that plus the absolutely massive i think 50 percent budget increase proposed by the president so i'll let

you keep going here but i'm excited to get into a few of these companies yeah and on top of this We also have the new space race unfolding. We have the commercial competitors of Rocket Lab. SpaceX is rating an IPO to potentially blockbuster $1.5 trillion price. You have missions from the United States to go to the moon and Mars. I think China is also competing with that as well, although I'm not an expert in all that stuff. There's opportunities out there for satellite players, technology for the so-called Golden Dome. There's immigration stuff, drugs smuggling, terrorism-focused missions.

It goes on and on and on. And when I was thinking about how does one invest in this theme, again, you can look at the general contractors, or I wouldn't even call them the general contractors, the prime contractors, the giant ones. Those seem a little stodgy, a little bit boring. We want to spice things up for this episode. And honestly, it comes back to the comments made by the president about the, certain capabilities they have, or we have, in regards to the Venezuelan operation. And from what we're aware of as the public, the U.S. military was able to use some sort of technology to, quote, shut off the electricity in Venezuela, freeze all their anti-aircraft equipment, and basically blind their entire security apparatus. So when I'm thinking about investment themes for this, it's really that technological advantage, cybertech, surveillance, jamming, software systems, AI, satellites, and stuff in that nature.

So with that in mind, Ryan and I, we went about it a different way. I utilized both Fiscal AI, our sponsor with Screeners, and Google Gemini to look at different defense tech companies that may be benefiting from this increased digital spending. Of course, again, like I mentioned, the prime contractors will benefit, but everyone knows about those. I want to look at some other ones as well. There are also stocks that we have touched on before, such as Kraken Robotics and Rocket Lab, which we are going to let stand as their own episodes. those are definitely related to the defense space but we're not going to be talking about them today below I have four stocks

Ryan has three we're going to kind of go through maybe five to seven minutes each discuss them but I think maybe after the episode we can rank the companies we can talk about ones we like don't like and we can kind of conclude with are we more

interested what was the conclusion question I have for us are you more or less interested in defense stocks so i my first one loaded up ryan but anything else generally before we get started here no i'll just say these are intended to be mostly quick hitters brief synopsis of the business what they do why would they benefit maybe some financial stats but not necessarily big episode like full episode deep dives by any means but i'll let you go first you have some more I guess more cyber less obvious software yeah yeah I would say less obvious beneficiaries

here than my list so why don't you kick things off okay the first one and I hope I'm pronouncing them right it's Leidos or Leidos L-E-I-D-O-S ticker is L-D-O-S market caps 25 billion dollars this is the largest company I looked at here it's a hybrid defense and civilian government contractor. They're focused on digital infrastructure, IT backbones, all of that type of stuff. 87% of the revenue comes from the U.S. government. From their annual report, quote, our mission software aims to provide the decision advantage for protecting the homeland, securing critical infrastructure, enabling logistics, and conducting multi-domain operations. Long story short, they run IT and software that connects all parts of the U.S. military together.

For example, we're going to use the Venezuelan operation because that's so recent in mind. But in the Venezuelan operation, many branches of the military had to work together, likely using Leidos software. I believe these are recurring contracts with extremely high switching costs, giving them a nice steady runway to grow and probably some pricing power when contracts come up. They also run air traffic control in the United States, as well as the health care systems for, I believe, not the government, but specifically military stuff. And that's actually their highest margin business, which gives them some diversification, maybe some steadier stuff away from any defense down cycle. On top of this, they run intelligence software for the NSA and CIA to track the movements of targets, I guess, you know, all for your safety. everyone, don't worry about those privacy concerns. For example, it has been reported that the CIA had Maduro's movements down to a T. Mossad has also been doing this in Iran for a

very long time. I think they're probably using, look, we're just speculating, but if you look at the annual report and you look at what these militaries are doing, they're probably using Lido software. And lastly, the company is working in hypersonics and autonomous ships called Sea hunter that tracks submarines and autonomous ship called sea hunter that tracks submarines for that one i kind of think well hey maybe another beneficiary for kraken robotics if we look at their latest quarter i mean it just seems like they have a ton of tailwinds at their back backlog was 43 billion dollars 1.3 times book to bill ratio which is not bad for anyone that doesn't know book to bill ratio is essentially it's the definition is in the title it's how

