Dips Never Last. This Sector Will SOAR. (3 Stocks to Buy Now)

and a summer slump for this entire [music] sector, but these are three names that could soar later on this year. Joining us today is Marketbeat analyst Chris Marotch with a look at the drone sector and how much investment is coming this way yet this year and three specific names in the drone sector that he thinks could be really strong later on this year. Chris, I'm excited to talk about this topic because drones are one area that I have been bullish on all year, really since late last year because of all of this investment coming into this area. But these stocks have kind of surprised me this year with how poor of performance we are seeing in stock charts for so many of these names really sectorwide. So, what do you think is going on with the drone sector this summer? Well, I I think that what's been going on is that uh investors were buying into this sector in 2025 with the expectation that there's going to be a lot of defense spending going into drones. And I think the reason for the selloff for the first half of this year is the fact that there just isn't a conclusion regarding, you know, when is that spending going to actually happen through Congress because the defense budget still the the appropriations haven't been made yet. So expectation was there for spending, but we haven't seen those contracts actually going out and that money actually going out yet. So that's part of the reason that makes sense for sure and we're going to dive into exactly how much money could be coming. But I want to talk about another factor uh to see your take on this. But wondering about profit taking because we did see a lot of these drone stocks climb pretty rapidly with that expectation of money coming from the federal government. Do you think that any of this could just have to do with investors taking profits from stocks that really jumped significantly in just a short window? >> Oh, for sure. I mean, but but to me, those are two sides of the same coin. I mean, you're taking the profits because maybe you realize that you were a little early as far as when the runup was going to happen. And so it's logical you take some profits off the table then knowing that you're probably going to get a chance as you are now to sort of reaccumulate back the shares that you gave away. >> Yeah, I think we are starting to see some of that reaccumulation happening uh late this summer and we're going to look at that in the three names and the charts that you have for us coming up. Well, let's get into that investment and that timeline of when we might actually find out uh how much is coming for these defense companies and who might start to get those contracts sometime soon. So, let's talk about that military budget and what has so many investors excited about the money flowing into this area. >> Okay, so back in April, the Pentagon put out a budget request totaling $1.5 trillion. Now inside that request approximately 75 billion was earmarked specifically for autonomous systems and counter drone technology. This is exactly the space that we're talking about. The why is fairly simple. This is the future of defense spending. This is the future of warfare should it be needed. And that's the idea that we need to have the drones. We don't have enough of them. We're trying to create them as fast as possible. And that's obviously in the budget that the Pentagon is proposing. >> Yeah. And clearly there's a huge change coming to defense spending and warfare and drones are at the forefront of that because AI is changing the story so much for all of defense and the entire drone sector. Just like AI is changing the scene for a lot of investors. I'm sure AI has absolutely impacted the way you invest. The same is happening in professional careers. And those who are staying ahead of the curve are seeing the biggest success professionally. 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You can apply for free by scanning the QR code or clicking the link in the description. Don't fall behind the curve in your own professional growth. Apply for MasterClass executive today. All right, Chris, let's get back to the drone sector and all of that investment that is coming because of how AI is impacting the defense story and these drones. We know that investment is coming, but why is it taking so long to figure out who's actually going to get those contracts? >> Well, I I don't know if it's necessarily that we don't know who's going to get the contracts. I think it's more of a question of what I started with at the beginning is saying when are they going to get the money? when is that money going to start flowing to some of these companies which then would mean when are we going to start seeing that in the earnings reports in terms of higher revenues in terms of uh you know in some of the cases not all but in some of these cases these are not profitable companies yet so we want to see a path to profitability we want to start seeing that free cash flow and for some of these companies that's a while away and it's not going to happen until some of these issues are settled >> yeah so it's maybe just a longer term growth story here and what investors originally thought. Do you think that early on, again, we have three names to get into. We're going to get there, but I'm just sectorwide, there's so much to discuss here, and there's so many different names that our viewers have been very interested in in this sector for good reason. Um, do you think that this is a longer term growth story though, and that these stocks maybe got ahead of themselves for where the actual growth story is in this market? >> Absolutely. And so, let's go back to what I was saying about the budget here. $75 billion