Shares of Kratos Defense & Security Solutions (NASDAQ: KTOS) sank 12% this week, according to data from S&P Global Market Intelligence. The upstart defense provider of drones and hypersonic technology slipped this week over the potential fallout of the Greenland dispute between the United States and Europe. Even after this downturn, the stock is up 234% in the past year, making it one of the best performers over that timespan.
Here's why Kratos Defense stock fell this week, and whether you should buy the dip for your portfolio.
NASDAQ: KTOS
Key Data Points
A Greenland scare and an analyst target
Global news this week centered on the United States and Europe's dispute over the island of Greenland. Greenland is a strategic area for missile defense and the Arctic. After repeated threats from the United States and President Trump about buying Greenland, European leaders began to retaliate, with some saying they would stop buying U.S. defense equipment if the conflict escalated.
This had a direct impact on U.S. defense stocks, sending Kratos spiraling from its highs. Even though the dispute has been resolved (for now), Kratos' stock did not fully recover from this news.
Besides this geopolitical event, Kratos was hurt by a $99 price target from Piper Sandler, which initiated a neutral rating on Kratos' stock. Shares of Kratos trade at close to $115, so this was seen as close to a downgrade from the investment community and cutting off some of the stock's price momentum.
Image source: Getty Images.
Time to buy the dip?
After this dip, Kratos' stock has a market cap of $19 billion. As I mentioned above, it is still one of the best-performing stocks of the past year as investors remain bullish on its prospects for drone technology, unmanned aircraft, and hypersonic missiles.
As of this writing, Kratos trades at a price-to-sales ratio (P/S) of over 14, which is much higher than its long-term average and significantly higher than the average defense stock. The company is growing much faster than the typical defense company -- it had 24% organic revenue growth last quarter -- but this is still a wildly expensive valuation after this drawdown. Stay away from Kratos stock right now; it looks too expensive.
