This article looks at the 8 best small cap defense stocks to buy now. We also dive deep into the impact of ongoing regional military conflicts on the defense industry.
The world has been rocked with conflict over the last few years. On November 19, Ukraine marked 1,000 days since Russia invaded the country, with no immediate end to the war in sight. Armenia and Azerbaijan continue to engage in sporadic exchange of fire across the border, after the former lost control of the Nagorno-Karabakh region to Azeri troops in 2020.
The Middle East is going through its worst crisis since the Arab-Israeli War in 1973, with Israel invading Gaza and then Lebanon in continuation of its response to the October 2023 Hamas-led attack on the country.
READ ALSO: 8 Best Military Drone Stocks To Buy According to Analysts and 7 Most Undervalued Defense Stocks To Buy According To Analysts.
While the human impact of the wars has been tragic, the defense industry has profited by luring investors into piling up their stocks. After Iran launched projectiles toward Tel Aviv and Israeli military bases on October 1, several of the world’s top defense contractors saw their shares book an all-time high. As of November 19, an Aerospace & Defense ETF issued by iShares has gained 19.26% year-to-date, outperforming the broader market by over two percentage points.
However, defense shares in the third week of November following the announcement of the Department of Government Efficiency (DOGE) by President-elect Donald Trump. The Republican-winning candidate nominated Elon Musk and Vivek Ramaswamy to co-lead the department, which will work outside the federal stream and aims to improve governance by reducing wasteful spending, cutting unnecessary regulations, and restructuring federal agencies.
In a note published on election day, analysts at Jefferies argued that a renewed focus under the Trump administration to force allies into paying their share can hurt defense sentiment. During his first term in office, the 78-year-old threatened to withdraw from NATO if other member countries didn’t increase their military spending. You can read about the disparities in spending in our 2023 article, NATO Military Spending by Country: Top 20 Countries.
Trump has also vowed to end the tumultuous wars in Ukraine and the Middle East. While talking to Quartz on November 4, Russell Hackmann, president at Hackmann Wealth Partners, stated the following:
Trump is more anti-war and therefore that is worse for the defense stocks.
In contrast, other experts see long-term growth potential in the defense sector under Trump’s second stint. He is credited for leaving a mark on the U.S. military during his first term, which saw defense spending reaching record highs and the establishment of the United States Space Force (USSF). Over the past year or so, Trump has regularly made mention of wanting to build ‘a great Iron Dome missile defense shield over our entire country.’
With that said, let’s now head over and look at the best small cap defense stocks to buy now.
A technician in a white coat testing an in-car system on a modern military vehicle.
Methodology
We used stock screeners to identify companies in the aerospace and defense industry with a market cap of between $300 million and $2 billion, as of November 19, 2024. Then we picked the top 8 stocks that had the highest number of hedge funds having stakes in them. We ranked them in ascending order of hedge fund holders in each company. Data on hedge funds was sourced from Insider Monkey’s database of 900 hedge funds for the third quarter of 2024. We have also included firearm companies in our analysis as they are considered a part of the broader defense industry.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
8 Best Small Cap Defense Stocks to Buy Now:
8. Redwire Corporation (NYSE:RDW)
Market Cap: $767 million
Number of Hedge Fund Holders: 7
Redwire Corporation (NYSE:RDW) is a global space infrastructure and innovation company, headquartered in Jacksonville, Florida. It provides core space infrastructure offerings to enable civil, commercial, and national security programs.
In June this year, the Defense Advanced Research Projects Agency (DARPA), which works under the Department of Defense (DOD), announced Redwire Corporation (NYSE:RDW) as the primary contractor and enabler of its Otter program, under which the company would leverage its leadership in very low-Earth orbit (VLEO) capabilities to develop an air-breathing satellite that uses novel electric propulsion systems.
The company announced financial results for the third quarter of 2024 on November 7. Revenue was posted at $68.6 million, growing 9.6% from last year. Year-to-date revenue, as of September 30, was 30.1% higher than in the corresponding period in 2023. The increase has been driven by a 47.5% growth in national security revenue and an 83.6% surge in commercial revenue. The company had a solid backlog during the quarter, with over 85% of the revenue derived from government-funded programs or global market customers.
During the quarter, Redwire Corporation (NYSE:RDW) acquired Harith Systems, a spacecraft development company that specializes in missions for national security space customers. The acquisition has broadened the company’s product technology portfolio with two additional spacecraft – Mako, which is under contract with the Space Force’s Tetra five program, and Thresher, which is designed to operate in contested environments and is under contract with an undisclosed customer.
After a strong Q3, Redwire Corporation (NYSE:RDW) reaffirmed its outlook for the remainder of the year. Revenue for the full year 2024 is forecast to be $310 million, representing a year-over-year increase of 27%. About 76% of the guidance had already been realized on a year-to-date basis at the end of the third quarter.
Redwire Corporation (NYSE:RDW) is one of the best defense stocks to buy now. Wall Street analysts have a consensus Strong Buy rating for the stock. Amongst hedge funds tracked by Insider Monkey, 7 held investments in the company, as of Q3 2024.
7. Ducommun Incorporated (NYSE:DCO)
Market Cap: $969 million
Number of Hedge Fund Holders: 13
Ducommun Incorporated (NYSE:DCO) is an American company that provides manufacturing solutions to customers in the global aerospace, defense, military, space, and industrial markets.
The company operates through two segments: Electronic Systems and Structural Systems. The Electronic Systems segment designs and manufactures high-reliability electronic and electromechanical products, while the Structural Systems segment builds contoured aerostructure components and assemblies.
In April this year, Ducommun Incorporated (NYSE:DCO) was awarded two major contracts worth over $50 million for the Raytheon SPY-6 family of radar systems. These include a $25 million follow-on order for one circuit card assembly already in production and a new $25 million order for another. Raytheon’s trust in Ducommun on this crucial Navy radar system demonstrated its significance in the defense industry. Later in June, Raytheon awarded the company a $12 million order for the TOW missile system.
On November 9, Ducommun Incorporated (NYSE:DCO) announced financial results for the third quarter of 2024. Revenue grew 2.6% year-over-year to cross the $200 million mark for the first time, driven by growth in commercial aerospace and military and space sectors. This was the fifth successive quarter with $190 million or above in quarterly revenue.
Ducommun Incorporated (NYSE:DCO) witnessed a 6% increase in military and space revenue from last year and attributed this to strong performances in its radar, electronic warfare, and missile programs. The company’s defense revenue has now been over $100 million in four out of the last five quarters. Northrop Grumman emerged as the second largest customer for Ducommun in Q3, as the company builds scale at defense giants outside of RTX.
Ducommun Incorporated (NYSE:DCO) is one of the best defense stocks to buy now. Wall Street analysts have a consensus Strong Buy rating for the stock and forecast an average share price upside potential of 12%. According to Insider Monkey’s database, 13 hedge funds held a stake in the company, as of Q3 2024.