earmarked specifically for drones. Now, another part of that budget is you've got another 50 odd billion that's being set aside for what I might call drone adjacent uh technologies, logistics and and different areas of this drone/defense/space technology. So, put those numbers together and you're getting somewhere around the vicinity of $125 billion for the sector. The three companies we're going to be talking about today did a combined 3.4 billion in trailing 12-month revenue. So you can see 3.4 billion 125 billion. That's a huge opportunity. And and I'm not trying to say these three companies are going to get all of that pie or even a majority of that pie. What I'm saying is the pie is going to be huge. And right now, if you consider the size of that pie, these companies are only getting a really small sliver and that sliver is going to expand. So that's how investors need to think about it. I think a lot of investors were hoping or speculating that that was going to start happening sooner. It hasn't, but that doesn't mean that it won't. This is the future. This is where things are going. That's what's driving the thesis for these three stocks. >> Well, let's get into it. What is that first drone company that you were looking at for uh significant growth coming yet this year after a really slow summer? >> Sure. The first company is Aervironment. Uh ticker symbol is AVAV AVA. This is about as close as you can get to a pure play um on drone technology without you know putting a lot of other businesses in there to dilute the story. The stock's up more than 50% over the last 5 years. So even with the pullback that we've been seeing this year, the long-term trend is still in place. Having said that, over the trail, you know, over the last trailing 12-month period, it's down about 40%. So that's a that's a fairly steep draw down that some investors have had to digest. >> Yeah. And this is one of the names in the drone sector, which again, some of these are pre-revenue companies. This one is already making money. It's an already, you know, existing company that's got revenue coming in. It seems to be growing as revenue. looking at earnings too, even though we've got a new one coming up in just a few weeks. But let's talk a little bit about why the pullback exists here. Is it really just that sectorwide issue that we saw, or is there something specific with AVAB that investors are concerned about? >> I think investors are concerned right now about the pace of earnings growth. Again, you were right, and you're bringing it up accurately, Bridget. This is a profitable company. Their guidance for the fiscal year of 2027 is putting adjusted EPS somewhere in a range of $32 to $3.34. However, even at the [snorts] high end of that range, it's going to be roughly flat year-over-year. And that's what's got some investors thinking, okay, maybe we got out over our skis on this one. If they're not growing those earnings, and we know that earnings price generates stock price growth, that's really what the story is right here. I want to look at the price action here compared to what analysts are saying about this stock, too. Um, we're still trading well below what that consensus price target is for AVAB. And I want to look at the trends that we're seeing from analysts. Are they expecting the stock to move significantly higher from where it is or are we seeing some price reductions that are showing the highend for this stock might not be that high that we saw just a few months ago? >> So, so my answer is going to sound contradictory, but the answer to both questions is yes and yes. They are expecting to see significant upside from where the stock is trading as we're taping this today. But also, yes, in the last few months, we've been seeing some analysts lower their price targets and some have even been going below that consensus price target. And that's again just based on the earning story that I was saying. This is a stock that was being priced, especially heading into this year. High growth stock. That's what the story was hinging on. And now they're saying, "Okay, high growth stock, but you're really only talking about flat earnings growth." That's the story. >> Yeah, that earnings growth is the key here to growing this sector again, I think. And the next couple of names we're going to talk about, some have already had earnings, and we might be starting to see that story unfold. Uh, but how quickly do you think the market needs to see that earnings growth accelerating for renewed interest and renewed momentum for this stock and maybe the whole drone sector as a whole? >> You're going to need patience. you have to start seeing some of this spending get released by Congress. Now, I believe I could be wrong about this, but I believe I heard the CEO of Air Environment speaking recently and he was essentially saying they're pushing forward. They they are they are pushing forward and they're committed to supporting the Pentagon and they are basically doing it on a wing and a prayer saying we know that the revenue is coming. We're going to we're going to support you. But still, investors are going to want to see more than that. they're going to want to start seeing evidence that this earnings blip is going to improve in the in the right direction. The company is spending heavily into their own growth and that is just again that's just another layer of the story. The long-term thesis, the only way it breaks in my opinion for the drone sector is if all of this Pentagon money does not come through, which I don't see is very likely. And in that case, I I just see it's a it's a story that's going to require patience. And I think the pullback is healthy for long-term investors. I think the case is is very strong. If you're