much bookings you're getting versus how much you're billing. So if you're getting a higher than one times book-to-bill ratio, it means you're getting more orders than you're able to fulfill and your backlog is growing and it means that your overall business is growing. So if the bubble won, that's a good sign. Since 2016, I know I'm giving a lot of stats out here and we have a nice chart from our friends at Fiscal AI, their operating income growth since 2016 is 20%. I would like to look at the past few years because if you look at the chart for any of the listeners, you can pull that up on Fiscal.ai. It's jumped significantly in the last two years.

I like to look at what happened to have this nice jump in earnings because maybe there's some normalization that's going to happen in 2026 for, you know, the next few years. That's going to play a role in the valuation. But I mean, beside that, that is solid performance.

If you look at the EV to EBIT, our preferred earnings ratio for quick hitters, it's under 15. So I think quite interesting. yeah based on headline numbers this is probably the most interesting one i've seen on the list i did not realize had an ebit multiple below 15 i would like to dig in and kind of get a sense of is there some normalization that is going to happen over the next few years what do we right is palantir taking a lot of their contracts or something like that right yeah but yeah i mean

just looking at trailing financials that looks pretty impressive and i imagine these are very very sticky deals is there any portion of their business that's commercial or is it all pretty much government 87 of its revenue comes from the u.s government i believe the rest is from allies so no wow all right i'm gonna get to my first stock here unless you've got any other comments on lidos i don't and if we're mispronouncing that any lidos experts uh apologies just before i get to the first stock i want to add a little more color on brett's comments that he had at the top of the show so first off the trump or the budget proposal this was an informal proposal for a budget increase as far as i can tell it was just a trump tweet slash true social post however people

are expecting that the white house will actually follow up and release an official budget proposal in march so right now it is uncertain well a it's uncertain whether or not the proposal actually passes but uh since it was an informal proposal we don't actually know what specific sectors would see the biggest budget increases so we don't have a sense of like 20 billion dollars extra is going to the golden dome versus like submarine development that kind of thing so you kind of have to i guess probably assume that it's widespread and going to all sectors of the defense industry i think it's likely well there's some stuff that's going to be given the it has to have a budget things like the f-35 and the virginia class submarines which are just they're they're

going to get their money no matter what. But if you look at the cutting edge stuff that we talked about in the opening, drones, underwater drones, satellites, the Golden Dome stuff, missiles, sensors, software, AI, it feels like that is going to, I would bet that it's going to get an increase in spending proposals. If you're a regular listener to Chit Chat Stocks, then you know that we love investing in international stocks. And no brokerage compares to interactive brokers, otherwise known as IBKR when it comes to international trading. You can easily trade assets worldwide using a multi-currency IBKR account in 160 markets, 36 countries, and 28 currencies with low fees. Compare that to your existing brokerage and its limited trading ability

and high fees on foreign exchange. There truly is no comparison. Trade stocks, options, futures, currencies and bonds globally with IBKR's unified brokerage platform. I wouldn't use any other brokerage for my investing needs. Switch to IBKR and level up your international trading game today. If you're interested in checking them out for yourself, head on over to IBKR.com. Interactive Brokers is a member of SIPC. Yeah, I said here, just given the tone and a lot of the commentary i guess so probably over the last year and some of the operations that we've seen my assumption here is that a lot of the budget increases will be focused on advanced weaponry uh ai and software as well as probably a lot of space tech as well there's been a lot

of talk about satellite surveillance and um obviously we've seen a lot of capital pour into the space economy over the last year or so. But since we don't have any specifics, I ran a broad screener for U.S. defense and aerospace stocks on Fiscal.ai. Pretty simple. And by the way, the screener is totally free. So if you're interested, I think this is a great way to find a list to rip through if you're interested in the sector. Just go to the screener in the industry tab look for defense and aerospace filter whatever countries you prefer uh in this case i was focusing specifically on the u.s and i didn't i wasn't really necessarily just looking for the cheapest stocks or the highest dividend yield or anything like that because i think it's a

