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Why KBR, Inc. Stock Dropped 12% Today

What happened

Strange things happen when traders get nervous. Take today, for example, when shares of government contractor KBR (NYSE: KBR) stock sank nearly 12% on no news whatsoever before bouncing back (somewhat).

At least, that's how it seemed.

KBR stock crashed today -- and it was a bit of a head-scratcher why, exactly. Image source: Getty Images.

So what

KBR's press room was devoid of new information today. No earnings releases. No earnings warnings. No nothing. So what went wrong?

According to trading news website TheFly.com, the story goes like this. Over in Britain, defense contractor Ultra Electronics Holdings warned investors (emphasis mine):

[T]he UK market has been difficult and has become increasingly so in the second half. There are mounting pressures in the funding of UK defence programmes and this has resulted in the UK MoD [Ministry of Defence] pausing, cancelling or delaying numerous programmes. Within the last few weeks a number of our UK orders budgeted for 2017 have been affected.

Traders are responding by selling off shares of everyone who has anything to do with U.K. defense-ministry contracts -- BAE Systems (obviously), but also Kratos Defense and, yes, KBR stock.

Now what

But here's the thing. Yes, according to data from S&P Global Market Intelligence, KBR does business in the U.K. But sales to Europe contribute only 11.7% of KBR's annual revenues -- and the U.K. is only one small part of "Europe" (and arguably, maybe not even that, for long). What's more, it's not like the U.K. is canceling all its defense contracts. Many are only being "paused" or "delayed."

Combined, these two facts make it clear that subtracting a slightly larger portion of KBR's market capitalization -- 11.9% -- was a drastic overreaction. Perhaps realizing this, investors later in the day began reversing course, and the stock ended up closing down 7% for the day. I expect the stock to recover further as traders realize the magnitude of their error.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.