a trader, that's a whole separate discussion. >> Yeah. So, what I'm hearing from you, does this look like a buy at where the stock is priced today? >> I think so. Again, especially if you're if you're looking at this as a long-term investor, and that means you're looking to hold the stock for at least one year. Okay, that's my definition of long-term investing. It's at least one year you're planning on holding the stock. This is a very good point. With this 40% pullback off of the off of that high, this is a good place to get involved. >> Yeah, it's a really significant pullback of the companies we're talking about today. This one has pulled back the most, but there are other names in the drone sector that are maybe holding their ground a little bit better than this one. It's really similar to what's happening in the AI and tech trade right now. We've seen a lot of volatility in some of those names this summer, too. But some certain tech stocks are holding their ground better than others. If you want to check out that full list in the AI and tech sector, scan the QR code or click the link in the description to get this free article on marketbeat.com about five tech stocks that are holding their ground through the AI trade pullback this summer. It's a really interesting list that's usually only available for our premium subscribers on MarketBeats, but it's a special offer for our YouTube viewers today. If you want to check out that article and get those additional five names to look at, don't miss that link right down in the description. All right, Chris, let's move on to the next drone company that you are looking at. And this one is an even larger drone company, and it is not pulling back nearly as much as Av has. >> Yeah, this is Kratos. Uh, Kratos Defense and Security Solutions. The ticker symbol is KTOS. This is a company that's actually a little larger in terms of market cap than Air Environment is. It's this has market cap about $10 billion. So, it's pushing into that. It's we're getting close to being in large cap territory as far as the stock is concerned. So, similar story in terms of what investors have seen with the stock price. Okay. Stock is down about 23% uh year to date as we're taping this and that is coming off the all-time high that it made right as we started 2026. So again, it's it's trending like the rest of the like the rest of this industry is. And again, I think it's that same reason is you're seeing some of the spending that they were hoping would already be starting to trickle in is not going to be trickling in. And I think that's that's what's holding the stock back. But I think with Kratos, the reasoning is a little different than with their environment because I think really with Kratos, it's coming down to largely a valuation play here. Kratos is trading at around 340 times current earnings. It's trading about 120 times forward earnings. So, that's encouraging. Uh, but I think investors just see a lot of growth already priced into this company. They just haven't been seeing those results yet. >> I'm really glad you brought that up, Chris. I think those are important numbers to look at at uh how much expectation is already built into this company, even though there are lots of expectations yet from analysts. you look at the the price targets the analysts are putting on this company and they're anticipating quite a bit of growth for an already very large company. What do you think about that the analyst trends for this stock in particular? I also uh want to go through the earnings because they reported earnings this week that seems to have some positive news for investors too. >> Well yeah actually I think that's a really great place to start Bridget. We we probably kind of buried the lead a little bit here with that one, but they did report earnings this week and that is a very encouraging story because they were um they improved on earnings per share. I'm looking adjusted earning per share. They beat almost 100% on the bottom line. They came in at 21 cents u adjusted as opposed to 11% the prior year. Revenue was up uh they delivered 458.8 million this quarter in the same quarter last year was 351.5 million. So strong beats on the top and bottom line. That's what investors are are likely um excited about and you are seeing a a an increase in the stock price to go along with that and analysts, you know, have been raising their price targets on this one. Yeah, we saw roughly a 25% jump in the stock price this last week and and Kratos is such a big drone company that it really seemed to boost several other stocks in the sector and we're going to see that in just a minute with the the last company that you have for us. Uh but I want to talk about whether that's a time to get in on a company like this once that once you start seeing the drone companies back in the headlines, you start to see positive earnings results like we saw with this one. Um, are you too late to have missed that pullback or is there plenty of ground to still make up for a stock like this? Again, looking at what analysts have to say, certainly they believe that there is still a lot of ground left to grow for this stock. >> Yes, my my answer is the same as I had with AVA. This is a, you know, for a long-term investor, this is a great opportunity because even with the stock trading where it is today, and it's trading just a little bit below $60 a share as we're taping this, the high back in January was over $130 a share. Now, you now investors could push back and say, well, it was really overvalued at $130 share. That's fair. But when you look at where analysts are still saying the stock could go and the consensus price is still $100 or over $100 and many price targets are well above that. Yeah, that's