maybe a misleading way to find companies here but i basically kept it open-ended i wanted to see what were the fastest growers what were the ev to ebit multiples of all these and maybe the highest dividend yields there aren't aside from trans dime which i don't actually believe has a very large government business it's primarily commercial there weren't any big contractors that had sizable dividend yields so uh unfortunately wasn't able to find any of those but i just kind of ripped through this list clicked on each one used some gemini help as well and i found a few that i think are interesting i'm not going to go through the whole list over audio but If you're interested in pouring through companies, I recommend going with that approach. The first company I'm looking at today is sort of a safe play. It is the second largest defense contractor by market cap and the largest by revenue. It is RTX Corp, formerly known as Raytheon.

did you know they specifically got called out by the president in an extra tweet slash truth uh i don't know exactly what they did but apparently he's not happy with them so they get extra scrutiny for the buybacks and dividends but either way i mean you're about to go through it they they just have rock solid contracts that aren't going away yeah i think all of the sizable companies have been they look like the biggest the easiest to critique because that nominally they spend the largest amount on buybacks and and dividends and capital returns so it's easy to say they spent 10 billion dollars on cap on buybacks or whatever instead of investing but like boeing would have done that too if they didn't have all the screw-ups like it's

it's you know i think part of that's just the nature of being as large of a company as they are but yeah my general belief here is that a 500 billion dollar budget increase is going to benefit a lot of companies some are higher risk some might have higher upside some might be like less obvious that might get huge bumps in uh project and bids but for sure it would benefit rtx i mean they already have the clearance they've got the a lot of the barriers to entry for being a defense contractor they already have so they're probably one of the most natural companies to work with for certain projects and obviously they already have large contracts but rtx operates three different segments that are all actually very similar

in size by revenue so pratt and whitney uh is 36 of revenue this is one of three major players in the aircraft engine oligopoly which i've seen a lot of commentary about the aircraft engine space lately it seems like there's like this renewed investor focus on the industry since ge spun off their other businesses and they realized just a while the stock's done quite well yeah yeah and now everyone seems to think it's the widest moat industry and they do seem to have really wide moats and there haven't been very i don't think any new entrants for like 50 years into the industry but this pratt and whitney gets most of their revenue from commercial customers so it's not really the focus for this one and then collins aerospace is the second largest business for them

this is 35 of revenue all three of these pratt whitney collins and raytheon are basically all a third of revenue almost um in collins aerospace you can think about it as pratt and whitney provides the engines and collins aerospace provides everything else so things like avionics flight controls cabin interiors landing gears literally just like every system or widget you could think of in an airplane there's collins might touch it the third one here is raytheon this segment is focused exclusively on high-end defense technology like missile systems radars torpedoes and electronic warfare systems i the reason i specifically chose rtx is mostly the missile exposure trump has been pretty vocal about wanting to build out the quote golden dome

which would be his uh basically national missile defense system uh raytheon is the leader here for i mean they generate 28 billion dollars a year and basically in revenue just from raytheon specifically like they generate 89 billion dollars in revenue across the whole rtx business 27 28 billion of that is from raytheon so they are the largest player not only in the defense industry generally but specifically in the missile segment i i want to reiterate that at this moment we don't know where the extra spending the budget increases are going or we have an idea but it hasn't been specifically laid out but i think it's pretty much a guarantee that rtx would capture some of it which is why it should at least be on people's radars for 2026

they've got a trailing eb to ebit of 33 times which doesn't screen cheap but a lot of that inflated multiple is from the Pratt & Whitney struggles recently. And the expectation is that profit margins should begin to climb again. So forward EV to EBIT looks like much cheaper than trailing. I think it's 24 times on a forward basis, as opposed to 33 on a trailing. I don't, if I were betting on one single stock from this list today, this wouldn't be it. But It's hard to imagine a massive 50% budget increase for the defense sector not helping this RTX stock. Yeah, and I kind of – I wish they almost would just split up the two businesses because I don't like that Raytheon. If you're going for, okay, hey, there's a budget increase.

