In this article, we will be looking at the 11 best small-cap defense stocks to invest in. To skip our detailed analysis of the defense sector, you can go directly to see the 5 Best Small-Cap Defense Stocks to Invest in.
US Defense Spending in 2024 and Beyond
With the world in a state of conflict in several regions, most notably the Middle East and Ukraine, the global defense industry is poised to have much to offer to investors in light of the immense reliance placed on aerospace and defense companies. As a result of this, some of the best defense stocks out there today are beginning to look more attractive to investors interested in this space. Current geopolitics have also resulted in countries around the globe setting aside larger and larger funds for their respective defense sectors. The United States has not been left behind in this respect either, as it continues to calibrate its defense funding and spending to meet the needs of the current political landscape. Another interesting development in the defense space is the rise of artificial intelligence on the battlefield and what it may mean for defense companies and countries embroiled in conflict.
On March 7, Greg Hayes, the CEO and Chairman of Raytheon Technologies Corporation (NYSE:RTX), joined CNBC’s “Squawk Box” to discuss US defense funding and spending, President Biden’s proposal for the defense budget to increase by a mere 1% in 2025. Note that this figure is far below the anticipated increase in US defense spending and is thus likely to garner some dissatisfaction. On that note, here are some of Hayes’ comments:
“The problem with a 1% increase is when you have 4% inflation, what you’re talking about is a 3% decrease in defense spending. And quite frankly, as much as we spend on defense, which is about 3% of our GDP, it is at a relatively historical low given the challenges that we face geopolitically. So assuming that, the President’s budget will be met with some skepticism when it gets to the Hill, and I think again the good news is, there’s a process there with the NDAA – the National Defense Authorization Act – that takes a look at each individual program, each capability, each requirement, and they come up typically with a very sound baseline for the budget. So, I think 1% is just a starting point.”
On the matter of current US spending, a topic that has been contentious among the general populace of the US, alongside the business and investment community in the defense sector, is that of sending defense funds across the globe to help the war efforts in conflicts that the US is engaged in. One such conflict is the one between Russia and Ukraine. Hayes made the following comments on US defense spending in the Russo-Ukrainian conflict:
“The fact is, what most of that money will do is go to support the American defense industry, to restock the stockpiles that had been depleted by the transfer of materials and weapons to Ukraine over the last two years. People think we’re sending a big cheque to Ukraine – that’s really not the case. 80% of that money is going to be spent right here in the US… those are American jobs that it’s gonna create. It’s not welfare to the Ukrainians.”
According to Hayes, the thing to remember is that this money is being spent to support and defend democracy across the globe, a cause that is strong enough to justify American money being spent, especially since the US can afford it.
AI Enters the Battlefield
Moving ahead of the defense spending debate, Hayes discussed the impact of artificial intelligence in the defense sector. Here is what he had to say on the future of AI in defense:
“AI is the future of defense and if you think about how to connect the battlespace, one of the challenges that you have today is that you have all these disconnected systems, whether if you’re on a ship, if you’re on a submarine, or if you’re on an aircraft. How do you make all of those systems talk to one another? That’s where AI is gonna come into the battlefield, to give the combatant-commander real time information, instead of waiting weeks or days for information in terms of how to prosecute the battle. We’re just at the very, very beginning of seeing what AI can do, but I think it’s going to be the pre-eminent technology, or game changer, as we think about defense policy in the next decade.”
Considering these comments, it’s likely that some of the best defense stocks in the market today, such as Northrop Grumman Corporation (NYSE:NOC), Lockheed Martin Corporation (NYSE:LMT), and The Boeing Company (NYSE:BA), are going to be heading towards incorporating AI in their operations. At the same time, Hayes’ comments highlight the fact that the defense sector is buzzing with activity right now, making it a good investment opportunity. As such, we have compiled a list of some of the best small-cap defense stocks to invest in right now. These include some cheap defense stocks to buy alongside some of the most undervalued defense stocks to buy.
Photo by Joel Rivera-Camacho on Unsplash
Our Methodology
We have selected the names for our list of the best defense stocks to invest in using Insider Monkey’s hedge fund data for the fourth quarter. The stocks all have market capitalizations of less than $2 billion as of March 13. They are ranked based on the number of hedge funds holding stakes in them, from the lowest to the highest number. Hedge funds’ top 10 consensus stock picks outperformed the S&P 500 Index by over 140 percentage points over the last 10 years (see the details here). That’s why we pay very close attention to this often-ignored indicator.
Best Small-Cap Defense Stocks to Invest in
11. Sturm, Ruger & Company (NYSE:RGR)
Number of Hedge Fund Holders: 10
Market Capitalization: $799.1 million
Sturm, Ruger & Company (NYSE:RGR) is a consumer discretionary company based in Southport, Connecticut. The company designs, manufactures, and sells firearms in the US.
There were 10 hedge funds long Sturm, Ruger & Company (NYSE:RGR) in the fourth quarter, with a total stake value of $50.9 million.
Like Northrop Grumman Corporation (NYSE:NOC), Lockheed Martin Corporation (NYSE:LMT), and The Boeing Company (NYSE:BA), Sturm, Ruger & Company (NYSE:RGR) is among the best defense stocks to invest in.
