Management Remarks Weighed on Kratos Defense & Security Solutions (KTOS) in Q4

Fred Alger Management, an investment management company, released its “Alger Weatherbie Specialized Fund” fourth-quarter 2025 investor letter. A copy of the letter can be downloaded here. The fund focuses on investing in a portfolio of 50 small and mid-cap companies with promising growth potential. The US equity market ended the fourth quarter on a strong note, with the S&P surging 2.7%, maintaining its steady upward momentum. Investors' optimism was supported by better-than-expected corporate earnings, the US Federal Reserve’s further interest rate easing stance, and a resilient macroeconomic backdrop. Improving clarity on trade policy provided additional support. Meanwhile, the quarter was characterized by increasing divergence below the Index’s surface. While AI remains the market’s biggest tailwind, it is being scrutinized for funding, limitations, and potential to return investment. The firm continues to observe secular trends that present attractive investment opportunities.  Furthermore, U.S. business spending appears to be rising due to rising demand for AI infrastructure and tax incentives from the One Big Beautiful Bill. Against this backdrop, Class A shares of the Fund underperformed the Russell 2500 Growth Index in Q4 2025. The Real Estate and Consumer Staples contributed to the relative performance of the Fund in the quarter, while the Information Technology and Health Care sectors detracted from the performance. In addition, please check the Fund’s top five holdings to know its best picks in 2025.

In its fourth-quarter 2025 investor letter, Alger Weatherbie Specialized Fund 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 46.53%, and its shares gained 233.58% of their value over the last 52 weeks. On January 22, 2026, Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) stock closed at $113.85 per share, with a market capitalization of $19.223 billion.

Alger Weatherbie Specialized Fund stated the following regarding Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) in its fourth quarter 2025 investor letter:

"Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) is a defense technology company focused on affordable unmanned systems, hypersonics and rocket systems, and satellite command-and-control, which we believe are increasingly aligned with U.S. and allied priorities around rapid fielding and scalable production. Kratos has invested deliberately in parts of the defense supply chain that we believe are increasingly critical to modern warfare and are now reaching an inflection point. Funding is beginning to flow into drone programs, demand for turbojet and turbofan engines is rising across unmanned aircraft and missile systems, and the company’s C5ISR and space businesses continue to grow rapidly. While the company reported strong fiscal third-quarter operating results, shares detracted after management’s fiscal fourth-quarter revenue outlook and free-cash-flow expectations came in below analyst estimates. Sentiment was further pressured by management commentary that cash receipts were being delayed due to the U.S. government shutdown, as well as ongoing cost headwinds tied to certain legacy unmanned contracts, which weighed on confidence in near-term margins and cash conversion."

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 TimesSquare Capital U.S. Small Cap Growth Strategy's views on the company in the previous quarter. In addition, please check out our hedge fund investor letters Q4 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.