We're going to see more spending on Raytheon in general. I don't want the aerospace exposure if I don't like that. but hey I don't know all right let's go through a GE here yeah the lawyers and bankers are going to do quite well with this one bring it together then split it up then bring it together then split it up we'll see all right let's speed through here to my second stock it's a company I've never heard of at all the name I think is just CACI I think I had something to do with California but the Tigger is also CACI. They're called CACI International, and they, quote, provide information solution services for the intelligence of the U.S. government. Market cap's $12 billion.

Compared to Lido's and its IT infrastructure, CACI is more focused on cybertech and electronic warfare. I'd say this feels like a tailor-made business to benefit from the increase in defense spending, especially when the future is cyber tech, drone jamming, all the good stuff. It looks really kind of like the dirty stuff that people don't want to talk about. Drone jamming, dark web searches for governments, laser communications in space and the digital architecture for something like the Golden Dome. When I look at the business, I see steady 10% revenue growth and only a 9% operating margin, which has slowly increased as they've gained scale. Of course, you know, the downside of the defense sector is the lack of margin expansion potential because of those

contracts that have regulated margins, cost plus stuff. Although when you look at some of these annual reports, usually it's about 50-50 cost plus versus other type of contracts, which with the cost plus is like, all right, we tell you how much it costs for us to build this, and then you give a little juice on top for what our margin is going to be. Some of the other ones are kind of fixed fee or more flexible. There's different types. But in general, you're not going to see a software provider have 30, 40% operating margins, even if they would in a commercial environment. But starting at a 9% margin, I feel like they still have a little bit of room to grow here, and it's a good base. You have this steady revenue growth. I mean, look, am I an expert on

this business? No, I think they've had a couple of acquisitions too that if you're going to do deep research on the company, you'd want to look into. But it's 10% revenue growth over the last, I believe, 10 years. It might have been five, but don't quote me on that. The trailing EBIT is 20. There's margin expansion, and it feels like a massive tailwind for these type of services. For example, one thing they mention is that they have technology to allow agencies or parts of the military to use dark web searches

to see any sort of potential terrorist activity or threats that you can't find on the open web, which I would think is going to be, I don't know if it's going to be increasingly valuable, but it's going to be very, very valuable in the future. And I would assume that those contracts are quite valuable, quite lucrative for CICI. It's a very, you could see the intelligence agencies or the government not, like they would need this software to operate in the modern world. How did you find this one?

I believe I just did a screener and I don't know, it just popped up. I also tossed in various prompts on Gemini. Build me some defense players that'll benefit from increased spending on various things that we've talked about, and CACI popped up. It's a company, have you heard of this company before? I've never heard a single person talk about it. No. $12 billion market cap.

I have never heard of that. It's not tiny. No. No, that would be, is that large cap? I think that's considered large cap. I think we need to adjust those filters. If we're doing my own determination, I think it's still bid cap. Large cap to me maybe is $25 billion and above, as we sit here in 2026.

Maybe that's the bubble talking to me, but yeah, mega cap $500 billion. I don't know. All right, let's get to my second stock here, L3Harris. Bad name. I'll say that. It's a bad name. Is this the spin from Lockheed Martin? or are you about to get into that or am i am i thinking of a different company different this

was a merger of equals in 2019 so there was l3 technologies and harris corp and they combined in an all-stock deal that immediately basically created made them the sixth largest defense contractor by revenue and uh what investors are now calling the sixth prime contractor some investors are calling them that so like rtx l3 harris's now there's been so many mergers in this industry this is sort of an amalgamation of a bunch of different segments and subsidiaries quick side tangent here i've said this before but i'm not a specialist in analyzing defense contractors in fact i have very little experience investing in companies like this at all and keep in mind this is a very different industry than most brett just mentioned this but margins can

sort of be capped if you generate a lot of revenue on a cost plus model so analyzing it does sometimes if you're looking at individual companies you may want some experience or at least take your time diving into the defense sector for a while however i am intrigued because of everything we discussed earlier and as a generalist venturing into the sector i'm not trying to find necessarily the biggest home run i just want to generate above average returns by being in the right spot in the right year i think that's part of the reason we're doing this episode is we think defense spending is going to be an interesting theme slash sector for 2026 specifically and 2027 given some of the budget increases and for me that means sticking to the

