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Why Kratos Defense & Security Stock Just Dropped 11%

By Rich Smith – Updated Mar 16, 2018 at 4:52PM

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Kratos just got targeted by short-sellers.

What happened

Shares of drone builder Kratos Defense & Security (KTOS -3.94%) plummeted in midday trading, falling 10.9% as of 2:45 p.m. EDT Friday after analysts at Spruce Point Capital Management targeted the stock for a short attack.

So what

After conducting an analysis of the company, Spruce Point concluded that Kratos management has destroyed "tremendous value" and blasted it for its record of burning cash. In a note that seemingly drove shares into the dirt on Friday, it also cautioned that Kratos had been accused of bribery.

According to Spruce Point -- which in its coverage of the analyst's note today, Barron's referred to as a "noted shortseller" -- Kratos' stock could drop 40% to 70%. If it's right about that, Spruce Point could make out like a bandit.

Drone firing rockets at a tank

Kratos suffers a drone strike from a short-seller. Image source: Getty Images.

Now what

Will Kratos stock fall 70%? A couple of examples from recent history may be instructive. In September 2017, Spruce Point took aim at iRobot (IRBT 0.08%) in a similar short report, warning that the company was vulnerable to competition from SharkNinja. iRobot shares tumbled 15% in response -- and are down about 30% today from their prices back then.

Two months later, a Spruce Point report on AeroVironment (AVAV -4.28%) had a somewhat less dramatic outcome. The stock slipped 7% as a result of the allegation that its valuation was "nonsensical and distorted," but shares have mostly made up those losses in the months since.

In both these cases, Spruce Point argued strongly that the stocks should fall 50% in value, and in fact both stocks did decline -- iRobot rather dramatically. In neither case, however, did the shorted stocks fall as far as the analyst warned they might. Given Spruce Point's record, I'd be surprised to see its short of Kratos Defense stock turn out any differently.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends iRobot. The Motley Fool recommends AeroVironment. The Motley Fool has a disclosure policy.

Stocks Mentioned

Kratos Defense and Security Solutions Stock Quote
Kratos Defense and Security Solutions
$9.51 (-3.94%) $0.39
AeroVironment Stock Quote
$88.71 (-4.28%) $-3.97
iRobot Stock Quote
$52.92 (0.08%) $0.04

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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