10. Ducommun Incorporated (NYSE:DCO)
Number of Hedge Fund Holders: 11
Market Capitalization: $733.7 million
GAMCO Investors was the most prominent shareholder in Ducommun Incorporated (NYSE:DCO) at the end of the fourth quarter, holding 381,866 shares in the company.
Ducommun Incorporated (NYSE:DCO) is an aerospace and defense company based in Santa Ana, California, and among the best defense stocks to buy today. It provides engineering and manufacturing services for products and applications used primarily in the aerospace and defense, industrial, and medical industries in the US.
Analysts at RBC Capital maintained an Outperform rating and a $60 price target on Ducommun Incorporated (NYSE:DCO) on February 16.
A total of 11 hedge funds held stakes in Ducommun Incorporated (NYSE:DCO) in the fourth quarter, with a total stake value of $85.1 million.
Diamond Hill Capital mentioned Ducommun Incorporated (NYSE:DCO) in its third-quarter 2023 investor letter:
“Ducommun Incorporated (NYSE:DCO) is a critical Tier 1 and Tier 2 supplier of advanced material aerostructures and electrical components to the defense and commercial markets. Via targeted acquisitions, the company is increasing its higher-margin engineered and aftermarket business. Simultaneously, management is working to improve organic margins by reorganizing its operational and physical footprint. We are particularly attracted to Ducommun’s electronic systems business, which engineers, manufactures, fabricates and integrates a wide range of high-performance components and systems for commercial and military aircraft, missile systems, ships and radars. While we believe the market sees Ducommun as a commercial aerospace stock, we believe management’s focus on the defense side of the company’s business is bearing fruit, and we believe it will capitalize on a productive M&A strategy moving forward.”
9. Intuitive Machines Inc. (NASDAQ:LUNR)
Number of Hedge Fund Holders: 12
Market Capitalization: $547.5 million
An Overweight rating and a $13 price target were reiterated on Intuitive Machines Inc. (NASDAQ:LUNR) on February 29 by analysts at Cantor Fitzgerald.
Intuitive Machines Inc. (NASDAQ:LUNR) is another aerospace and defense company on our list of the best defense stocks. It is based in Houston, Texas. The company designs, manufactures, and operates space products and services in the US.
We saw 12 hedge funds long Intuitive Machines Inc. (NASDAQ:LUNR) at the end of the fourth quarter, with a total stake value of $1.9 million.
8. Terran Orbital Corporation (NYSE:LLAP)
Number of Hedge Fund Holders: 13
Market Capitalization: $243.1 million
Terran Orbital Corporation (NYSE:LLAP) was seen in the portfolios of 13 hedge funds in the fourth quarter, with a total stake value of $27.2 million.
Based in Boca Raton, Florida, Terran Orbital Corporation (NYSE:LLAP) is an aerospace and defense company that manufactures and sells satellites. It offers end-to-end satellite solutions, among more, and is one of the best defense stocks to buy.
HC Wainwright & Co. reiterated a Buy rating and a $3 price target on Terran Orbital Corporation (NYSE:LLAP) on March 4.
7. Park Aerospace Corp. (NYSE:PKE)
Number of Hedge Fund Holders: 13
Market Capitalization: $304.5 million
At the end of the fourth quarter, GAMCO Investors was the largest shareholder in Park Aerospace Corp. (NYSE:PKE), holding 658,900 shares in the company.
Park Aerospace Corp. (NYSE:PKE) is an aerospace and defense company that is one of the best defense stocks to buy. The company develops and manufactures solutions and hot-melt advanced composite materials used to produce composite structures for the global aerospace market.
Our hedge fund data for the fourth quarter shows 13 hedge funds long Park Aerospace Corp. (NYSE:PKE), with a total stake value of $38.3 million.
6. V2X Inc. (NYSE:VVX)
Number of Hedge Fund Holders: 14
Market Capitalization: $1.3 billion
V2X Inc. (NYSE:VVX) is a company that provides critical mission solutions and support services to defense clients across the globe. It is based in Mclean, Virginia.
Ancora Advisors was the largest shareholder in V2X Inc. (NYSE:VVX) at the end of the fourth quarter, holding 238,493 shares in the company.
V2X Inc. (NYSE:VVX) was spotted in the 13F holdings of 14 hedge funds in the fourth quarter, with a total stake value of $44.7 million.
A Market Outperform rating and a $65 price target were maintained on V2X Inc. (NYSE:VVX) on March 6 by analysts at JMP Securities.
Like Northrop Grumman Corporation (NYSE:NOC), Lockheed Martin Corporation (NYSE:LMT), and The Boeing Company (NYSE:BA), V2X Inc. (NYSE:VVX) is one of the best defense stocks to invest in this year.
Click to continue reading and see the 5 Best Small-Cap Defense Stocks to Invest in.
Suggested articles:
- Top 20 Defense Contractors in 2024
- 13 Best Aerospace and Defense Stocks to Invest In
- 11 Best American Defense Stocks To Buy According to Analysts
Disclosure: None. 11 Best Small-Cap Defense Stocks to Invest in is originally published by Insider Monkey.