obvious beneficiaries which in this case l3 harris rtx are both kind of obvious ones you can even take an etf approach but throughout pretty much throughout most of my time as an investor i've always been a deep dive individual company know it extraordinarily well don't trade in and out of it own it for a long time style investor however i've been inspired by some other newsletter writers that i follow where they aren't afraid to get to know a company really quickly if they think the industry is going to do well or if they think there's a specific catalyst or an overall tailwind behind the industry and they've done well doing that where it's like am i the best defense uh contractor investor out there no not by a mile but you if you owned it over the last

year like an etf even if you just own the ishares defense etf you got 60 annual returns over the last year versus 20 in the s&p 500 so you can't do well betting on specific themes anyway let's get back to l3 harris this is more of a conglomerate i guess any comments there brett i know that was kind of a tangent i think it makes sense the looking at specific theme can be helpful and it comes back to at least for the listeners not being afraid to invest and then research where if you look at a company they just don't do this right before they're about to report earnings but you look at a company say oh this looks interesting i like this name i want to invest in it you could always sell a few weeks later or a month later if you research the business and

find that you don't like what you see but at least for a starter position or your first kind of buy don't be afraid to kind of jump in right away if you feel that the sector is going to have any beneficiaries don't don't be afraid to just sit there suck your thumb yeah agreed all right l3 harris let's go through the different segments here they've got space and mission systems this used to be two separate segments but i think they're now reporting them as one moving forward And the segment is very, very broad. So I'm going to let Gemini give a synopsis here. It says space and mission systems develop space payloads, sensors for missile defense, satellite navigation and electric warfare countermeasures. It also handles intelligence, surveillance and reconnaissance. I might be pronouncing that wrong. Reconnaissance, recon, recon missions. And maritime electrical systems. So it's very broad. This segment generates, I believe, around $12 billion in revenue, a little more, almost $14 billion. So a lot kind of under the hood there.

And then the second one is communication systems. So this is equipment for troops literally on the battlefield. So think stuff like tactical radios, night vision equipment, secure broadband communications, because you need that when you're on the battlefield. And then the last one here is Aerojet Rocketdyne. So they acquired this business in 2023, and they primarily manufacture rocket motors and propulsion systems for missiles. So if you're looking at the financials on Fiscal AI, you might be thinking, Ryan, what is attractive about this? growth has been meager at best they've grown revenue by 3.8 annually since the merger in 2019 and much of that is inorganic so why own this my primary thinking here or i guess why i would be attracted to it is 75 of the revenue comes from government customers so and maybe i think that was just u.s government so maybe even more from international and allied governments the when you get a 500 billion dollar budget increase you get a lot of new projects a lot of new development a lot of new tasks from the government or fund fund more more units for

existing systems yeah so my thinking here is that the next few years are gonna could look very different than the last few years and it's very much a if geopolitical tensions get even worse i mean i just described the businesses here you could see those definitely needing to be used so i think once again this is one of those beneficiaries where it's a rising tide lifts all boats they they would be someone who's going to hopefully be a landing place for a lot of that budget increase all right folks before we move on we need to tell you where we get our data fiscal.ai fiscal.ai is the complete stock research platform for fundamental investors i use the platform pretty much every single day you'll see the charts in our podcast you'll see it in our

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emergingmoats.com. The link will be in the show notes. All right, let's go into my third stock, BWXT Technologies. Market cap is actually bigger than the one before, $17.6 billion, but the revenue is not that high. This one is one I've known before. It's an airboat mission on my part. I saw they were a monopoly, but the valuation was kind of meh. Their growth wasn't that great. Now it's up 3x from here. I guess the rule of thumb is you should always invest in the stocks that I like but don't love because they seem to go up at an insane rate. Rocket Lab, hims and hers. BWXT Technologies, probably missing a few there. New Holdings, I guess, is on its way to that as well. So here's the monopoly. They are the only company authorized

to build nuclear reactors, nuclear fuel, and equipment for the U.S. Navy. I think this is quite an enviable position that will print money for years. And the U.S. Navy has had, I think, from the 1950s a nuclear program at least in some capacity for reactors for uh ships and submarines and it's going to be around for a long long time you have the virginia class that's going to be i think manufactured for the next few decades they're going to be operational for decades beyond that at least hopefully uh and on top of this they are researching the ability bwxt technologies is the ability to build micro-reactors for the Army as well as deploying reactors into space

working with Lockheed Martin and DARPA, which is the advanced, oh, I forget what it is. It's the Government Advanced Research Projects, something like that. It's where the internet was, I think, made, honestly. Either that or GPS was made from there. Lots of things was made from DARPA. And actually, and as a side note,

