The set-up: For anyone following defense stocks, it’s no secret that many in the sector have been up near or over 100 percent in the last 52 weeks. Kratos Defense & Security Solutions Inc. (KTOS) is no exception, as its shares have soared from $523 in late October of 2016 to a high of $12.91 just a few weeks ago.
After a short pull back, I think KTOS is setting up for the next leg higher, triggered by the August 2 announcement that its Modular System Division received a $10 million contract for specialized hardware and modular systems in support of a leading anti-ballistic missile defense system expected to be deployed internationally.
Why now: The tension between North Korea and the United States is mounting. It seems like each morning, I read the headlines and one side or the other is testing intercontinental ballistic weapons, so the timing of the $10 million dollar contract is perfect from a fundamental stand point. Now add in the technicals, which show KTOS has recently bounced off the mid-$10 dollar range four times in the past two months and you’ve got a prime stock in a hot sector ready to reverse and head higher. I just had to be a player.
My play: Tuesday afternoon – after the contract was announced — I bought 1,600 shares of Kratos at $11.15 cents per share as the stock came off a recent three-day down pattern, followed by back-to-back “doji” candles (great candles for showing a reversal of the trend).
While I have filled my position in the stock, I think it is currently buyable in the $10.75 to $11.30 range.
I’m targeting a return to the 20-day moving average line at $12 dollars, which could net me well over $1,000 in profits on a swing that I’m looking to pay out between one and five days. My stop is set at $10.50 to limit my downside exposure, but based off of Tuesday’s green candle, I’m thinking we head up here short term.
Jeff Williams is the lead trader of PennyPro.com. He is a short-term trader of stocks under $10 a share. At the time this article was published on RagingBull.com, he held 1,600 shares of KTOS as described in this commentary – but had no options or open orders on the stock — and was planning to trade it accordingly. Prior to his current trade, he has not been in the stock at all in 2017.