Last summer, when I was working for a major Defense Contractor, we were putting the finishing touches on the annual long-range strategic plan. As we sat in the conference room editing slides, the conversation drifted into the major investment themes of the past several years. Investments made a decade earlier were finally starting to trickle into the strategic plan and the commercial market.
Our planning cycle was clearly shifting to new technologies. It was becoming evident that the success of drones in the Ukraine conflict was dictating the future of defense spending. Ukraine was building drones fast and cheap, and it had everyone talking about Advanced Ammunition and strategic Counter-Unmanned Aircraft Systems (C-UAS).
That strategic session helps to explain the funding that is now making its way to the sub-suppliers. The companies that had the foresight to align internal investments with the emerging themes are the ones set up for the next decade.
For the government, the tough part about defense spending is not the capital injection; it's standing up and qualifying the supply chain. The shift is happening from the "forever platform" to the "agile manufacturing base." Couple this shift with the potential $1.5 trillion budget request, and the opportunity for small and mid-cap defense stocks is immense.
The Context
Looking into the proposed budget, the F-35 fighter jet is a prime example. For over a decade, this program received vast amounts of funding, averaging $12 billion annually and consuming nearly 20% of the total aircraft procurement budget. In the new request, the administration cut procurement from 74 jets to 47.
This is a large reversal. The cuts for the fighter jet are being reallocated to the "Golden Dome" missile shield and the "Replicator 2" drone initiative. This leaves traditional aerospace supply chain exposed while creating a gold rush for the small-cap companies that can build the sensors, software, and rocket motors needed for modern warfare.
Three Trends
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The "Golden Dome": The administration has requested $151 billion over ten years for a continental missile defense shield. While funding will flow to major Defense contractors like Lockheed Martin, we are more interested in where the funding will flow down to. We are watching companies like Rocket Lab (RKLB) and Redwire (RDW) which are building space-based sensors. Kratos (KTOS) builds the hypersonic target drones used to test the system.
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"Replicator 2": This initiative is designed to protect U.S. bases from drone swarms. It favors companies with open production lines, such as AeroVironment (AVAV), specifically following its recent acquisition of BlueHalo.
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Rocket Fuel: The U.S. has a critical supply chain bottleneck with solid rocket motors. L3Harris (LHX) is spinning off its rocket motor business (Aerojet) into a standalone public company later this year. This deal is backed by a direct investment from the Pentagon. Meanwhile, Kratos is building its own "Zeus" motors to attempt to bypass the shortage.
The Stocks to Watch
- The "Golden Dome" & Space Infrastructure Plays
- Rocket Lab (RKLB) has become a "Space Prime." They hold a pivotal $816 million contract with the Space Development Agency (SDA) to build missile-warning satellites, the eyes of the Golden Dome. The Neutron rocket debut in mid-2026 breaks the SpaceX monopoly on National Security Space Launch (NSSL) Lane 1 missions.
- Redwire (RDW) manufactures the antennas, optical benches, and power systems that enable satellites to communicate and track hypersonic threats. Their acquisition of Edge Autonomy adds tactical drones to their portfolio, bridging the gap between space infrastructure and aerial surveillance.
- Mercury Systems (MRCY) makes the secure, radiation-hardened microelectronics and processing subsystems found inside radars and missiles. They are platform-agnostic, meaning they win regardless of which Prime integrator (Lockheed or Northrop) gets the headline contract. Mercury was recently awarded over $60 million in contracts for strategic radar programs that form the backbone of the new missile defense architecture.
- Ducommun (DCO) builds the complex titanium and aluminum structures for missiles and radar systems. Management has explicitly linked their 27% growth in missile products to the demand signals from the Golden Dome initiative. Persistent rumors of a takeover bid (rejected offer at $65/share) make this a potential M&A target as Primes look to secure their supply chains.
- The "Replicator 2" & Autonomy Plays
- Kratos Defense (KTOS) The only public company with a foothold in both affordable combat drones (Valkyrie) and hypersonic targets/propulsion. Kratos developed its own "Zeus" motor architecture to secure a dedicated supply of affordable propulsion, ensuring they aren't left waiting in line behind major missile programs.
- AeroVironment (AVAV) The leader in loitering munitions (Switchblade), their acquisition of BlueHalo makes them a powerhouse in "directed energy" (lasers) and electronic warfare, the exact technologies needed for Replicator 2's counter-drone mission.
- Leonardo DRS (DRS) integrates the sensors and guns for the Army's mobile counter-drone vehicles (M-LIDS). They recently won a DoD competition for their electronic warfare systems, validating their tech for the Replicator 2 architecture.
- The Digital & Logistics Integrators
- Parsons Corporation (PSN) Parsons writes the code that fuses sensor data. Their acquisition of Altamira Technologies locks in high-end signals intelligence (SIGINT) capabilities required to track threats in the electromagnetic spectrum. Expected to generate over $200 million in 2026 revenue solely from the Altamira acquisition.
- V2X, Inc. (VVX) manages military base operations and logistics. They were named as an awardee on the $151 billion SHIELD contract vehicle, giving them a license to bid on the massive logistical support tasks required to build the Golden Dome sites.
Latest News
Red Cat Holdings (RCAT)
- Red Cat reported a preliminary Q4 revenue between $24-$26M. This is an approximate 1,800% increase year-over-year.
- The "Black Widow" drone system is fielding substantial government orders.
Intuitive Machines (LUNR)
- Intuitive Machines completed its $800 million acquisition of Lanteris Space Systems on January 13.
- They acquisition gains immediate manufacturing capacity for LEO/GEO satellites used in missile warning and intelligence.
CPI Aerostructures (CVU)
- CPI Aerostructures won a new firm-fixed-price Award from Raytheon (RTX) to manufacture missile wing assemblies.
- CVU is a micro-cap company that signals the small companies are starting to increase their backlog.
Movers & Shakers
- Movers & Shakers data returns in tomorrow's edition following the MLK holiday on 1/19.
The Briefing
- "Greenland 8" Reality Check: The White House confirmed that the "Greenland 8" strategic resource tariffs will go into effect February 1st, covering critical rare earths and battery components.
- The Inflationary Drag: Goldman Sachs updated their model this morning, projecting the tariffs could add 0.4% to headline CPI by Q2. The market is realizing that "energy security" comes with a price tag.
Today's Fact
On January 20, 1892—exactly 134 years ago today—the first official basketball game was played at the YMCA in Springfield, Massachusetts.
The game was played with a soccer ball and two peach baskets. The final score was a thrilling 1–0. The total revenue for the event was $0 and the cost of the "equipment" was negligible (two used fruit baskets).
Today: The NBA generates over $10 billion in annual revenue, and the average NBA franchise is valued at roughly $4 billion. Not bad for a bouncy ball and two peach baskets.
Thank you for your time this morning. I'll be back tomorrow with another edition. -Marques
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