Waymo was started, I think, self-driving cars were started from a DARPA project. Either way, that's a tangent. We can go down another day. Commercial use cases are growing for this further, you know, the space technology. And they're also looking at potential use cases in the medical field. I will say I have no idea what nuclear medical stuff combines into. That's something to research further. But this is a company that seems to have a really strong track record of innovation, cutting edge, actually getting research projects out there, because if you look at some of the other companies in the nuclear space, these quote-unquote small modular reactor

companies, the micro-reactor companies, they seem to be producing just investor presentations. And BWXT Technologies has decades of actually making these things, and there could be a interestingly, led to a backlog increase of 119% year-over-year last quarter to $7.4 billion. The nuclear energy renaissance is really helping them. Their commercial revenue is growing 100%. Consolidated revenue growth is up 29% or growing at 29%. They have grown revenue at 6% annually since 2013. 13% operating margin has come down a lot. I actually wrote, I wonder why that is, I looked into that after and I forgot to write it down that they believe

they're starting up a lot of new contracts now and once you start up these contracts the margins are low at the start but then when you have the maintenance revenues the service revenues that come on top of that the margins will begin to rise again it's kind of like investing in the factory and then getting full capacity on top of that unfortunately while this looks like a fantastic business and one i could have bought it under 20 times earnings i think in 2022

uh yeah they really have the chart there and now trades are close to 50 times earnings it's a real shame this would have been a nice monopoly asset to own but i feel like if even being the most generous we are at fair value right now if not overvalued I wonder if they're benefiting from the energy needs from data centers. It's possible. I guess I didn't look fully through their annual report and conference call.

I believe that could be the case, but what they do have is, again, the contracts with the U.S. Navy, researching the ability to use microreactors for the Army. so essentially having like a storage container you know like a storage container that goes onto a ship and having a reactor there it's portable so then you have stable energy like off the grid i don't know exactly the use case so that would be i'm not in the army and then the space stuff locking darpa i didn't see anything for what you're maybe thinking about with data centers

but i could be i could have totally missed that and you could be totally right because i'm just what do you think the commercial use cases are uh i don't know could be that could be that for sure i i don't i i didn't did not look that up in the in the shallow dive here yeah 50 times earnings is a bit discouraging unfortunately but the triple digit backlog growth on the commercial side is probably the main reason that it's uh that it trades at 50 time earnings. Let's hop into my third stock, maybe the most interesting of any of the ones I've talked about. This is Kratos Defense and Security Solutions. It's a $15 billion market cap company, and they're best known for their unmanned drones. So there isn't really

a single product or segment that drives the business. Pretty much everything I've talked about today is some sort of uh conglomerate and it sounds like maybe these big defense contractors will have like a name a main product that helps the business kind of launch and grow and then governments will kind of give them custom projects for other solutions over time and before you know it they've got four different segments contributing to the top line but anyways there's uh they've got about 1.3 billion dollars in revenue so a lot smaller than the other two businesses i've looked at so far and they split that into basically two segments uh so government solutions and unmanned systems the government solutions accounts for the bulk of the business 78 percent of revenue

and this includes a ton of stuff so microwave electronic products uh for my non-technical listeners like myself think of this as small components like attenuators switches frequency converters and often they are compiling a bunch of these small components into a custom assembly based on specific requirements from whoever that end customer is usually it's a department in the government the second one here is space and satellite communication so kratos provides ground infrastructure uh for i believe it's ground infrastructure software for space missions they also sell antennas which seems like there's so many different sub-segments of uh so many different like micro niche products you don't think about that have billion dollar or 10 billion