just saying there's a lot of opportunity here. The thing that stood out to me is analysts are forecasting 70% earnings growth this year. So we go back to the valuation story. That's the key number because if you're hitting 70% growth in earnings year-over-year, that's growing into your valuation, which means you shouldn't be focusing on the one number. You should be focusing on the growth number, and they're growing into that. Another thing I think is interesting, this valuation story makes me think of Palanteer, which we know is a defense company, maybe not as much in the drone sector, but uh the thing that I think is interesting about valuation here is Palanteer, you know, was kind of slow to get on those institutional investors. As we look at Kratos and as we looked at Aero Environment as well, lots of institutions are pouring into these stocks. AVAB had over 85% institutional ownership. Kratos has about 75% institutional ownership. So the institutions and and the big Wall Street money is not afraid to be investing in the stocks even with the valuations at where they are today. What does that tell you Chris? >> Well certainly I think institutions I you know it's an overused phrase but in this case it's very apt. Institutions are always skating to where the puck is headed and they were getting into these drone stocks well in advance this. Now I would say if you look at the institutional ownership on Kratos, investors who are looking for breadcrumbs could see that over the past several quarters institutional selling has outpaced buying. And so that explains a lot a big reason why the stocks taken a big hit. Um when you have 75% or so institutional ownership and institutions are doing more selling than buying, that's a heavy lift for retail. Retail's going to have to be patient there because it's institutions that are driving the stock. Whereas for a long time, retail has been driving Palunteer in the other direction. So that's actually a really nice contrast there when you see about 45% institutional ownership for Palunteer, 75% institutional ownership for Kratos. >> Yeah, such an interesting breakdown of of what's happening behind the scenes with some of these stocks and what Wall Street thinks about where these companies could be going versus retail. There's always that contrast between the two. And I think that that shows up uh quite a bit in this last company that we're looking at, which is one of the smaller cap drone stocks uh that is on the list today. And I feel like these small cap names is where retail really shines when it comes to investing early in some of these drone companies. >> They do. And the and the name we're talking about here is Redcat. Um we know that it's a favorite of a lot of the speculative investors. Um it is a small cap stock. We're talking about a market cap of just over a billion dollars. So, firmly in the in the small cap space. Um, and that really explains what's going on with Redcap because you've got a small cap stock like this. This is the only company of the three that we're talking about that is not yet profitable. And that is a trigger for shareholder dilution. They have to issue new shares to fund their growth. That weighs on existing shareholders. And so right now it's it's the question of can the company generate enough revenue and keep that revenue machine going and get to profitability while you know so that you get to the point where you're not diluting your current shareholders. >> Let's talk about earnings growth for this company in particular. We know this one also reported earnings this week. Uh it also saw the same kind of price action boost uh right when Kratos's report came out earlier in the week. So also seeing some positive trends with this earnings. >> Yeah. And and I again I just think that investors are are getting some good information from the company. Analysts are are projecting that earnings per share are going to grow this year which means they're going to get closer to that profitability level. And that's certainly encouraging. And that's again that's what Redcat has to do. They have to prove that they're going to be growing those earnings and growing that revenue enough to justify the investment where investors can do it without the fear of having their shares be diluted. >> Yeah, I want to talk a little bit more about execution risk as well with this company and just competition. There's so many different drone companies out there, a lot of these smaller names, pre-revenue names that are fighting for those same contracts from the government. And we started out the video talking about that's really the catalyst for the whole sector is all of this influx in spending and investment from the government into these drone companies. Is there a guarantee that some of these smaller companies like Redcat are going to get a piece of that massive investment? Or is there so much competition that maybe there's only a few key players who are going to get that money and smaller companies might have a harder time at securing those contracts? That's certainly a concern and that's what investors are going to have to be looking at going forward. This is where investors have to be very careful when you're investing in these stocks. I understand the attraction to a company like Redcat. It's the asymmetric play. It's the idea of you're buying the the stock that's the cheapest of these three stocks. It's the smallest market cap. It's got the it's got the best chance for that 5x 10x opportunity in that sense. And I get why investors would be excited about that. But with that comes also the possibility of a lot of risk in the short term, especially if they if they if they miss at all on their revenue numbers. If the revenue isn't growing as strongly as