Top stock pitches (Mon, Jul 15)

Red Cat Holdings (RCAT), the only public U.S. small defense drone manufacturer, is poised for significant growth with a 50%+ chance of winning a $600m-$1b DIU contract. The company's Teal subsidiary drives revenue growth, capitalizing on the crucial role of drones in modern warfare and U.S. government support for domestic production. With a $12 price target, RCAT benefits from geopolitical tailwinds, including the need for secure supply chains and concerns over Chinese-made drones. The company's custom-built drones for defense applications give it an edge over competitor Skydio in the SRR T2 program. Financials show exponential revenue growth, with expectations of reaching cash flow breakeven in 2-3 years even without major contract wins. Risks include a potential Trump presidency affecting NATO relations, over-acquisition concerns, and slow direct sales. The stock's current undervaluation is attributed to technical complexity, burn rate concerns, and investor fatigue, but analogous situations in the drone industry suggest significant upside potential if Red Cat secures major government contracts.

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KKR & Co. Inc. (KKR) is evolving into the 'Berkshire of alternatives,' with a simplified reporting structure, a shift towards quality compounders, and a long-term ownership focus. The company's diversified platform, including a growing insurance business, mirrors Berkshire Hathaway's model. KKR has significant growth opportunities in insurance, private wealth, and Asia, and is undervalued relative to its potential. The firm has simplified its financial reporting into three segments: Core Business, Strategic Holdings, and Insurance earnings, aligning with Berkshire's format. KKR's investment philosophy prioritizes businesses with durable competitive advantages, high switching costs, and significant market share. With a market cap of $46 billion compared to Berkshire's $890 billion, KKR presents a multi-decade growth story with substantial upside as the market realizes its value creation trajectory. The company's convergence with Berkshire's model, focus on long-term capital allocation, and ability to compound capital on its balance sheet differentiate it from fragmented competitors in the investment management space.

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Black Stone Minerals (BSM), an oil and gas royalty limited partnership, owns 7.4 million net royalty acres primarily in the Permian, Haynesville, and Bakken basins. Trading at $15.60 per share with a 9.6% yield, BSM offers a $1.50 annual dividend with 1.22x coverage after a recent cut. The company's size grants strategic power over operators, maintaining 60-100 active drilling rigs (10% of all new horizontal permitting activity) despite owning less than 0.5% of total U.S. shale basin acreage. BSM hedges 60% of its 2024 natural gas production at $3.55/mmbtu, outperforming current prices. The company is actively acquiring new acreage, potentially in the Haynesville basin, anticipating LNG export growth in 2025-2026. CEO Thomas Carter continues to buy shares, demonstrating confidence. Risks include volatile commodity prices and potential further dividend cuts, while catalysts include LNG export growth and increased drilling activity. An options strategy could potentially boost yields above 10%. The company's strategic position, hedging strategy, and potential for growth in natural gas demand make it an attractive long-term investment opportunity.

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