dollar defense contractors behind them then the last one here is training system so kratos uses mixed reality and simulation to train soldiers and air crews in basically immersive environments. So it's some of that AR training that a lot of people have maybe seen. And then unmanned systems accounts for basically a quarter of the business. However, this has grown very quickly. So 16.5% revenue annual revenue growth rate since 2015 and when for this segment i think you most people can probably envision it just by the name but when you watch a modern movie with aerial combat you're likely seeing something that looks like what kratos builds it's these big jet powered drones used by the military stealthy uh pretty cool looking honestly uh we don't know exactly what

they do that's probably classified but yeah i get why the pictures can illustrate exactly what you'd be seeing um and they they fly alongside manned aircraft right i believe so maybe it's a different maybe it's a different company but so for example the f-35 would have a fleet of ten of these uh whatever they're called yeah and some of these are apparently designed to uh be destroyed so they're designed to basically uh go into a certain target or wherever which i would think uh it's not great for like uh you're pouring all this money in as a company and then it's hey that's they need more they need more you know hey we got a reefer we get a that's we gotta get more of the inventory what that one's got to be a cost plus model i say yeah well

they're not owning it they they're selling it to the military yeah and they need more they need more inventory yeah maybe that's the the pitch right there uh but of all the companies on my list this one probably intrigues me the most and in my kind of quick research for kratos something that stood out is that they apparently are considered unique in the defense industry because they use a lot of internal funding to develop prototypes instead of waiting for government funding. So obviously waiting for government funding is a safer play because you're not really risking any capital. But this allows Kratos to kind of stay ahead of a lot of other defense contractors and will has and will likely continue to enable them to to grow faster than the industry. And

while it a lot of these are not cost plus models so when you're reinvesting your own internal funding instead of having a baked in margin of like you know your cost plus seven percent or whatever you theoretically have higher margins than other companies in the industry however at the moment they are generating less than two percent operating margins because they are going through a big development cycle they are estimating uh that they'll get to five to six percent operating margins by 2028 but obviously when they're using internal funding production cycles can lead to a lot of lumpiness in profitability right now the ev to ebit is 600 something so that's because they're hovering right above profitable and then i think that's pretty much

shit. I hesitate when something is not profitable and I don't have necessarily a clear view on the path to profitability. This could be one where they're consistently sacrificing short-term margins because they think there's a project worth investing in and they are accelerating revenue growth and so far that's helped the stock quite a bit but i don't know i i probably would end up taking a basket approach if i'm looking at all the stocks i own today none of these in particular stood out to me as the obvious one to buy if you look at credo specifically the market cap of $15 billion revenue is just $1.2 billion

and it's not that great it seems fairly expensive but yeah let's close things out with my last stock a little bit more of a speculative play here a fun one to end things for people that like that type of stuff Black Sky Technologies they operate a satellite network

that is used for intelligence for the military interestingly 91% of its backlog is from international contracts They still haven't even won that many deals with the U.S. military. They're at only $20 million in quarterly revenue, but they have hundreds of millions in backlog. It's a next-gen satellite. You can see images of up to, from orbit. I don't know if this is low Earth orbit or higher orbit.

Again, not going to be a scientist here. But they could see up to a 35-centimeter resolution. That is from space. You know, it's not, that's low if you're taking a photo from three feet away. but these are from tens of thousands of feet away and they use infrared sensors to detect objects through smoke cloud cover etc i would say this sounds highly useful for trying to track stuff for military terrorism immigration drug cartels etc the old system i think had a much lower resolution so now you can actually see what you're looking at generally and i assume that

their next generation is going to get better so this feels like a blue ocean of growth a nice little tailwind of an industry you're going to want this type of stuff um if you look at what exactly they actually make money on they sell again the imaging services where it's not real time but within i think their quota is 90 minutes they want to say all right we're going to be going over an area we're going to get an image for you and if something changes we're going to send it to the general or whoever is in the decision-making capabilities all right something changed here you can make a decision and they also sell their software that can help with monitoring and kind of sifting through all the images out there quote black sky spectra software