the investors want and they're not showing that path to profitability. I'm not saying they can't. I don't know. But what I'm saying is this is there's a $125 billion opportunity sitting in the Pentagon proposed budget right now. And certainly the market for drones is much larger even than that. But we just don't know how much of that pie a company like Redcat's going to get. I mean, this is a company that generated um you know, as I'm looking at it, about what $35 million in 2025. So, you know, they're on pace this year to beat that. No question about that. But again, this is a company that's measuring their their, you know, their they're they're generating their revenue in millions of dollars. >> Still a very small company, but like you said, that that risk versus reward is what attracts so many investors, especially in the retail community. You can see that in institutional ownership, far less in a company like this one, but also the the analyst expectations for this one. Uh the gains appear to be much greater in a company like this too, like you just mentioned. So talk a little bit about what analysts have to say about Redcat and why you think the analyst community is so bullish on a smaller company like this. >> They're raising their price targets heading into earnings. That's always a good sign. And I think they see the same opportunity that a lot of other uh that that the retail community sees. This is this is an asymmetric opportunity. Now to be fair, a small cap company like Redcat doesn't have as much analyst coverage. There's only I, you know, market beat only shows about seven analysts covering the stock right now. You see some companies of a billion dollar market cap that have far fewer analysts. So the fact that they have [clears throat] seven is pretty impressive, but it's not a lot. Until the company is profitable, it's going to be off of a lot of investors, institutional investors, it's going to be off their radars. And you see that in the institutional ownership was about 37% right now. Yeah, the expectations on this one and the interest from Wall Street uh is interesting, but so is that short interest. You can see that there are plenty of different investors out there who are betting against this company, too. And that's not unusual in small companies that risk versus reward. Uh what does that short interest tell you about this name in particular? >> Well, short interest is about 30% on this company. And that's and that's high. Um it's going to be high for any company, but especially a company that's a that's a small cap name like this. It just goes to tell me that again retail's facing a a challenge of a different sort here because they're they're basically they're they're trying to bet against short sellers who again are betting pretty aggressively against the company. Now I I can understand the other side of that argument. You'd have some investors that would be saying, "Yeah, but with 30% short interest and if the earnings results come out and they deliver a really really great earnings report, hey, that we could see a short squeeze." It's also that that flips both ways. If if the if the results disappoint, the short sellers can be in very much in control and the stock could go much lower, much faster. >> Yeah, that volatility is still very much a possibility here with Redcat. Uh, and full disclosure, this is a name that I have been bullish on for a while. It was the second name I added to my Bridget Spy watch list because there was so much excitement about it at the the start of the year. And even though it's lost a lot of the gains that it did see in that January time frame, if you haven't heard of Bridget Spies before, this is my paper trading watch list where I like to add one stock for every video that we talk about on here and see how the stock moves over time. And that's exactly what we're doing here today is looking back at how Redcat has moved since I added it in November. At least for me on my watch list when I added it back in November, the stock is still up uh a little over 35% almost 40%. So that the gains are still there for early investors who got in early on a company like Redcat. I know that that volatility could still come. Uh and so will that November entry point prove to be good long term? Uh potentially there it could go many different directions for Redcat. And I it will be exciting to see long-term what it will take for that entry price in November to look like a really smart investment solidly and that risk of volatility to go away. What do you think that long-term story could look like and when that stability might come into this name? >> Again, I would expect that one of the things you're going to be waiting on is we need to see that budget get approved. We need to see that spending get approved and then we're going to start seeing where that money is going to be allocated and who are going to be the winners and the losers. That's when it's really going to play out. I think for Redcat, the company goes beyond drones a little bit. They are in the robotic space. They are in autonomy and sensoring solutions. So, they're not just drones, but again, that's a big part of where they're trying to play at. And I think that's going to be part of the story here. >> Yes. And we only covered three of the names in this drone space. There are so many other names that many investors are probably seeing similar moves on or might be similarly interested in. If you want to dive a little bit deeper into some other drone names and see where those stocks are today and what their long-term story might be, make sure to watch this video. It's the most recent one we have detailing a few different drone companies that have some strong potential uh and a lot of volatility too.