| Written by Chris Markoch 
The recent passage of the Trump administration’s One Big, Beautiful Bill provides $150 billion in additional defense spending. That pushes total U.S. defense spending close to $1 trillion. That’s a lot of zeroes to digest. But if you’re an investor, there’s a reason to believe you can profit from this additional spending. That’s because the Pentagon is in the early stages of a five- to ten-year push to modernize the U.S. military. A key part of that effort will be a shift toward drone-centric and autonomous systems. This focus means looking beyond some of the large-cap defense stocks like Lockheed Martin Corp. (NYSE: LMT) and General Dynamics (NYSE: GD). These companies will have a seat at the table, but the table has a few more place settings. Those will be occupied by smaller, niche companies that specialize in the drone industry. Several of these aerospace stocks have shot higher in the past few months, which is giving some investors that FOMO (fear of missing out) feeling. There’s no doubt that risk-tolerant investors with a long timeline should consider investing in this sector. But you may not have to go all in just yet. Several of these stocks have extended valuations. Over the next several years, investors can expect some ups and downs that will allow a position to build over time. Here are three stocks worth considering and how they fit into this emerging sector. Investors Can Lean into AeroVironment’s Strong Balance Sheet Any time investors are considering speculative stocks, they should keep a close eye on the balance sheet. That’s a good reason to consider AeroVironment Inc. (NASDAQ: AVAV). The company is an industry leader that is already supplying small tactical drones to the United States military and its allies. That gives AeroVironment something that many companies in this sector lack: growing revenue and positive earnings. In its last quarter, revenue was up 39% year-over-year (YOY), and earnings per share increased by a whopping 274% YOY. Those numbers were a key reason AVAV stock gapped higher after its June earnings report. However, the company isn’t resting on its laurels and announced plans to raise up to $1.5 billion in new capital. AVAV stock is down about 6% since that announcement. That’s not surprising. Raising capital in this way is often dilutive to a company’s share price in the short term. However, investors may want to buy this dip. To begin with, the company has a strong backlog backed by expanding margins. AeroVironment isn’t raising cash to stay afloat; it’s doing so to manage that growth. From a tactical perspective, AVAV stock is extended trading at 78x forward earnings. Investors will often pay a premium for industry leaders in an emerging sector, but with the stock up more than 71% in 2025, this is a healthy pullback that will give investors time to enter or add to a position. Red Cat Offers High-Risk and High-Reward Red Cat Holdings (NASDAQ: RCAT) is a small-cap stock focusing on rugged, military-grade drones through its Teal Drones subsidiary. The company has won contracts with the U.S. Army and the U.S. Customs and Border Protection. However, this just emphasizes the lumpiness that can come with government funding cycles. That shows up on the company’s balance sheet. The company is not profitable and is generating very little revenue. It's projecting around $80-$120 million in revenue for 2025 and just completed a $30 million equity offering in April. With the equity offering behind it, RCAT stock has gone up more than 100% in the last three months. Some of that, however, may be from short covering as the stock has over 20% short interest. The upside could be meaningful if Red Cat can grow into its valuation and convert contract wins into scalable revenue. For risk-tolerant investors, RCAT stock is a long-term moonshot worth monitoring. However, scaling in slowly may help mitigate near-term downside. Kratos Defense: Loaded With Potential, But Overvalued Since the passage of the One Big, Beautiful Bill, the Pentagon has expressed its intention to “unleash U.S. drone dominance.” Kratos Defense & Security Solutions (NASDAQ: KTOS) may play a key role in making this a reality. The company’s experimental Valkyrie program features low-cost, autonomous tactical drones that can be deployed in swarms. The Pentagon has prioritized this for many years. While the Valkyrie program offers great promise, the company is currently generating revenue from target drones and satellite communication systems for the U.S. military. Kratos generated approximately $1 billion in revenue in 2024 and is profitable. The company's positioning between small-cap agility and large-cap infrastructure would seem to make KTOS stock a Goldilocks option for investors. However, after surging 98% in 2025, the stock looks overvalued and overbought. Rising short interest in the last month makes it likely that the stock will drift lower into earnings, which may set up a buying opportunity.  Read This Story Online | 
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