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Exclusive Content
Defense Budget Expansion: 3 Mid-Cap Names in a Sweet SpotAuthored by Chris Markoch. Date Posted: 4/20/2026. 
Key Points
- A proposed surge in defense spending is accelerating demand for next-generation military technologies.
- Mid-cap defense companies offer growth potential as they gain contracts and visibility.
- Autonomous systems, cybersecurity, and shipbuilding are key themes driving long-term upside.
- Special Report: Elon Musk’s $1 Quadrillion AI IPO
In early April, the Trump administration proposed boosting defense spending to $1.5 trillion for 2027 — the largest such request in decades and roughly a 44% increase for the Pentagon. It would be easy to attribute the proposal to the Iran war, but the administration had signaled its intent for a larger defense budget before that conflict began. The rationale is both practical and strategic: current military infrastructure is not optimized for the character of future warfare and needs significant modernization. That will require greater investment in next-generation shipbuilding and in autonomous defense solutions.
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That shift helps explain why defense and aerospace stocks have led the market higher in 2026, including established names such as Lockheed Martin (NYSE: LMT) and Northrop Grumman (NYSE: NOC). But there’s growing opportunity among mid-cap stocks that have less visibility than the majors and are still being repriced. Kratos Defense: A Pure Play on Autonomous Warfare Growth The push for unmanned and autonomous technologies in defense will require both offensive and defensive capabilities. Kratos Defense & Security Solutions (NASDAQ: KTOS) operates on both fronts. On the defensive side, Kratos is one of the largest producers of counter-unmanned aerial systems (C-UAS). That market is projected to grow from roughly $6.64 billion in 2025 to about $20.31 billion by 2030 — a compound annual growth rate near 25%. In March and April 2026, Kratos announced contracts totaling more than one-third of its fiscal 2025 revenue of $1.35 billion. On the offensive front, Kratos’ XQ-58 Valkyrie has been adopted by the U.S. Marine Corps, which continues to procure additional Valkyries and could advance Kratos toward a formal program of record with the Department of Defense. KTOS is down roughly 40% from its year-to-date high, with institutional selling outpacing buying. Still, analysts are forecasting about 38% earnings growth and continue to raise price targets. That makes the current levels a more attractive entry point for a stock that remains up over 100% in the past 12 months. Leidos: Software and Cybersecurity Powering Modern DefenseThe demand for offensive and defensive solutions extends to software as well as hardware. Leidos (NYSE: LDOS) represents the software-driven side of modern defense, focusing on government IT modernization, cybersecurity, engineering, and professional services across IT, analytics, and mission-critical systems. In 2025, Leidos won a multi-year contract with the U.S. Transportation Security Administration, but investors reacted to weakness in the company’s Q4 2025 earnings report. Revenue missed expectations in large part because of a six-week government shutdown in 2025. Looking ahead, management has pointed to the Golden Dome project as a potential catalyst in 2026 and beyond. The company also plans to raise capital expenditures to about $350 million, a level that appears intended to expand production capacity and upgrade classified facilities. LDOS is down roughly 20% from its YTD high amid concerns about AI-driven changes to cybersecurity. While some analysts have trimmed targets, the consensus price target for LDOS is $208.27, which is more than 30% above the stock’s mid-April price. Huntington Ingalls: Shipbuilding Strength Meets Next-Gen TechHuntington Ingalls (NYSE: HII) combines traditional shipbuilding expertise with emerging technologies. The company’s core shipbuilding capabilities align with the government’s America’s Maritime Action Plan (MAP), a broad initiative to update and expand U.S. shipbuilding capacity. Even before MAP, Huntington Ingalls was forecasting as much as $50 billion in new government contracts over the next 24 months — notable compared with the roughly $12 billion in revenue the company generated in 2025. At the same time, Huntington Ingalls is growing its Mission Technologies segment, which includes AI, cyber defense, and unmanned systems. That segment accounted for about a quarter of 2025 revenue and is expected to expand in coming years. HII is the momentum pick in this group. The stock is up about 15% in 2026 and is trading near its consensus price target of $383.22. Analysts have been raising targets ahead of the company’s May 7 earnings report, suggesting further upside as institutional interest grows (institutional ownership is notable). |
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