Mid-Cap Defense Stocks: A Strategic Haven Amid Market Volatility?

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Matthew Tuttle
March 18, 2025

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Market Recap

We did end up getting follow through yesterday, which was good news for the bulls. More impressive, the market was able to do this with the Magnificent 7 sucking wind. SPY is still under the 200 day moving average and we have the NVDA conference and FOMC on deck.

That’s the key metric right now, move back above, probably on something bullish out of Jensen and/or Powell and we have a change in trend.

On the downside watch $549.68.

Talked about coal stocks last week. So far this morning it looks like BTU will open above the 20 day EMA. Perhaps the next stop is the 50 day.

I also talked about P&C insurance stocks last week…..

The bull market’s growth stocks have stumbled. If investors are looking for value, they should consider insurance companies that steadily build book value.

Four such companies are Arch Capital ,Cincinnati Financial ,RenaissanceRe Holding, andW.R. Berkley, according to a Friday note by BofA analyst Josh Shanker.

I’ve been talking about China a lot, and BIDU finally joined the party….

Investing Lesson of the Day-The VIX Needs a Reason to Stay Elevated

The market’s ‘fear gauge’ spiked, then slid. What that means for your stocks.-MarketWatch

Contrarians consider a high VIX to be a positive sign — especially so when the VIX spikes upward as quickly as it did recently.

Except high VIX readings are not necessarily bullish for the stock market. Stocks historically do better when volatility is low.

So you might get better stock returns and rest more easily in this case by doing the opposite of a contrarian investor. In other words, keep a higher equity allocation when the VIX is low.

The article is confusing a couple of things, their are VIX spikes and then there is intermediate and longer term VIX readings. The VIX will spike from time to time when investors scramble to buy protection, hence why it is called the fear gauge.

Just on this daily chart alone you see a couple of spikes, that all came back down pretty quickly. This is because the VIX needs a reason to stay elevated. So buying stocks, or puts on VIX or VIX ETPs (don’t short VIX outright unless you have a death wish) can be a profitable strategy after it has spiked. You are also better off intermediate and long term in a lower VIX environment. I figured out a way to design a leveraged/inverse VIX ETF that can’t go to zero even if VIX spikes 100%, expect a filing on that soon.

Mid-Cap Defense Stocks: A Strategic Haven Amid Market Volatility?

What’s going on in Ukraine is horrible, but it is also highlighting the future of warfare…

This innovation is being led by a new group of defense names, which have also been a port in the storm during this market decline. This morning I asked GPT to take a deeper dive on these names……

Mid-cap defense stocks have notably outperformed the broader market during the recent downturn, attracting investor interest amid growing geopolitical tensions, increasing U.S. defense budgets, and strategic technological advancements. Here’s a comprehensive, analysis of the sector, complete with actionable ratings and insights.

Why Mid-Cap Defense Stocks Remain Resilient

Several fundamental drivers underscore the recent strength in mid-cap defense stocks:

  1. Stable Defense Budgets and Robust Demand:
    Global tensions, particularly with China and Russia, continue to drive bipartisan support for increased defense spending. This secular spending growth underpins long-term revenue stability.

  2. Advanced Defense Technology:
    Companies focusing on unmanned drones, autonomous systems, surveillance, cybersecurity, and electronic warfare benefit significantly from modernization efforts. These technologies are central to next-generation warfare.

  3. Limited Economic Sensitivity:
    Defense spending is relatively insulated from economic cycles, providing investors with a defensive hedge during market volatility.

Mid-Cap Defense Stocks & Suppliers Ranking (1-10)

Core Mid-Cap Defense Stocks:

  • Kratos Defense & Security Solutions (KTOS): 9/10

    • Leader in drones, unmanned aerial vehicles, and missile defense technology.

    • Exceptional growth prospects from Pentagon’s increased spending on unmanned and autonomous warfare.

  • Mercury Systems (MRCY): 8.5/10

    • Critical player in defense electronics, radar, cybersecurity, and signal intelligence.

    • Strong relationships with defense primes but slight headwinds from customer concentration.

  • Leonardo DRS (DRS): 8.5/10

    • Key provider of electronic warfare, infrared systems, and advanced sensors.

    • Positioned well due to increased demand for high-tech sensors in military operations.

  • AeroVironment (AVAV): 8.5/10

    • Dominant player in tactical drones, loitering munitions, and ISR capabilities.

    • Global market presence with significant demand due to recent military deployments.

  • Curtiss-Wright Corp (CW): 8/10

    • Specialized in aerospace and defense electronics, precision-engineered components, and mission-critical solutions.

    • Consistent government contracts with growth in critical defense infrastructure.

  • Leonardo DRS (DRS): 8.5/10 (as above)

  • Ducommun (DCO): 7.5/10

    • Supplies specialized electronic systems, robust supplier relationships, resilient against market volatility.

    • Strong but less pure-play compared to drone leaders.

  • Embraer (ERJ): 8/10

    • Mid-tier aerospace and defense manufacturer benefiting from military aircraft modernization globally.

  • Amentum (Supplier to Kratos): 7/10

    • Specialization: Defense services, logistics, and infrastructure support.

    • Strengths: Solid recurring revenue streams.

    • Risks: Lower margin services and contract concentration.

  • Red Cat Holdings (RCAT): 7.5/10

    • Specialization: Drone manufacturing and drone services.

    • Strengths: Positioned for niche military applications growth.

    • Risks: Small size and scale limitations.

  • AMETEK Inc. (AME): 8.5/10

    • High-quality precision instrumentation supplier to aerospace and defense.

    • Strong revenue visibility from defense tech upgrades.

  • Cohu Inc. (COHU): 7.5/10

    • Semiconductor test equipment provider, benefits from increased defense electronics demand.

  • Coherent Corp (COHR): 7/10

    • Specialization: Photonics, lasers, and advanced optical components.

    • Strengths: Growing demand in defense laser technologies.

    • Risks: Intense competition in photonics sector.

Strategic Recommendations:

Must Buys:

  • Kratos (KTOS): Highest thematic conviction with significant Pentagon alignment.

  • AeroVironment (AVAV) and Mercury Systems (MRCY): Beneficiaries from autonomous technology investments.

  • Leonardo DRS (DRS): Strong growth due to sensor and electronic warfare tech.

  • AMETEK Inc. (AME): Essential industrial supplier to aerospace and defense industries, diversified stability.

Cautious Buys & Portfolio Additions:

  • Embraer (ERJ): Strong thematic positioning but with moderate economic sensitivity.

  • Cohu (COHU): Indirect beneficiaries through semiconductor and electronic testing.

Strategic Conclusion:

Mid-cap defense remains a critical thematic area in current market volatility, driven by robust defense budgets, essential technological advancements, and increasing geopolitical tensions. Investors seeking to maintain resilient portfolios with strong intermediate and long-term upside potential should prioritize leading drone and defense technology companies, coupled with essential suppliers positioned to support military modernization.

Given this landscape, thematic investors should confidently remain overweight on mid-cap defense, especially KTOS, AVAV, MRCY, and AMETEK, which present the most strategic upside and lowest execution risks in an uncertain macroeconomic environment.

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