uses ai to automatically scan incoming images it counts ships in a harbor tracks aircraft on a runway or flags anonymous activity like a convoy of trucks moving toward a border and sends a tip to the user instantly you've had 90 or excuse me 39 percent revenue growth since 2020 they're broken spec they're unprofitable but they trade at just quote unquote just 14 times gross profit this feels like even though it was obviously much cheaper well i guess i haven't mentioned that was much cheaper in 2023 2024 feels like a fine high risk high reward company if you're if you're confident in them to take a flyer on a nice little david garner type bet here this sounds like one that you would pass on and with 3x well yeah it's it's interesting but again investors

should remember highly unprofitable somewhat of a premium valuation and very tiny company in the grand scheme of things here so it's unclear whether a competitor could step in and win kind of a giant contract from the U.S. government because, again, 91% of the backlog is from international contracts. They've failed so far, at least from the cursory look at things, to win contracts from the U.S. government. All right. Closing question.

Go ahead, Ryan. I love the way all these companies have just super opaque, dystopian-sounding names. Black Sky Technology. Kratos Security Solutions. Yeah, exactly. Exactly. Black Sky Technologies. Yeah, that is. Yeah, some of the stuff will make you think about that CIA and NSA budget, you know, privacy, all that good stuff. But that's a different conversation from whether these are investable companies. I think the concluding question here, and maybe talking about we are interested in defense stocks, one takeaway I would have is that looking at a lot of these companies, they're up a ton in the last year. So are they attractive right now? Maybe, maybe not. But maybe, Ryan, we can go through and rank them from interest, general interest versus not interested.

I can go first the two that interest me the most today would be CACI and Leidos because of the valuation and I think general tailwind for the industry if we look at stocks I think the businesses I like

versus that are just overvalued I feel like BWXT and Kratos are both highly interesting but just traded just too high of a price for my blood and then black sky is obviously very speculative and then the um more traditional ones l3 harris and rtx i'm just generally not interested in those because i feel like they're almost bond length instruments i i don't i don't know it doesn't it's just not that exciting to me what

about you no i would probably rank them all similar none of these really individually stood out to me other than maybe leidos or leidos um like you said rtx very bond like same with uh l3 harris you're gonna get low single digit revenue growth most likely unless i would imagine annualized over multiple decades you're gonna get low single digit revenue growth plus maybe i mean not even a lot of margin improvement because of the structure of a lot of their revenue so maybe you'll get some dividends along the way but at the moment that that sort of capital returns approach seems to be under pressure uh politically so yeah but that part is i guess a different different story we'll see we'll see i i am interested in the

sector because of almost purely because of everything going on geopolitically none of these companies would i if i didn't think that now honestly if it weren't for trump's tweet last week i wouldn't be interested in any of these but a 500 billion dollar budget proposal increase is massive i mean it's it really is massive and you could get just the the overall basket the etf whatever the seven of these up 30 this year um yeah but difficulty is a lot of this was baked in six months ago when yeah it's it's been a nice little tail when they're in 2023 2024 2025 from post-ukraine war a lot of these stocks have kind of been pricing in that something like this was going to happen i think for me leidos is what i want to research first just given again like

to look at this business further and see why it's trading at kind of maybe a potentially undervalued price versus what i see as a nice little tailwind for the business but yeah besides that i'm with you it's not that sexy of an industry it's really durable you know in the grand scheme of the durable cash flow but not something that's going to be hyper growth outside of maybe this 2027 one-time bump i would think at least i would hope if you kind of get what i'm implying for thematic investments i would like to find ones where it's like this industry two years ago where you're getting much you can get some industry-wide tailwinds plus multiple re-ratings across the board. So maybe there's been some depressed valuations. People think lowly of

the industry and there can be room for not only actual accelerations fundamentally at these businesses, but also investors changing their mind about the industry. Yep. Okay. I think that's a great way to close things out. Let's hit the disclosure and get out of here. Let us know in comment on any of these. I believe you can comment on both Spotify and YouTube. You can send us an email, DM us on Twitter, DM us on Substack, what have you. Let us know if you like these type of episodes.

If you don't, as well, we only want to do episodes people want to listen to. And give us any other secular themes you would like us to study. But yeah, let's hit the disclosure and get out of here. We are not financial advisors. Anything we say on the show is not formal advice or recommendation.

Ryan, I, or any podcast guests may hold securities discussed in this podcast may have held them in the past and may buy sell or hold them in the future thank you everyone once again i will see you next time