Here's Why Kratos Defense & Security (KTOS) Rose 95% in Q3

TimesSquare Capital Management, an equity investment management company, released its “U.S. Small Cap Growth Strategy” third-quarter 2025 investor letter. A copy of the letter can be downloaded here. During the quarter, the fund returned 2.26% (gross) and 2.01% (net), compared to the Russell 2000 Growth Index’s 12.19% return. During the quarter, all asset classes except fixed income outside the U.S. posted positive returns. In addition, please check the fund’s top five holdings to know its best picks in 2025.

In its third-quarter 2025 investor letter, TimesSquare Capital U.S. Small Cap Growth Strategy highlighted stocks such as Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS). Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) is a technology company that offers mission-critical products, services, and solutions. The one-month return of Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) was 16.75%, and its shares gained 214.33% of their value over the last 52 weeks. On January 5, 2026, Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) stock closed at $89.93 per share, with a market capitalization of $15.184 billion.

TimesSquare Capital U.S. Small Cap Growth Strategy stated the following regarding Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) in its third quarter 2025 investor letter:

"Many of our Industrials positions provide necessary business-to-business operational services, highly technical components, equipment enabling automation & efficiency improvements, or essential infrastructure services. A positive contributor to results was Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS), the U.S. defense company producing unmanned systems and satellite communications. Early in the quarter, Kratos announced a new partnership with the German air force for its Valkyrie collaborative combat aircraft (CCA) and later noted that the Valkyrie CCA would become the program of record for the U.S. Marines. In its subsequent earnings report, Kratos’s revenues, margins, and earnings all exceeded expectations with better-than-expected growth across all segments. Management noted several new high-probability wins at the end of its fiscal quarter, which should continue Kratos’s sales momentum. In the near term, its shares gained 95% and we trimmed on that strength."

Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) is not on our list of 30 Most Popular Stocks Among Hedge Funds. As per our database, 36 hedge fund portfolios held Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) at the end of the second quarter, which was 33 in the previous quarter. While we acknowledge the potential of Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) as an investment, we believe certain AI stocks offer greater upside potential and carry less downside risk. If you're looking for an extremely undervalued AI stock that also stands to benefit significantly from Trump-era tariffs and the onshoring trend, see our free report on the best short-term AI stock.

In another article, we covered Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) and shared the list of best AI stocks to buy according to analysts. In addition, please check out our hedge fund investor letters Q3 2025 page for more investor letters from hedge funds and other leading investors.

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Disclosure: None. This article is originally published at Insider Monkey.