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Goldman Upgrade Draws Options Bulls to Kratos Defense Stock

Lillian Currens

Drone maker Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS) is eyeing its best day in months following a bull note from Goldman Sachs. The analyst upgraded the stock to "buy" from "hold," and hiked its price target to $26 from $24 -- a roughly 44% premium to last night's close. Goldman said it had confidence in the 2020 performance of KTOS' unmanned system unit, as well as potential contracts win for its government solutions division. 

The equity has tacked on 5.5% to trade at $19.09 today, heading toward its best day since May 10. The stock staged a dramatic post-earnings nosedive off its July 31 11-year high of $25.08 at the start of the month, with the shares eventually skimming their early May levels near $17. However, the equity was able to make a clean bounce off its 200-day moving average -- a trendline that has served as a springboard for KTOS for over a year. 

Goldman's upgrade is in good company, with the majority of the nine analysts in coverage calling the stock a "strong buy." What's more, the consensus 12-month price target of $24 is a 25% premium to current levels. 

While short sellers have been in cover-mode recently -- short interest fell 8.4% in the last two reporting periods -- these bearish bets still account for a firm 9.1% of the stock's available float. What's more, it would take over a week to buy back these bearish bets, at KTOS' average pace of trading. This could create extra wind at the security's back, should even more of these bears begin to hit the exits. 

And while the options pits are relatively quiet overall, almost 2,500 calls have crossed the tape so far -- double what's normally seen by now -- compared to only 200 puts. It looks like many of these traders are expecting more upside for KTOS, with plenty of buying action detected at the September 22.50 and November 20 call contracts.