The Underground Defense Technology Stock That's About to Shock Wall Street (It's Not What You Think)

Many investors think investing in defense stocks means buying shares of giant companies such as Lockheed Martin, RTX, and Northrop Grumman. While these are strong businesses, they are also widely owned and heavily analyzed. Subsequently, they are rarely able to truly surprise Wall Street.

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A better "underground" defense sector pick for 2026 may be Kratos Defense & Security Solutions (NASDAQ: KTOS), a small but increasingly important supplier of systems used by the U.S. military -- among them, low-cost unmanned aircraft, hypersonic (at least five times faster than the speed of sound) testing platforms and flight vehicles, and space communications hardware.

Growth prospects

Kratos CEO Eric DeMarco has highlighted that the U.S. is entering a multiyear, multidecade defense recapitalization and rebuilding cycle driven by foreign policy changes and rising geopolitical threats. He argues that a shift of just 10% in annual U.S. procurement spending from traditional security players could create a roughly $25 billion annual opportunity for Kratos and other small defense suppliers.

Kratos is working to capitalize on this opportunity through multiple avenues. The company is working with Northrop Grumman to build its autonomous XQ-58 Valkyrie drones and fly alongside Marine Corps fighters under its Marine Air-Ground Task Force Uncrewed Expeditionary Tactical Aircraft (MUX TACAIR) program. Management expects this initiative to transition from mission evaluation to low-rate production and eventually to full-rate production, which could translate into significant annual demand.

Despite this, Kratos has not included the expected contribution from the production of large quantities of Valkyrie drones in its base financial forecast for its fiscal 2026 or 2027. Instead, the company is waiting for clarity around contractual funding and delivery timelines before it officially adds those potential sales and earnings to its projections. There is a real chance for an upside surprise for shareholders if the procurement of Valkyries by the Marine Corps accelerates faster than expected.

Management also expects the company's hypersonics portfolio to emerge as a significant near-term growth driver and earn over $1 billion in revenue by 2028.

Hence, although Kratos faces execution risks and margin pressures, it still has the potential to catch Wall Street off guard.

Manali Pradhan, CFA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Kratos Defense & Security Solutions and RTX. The Motley Fool recommends Lockheed Martin. The Motley Fool has a disclosure policy.