In this article, we will take a look at the 10 best small-cap defense stocks to buy now. If you want to explore similar stocks, you can also take a look at 5 Best Small Cap Defense Stocks to Buy Now.
Defense Stocks Are "Creating Some Value Opportunities"
On March 31 John Eade, president & director of portfolio strategies at Argus Research, appeared in an interview on TD Ameritrade Network where he discussed the defense sector and the opportunities it is presenting. John Eade noted that though the defense sector has exhibited strong performance over the past couple of years, it has been underperforming in 2023 particularly due to concerns related to government spending and the impending debt ceiling issue. According to John Eade, defense contractors derive a significant portion of their revenue — roughly 50% to 80% — from contracts with the U.S. government. The uncertainty surrounding government spending and the risk associated with the debt ceiling have impacted defense stocks negatively and so they "have pulled back, creating some value opportunities". Here are some comments from John Eade:
"You really did see them (defense stocks) take off about a year ago from now, when the Russian army invaded Ukraine. And at that point, we also started to see government spending on defense turn positive after several quarters of cutbacks. So I think the backdrop is there. These companies all generate a lot of cash flow, they pay decent dividends, they grow their dividends. And like I said earlier, when they pulled back from their 52-week highs, as they have here, that can be a good long-term buying opportunity."
John Eade likes companies that have exposure to both defense and commercial aerospace. Eade thinks these companies have "extra fuel for growth", since the commercial aerospace sector has still not recovered to pre-pandemic levels.
John Eade talked about Raytheon Technologies Corporation (NYSE:RTX) and said that "it is one of the better growth stories" in the space since it has exposure to both commercial aircraft and defense sectors. Argus has a Buy rating and a $115 price target on Raytheon Technologies Corporation (NYSE:RTX). As of April 27, Raytheon Technologies Corporation (NYSE:RTX) has gained 4.53% over the past 6 months and is offering a forward dividend yield of 2.37%.
John Eade also weighed in on Lockheed Martin Corporation (NYSE:LMT). He noted that Lockheed Martin Corporation (NYSE:LMT) is offering one of the highest dividend yields among its peers and that the company has been "growing its dividend at a high single digit rate". John Eade expects Lockheed Martin Corporation (NYSE:LMT) to grow its earnings over the next couple of years. Argus has a Buy rating and $500 price target on Lockheed Martin Corporation (NYSE:LMT) and, as of April 27, the stock is offering a forward dividend yield of 2.58%.
Finally, John Eade shared his thoughts on The Boeing Company (NYSE:BA). He noted that though The Boeing Company (NYSE:BA) is struggling with profitability in its commercial aerospace business, the company's defense and airlines services business segments are doing well. Eade expects The Boeing Company (NYSE:BA) to suffer losses in the first half of 2023, and then turn profitable in the second half of 2023. As of April 27, The Boeing Company (NYSE:BA) has gained 43.24% over the past 6 months.
While larger industry players like Raytheon Technologies Corporation (NYSE:RTX), Lockheed Martin Corporation (NYSE:LMT), and The Boeing Company (NYSE:BA) garner attention, investors should also explore the potential of small-cap defense stocks. These often overlooked gems may present unique opportunities for investors seeking specialized exposure to the defense sector and also allow them to diversify within the sector. Some of the best small-cap defense stocks to buy now according to hedge funds include Astronics Corporation (NASDAQ:ATRO), AAR Corp. (NYSE:AIR), and Triumph Group, Inc. (NYSE:TGI). Let's now discuss these stocks, among others, in detail below.
10 Best Small Cap Defense Stocks to Buy Now
Photo by Ruben Sukatendel on Unsplash
Our Methodology
To determine the best small-cap defense stocks to buy now, according to hedge funds, we used Yahoo Finance's stock screener to first identify small-cap companies operating in the defense industry. Small-cap companies are defined as companies that have a market capitalization between $250 million and $2 billion. We then sourced each stock's hedge fund sentiment from Insider Monkey's proprietary database of 900 elite hedge funds. Finally, we narrowed down our selection to stocks that were the most widely held by institutional investors and ranked them in ascending order of the number of hedge funds that have stakes in them.
VSE Corporation (NASDAQ:VSEC) is an American provider of aftermarket products and services for land, sea, and air transportation assets. The company conducts business through three segments: Aviation, Fleet, and Federal & Defense. On March 9, VSE Corporation (NASDAQ:VSEC) reported earnings for the fourth quarter of fiscal 2022. The company reported an EPS of $0.68 and generated a revenue of $234.32 million, up 11.49% year over year.
On March 10, Canaccord revised its price target on VSE Corporation (NASDAQ:VSEC) to $55 from $58 and reiterated a Buy rating on the shares. As of April 27, the stock has a market cap of $543.7 million and is offering a forward divided yield of 0.96%. VSE Corporation (NASDAQ:VSEC) is placed ninth on our list of the best small-cap defense stocks to buy now, according to hedge funds.
VSE Corporation (NASDAQ:VSEC) was spotted on 8 investors' portfolios at the end of Q4 2022. These funds disclosed collective stakes worth $48.9 million in the company. As of December 31, Juniper Investment Company is the most prominent shareholder and has a position worth $12.7 million.
Rocket Lab USA, Inc. (NASDAQ:RKLB) provides launch services and space systems solutions for the space and defense industries. The stock is one of the best small-cap defense stocks to buy according to hedge funds. Rocket Lab USA, Inc. (NASDAQ:RKLB) was held by 12 hedge funds at the end of Q4 2022. These funds disclosed positions worth $67 million in the company.
On February 28, Rocket Lab USA, Inc. (NASDAQ:RKLB) posted earnings for the fourth quarter of fiscal 2022, in which the company beat EPS estimates by $0.02. The company generated a revenue of $51.76 million, up 88.38% year over year and ahead of Wall Street estimates by $5.07 million. As of April 27, Rocket Lab USA, Inc. (NASDAQ:RKLB) has a market cap of $1.86 billion.
On March 7, Deutsche Bank analyst Edison Yu updated his price target on Rocket Lab USA, Inc. (NASDAQ:RKLB) to $10 from $12 and maintained a Buy rating on the shares.
In addition to Rocket Lab USA, Inc. (NASDAQ:RKLB), other small-cap defense stocks that are on analysts and hedge funds' radars include Astronics Corporation (NASDAQ:ATRO), AAR Corp. (NYSE:AIR), and Triumph Group, Inc. (NYSE:TGI).
Vertical Aerospace Ltd. (NYSE:EVTL) is a UK-based aerospace company that is involved in the design and manufacture of zero-emission electric vertical take-off and landing (eVTOL) aircraft. The company serves various end-markets including commercial aircraft, air cargo, military and rotorcraft. As of April 27, Vertical Aerospace Ltd. (NYSE:EVTL) is worth $392 million on the open market and is one of the best small-cap defense stocks to buy now.
As of March 2023, Vertical Aerospace Ltd. (NYSE:EVTL) has 2 Hold ratings from Wall Street analysts and an average price target of $5.11, which implies an upside of 179.07% from current levels.
At the close of Q4 2022, 13 hedge funds were eager on Vertical Aerospace Ltd. (NYSE:EVTL) and held positions worth $7.2 million in the company. Of those, LMR Partners was the most prominent stockholder in the company and held a position worth $3.7 million.
Ducommun Incorporated (NYSE:DCO) is a leading provider of engineering and manufacturing products and services to the aerospace and defense industries. As of January 9, Truist analyst Michael Ciarmoli has a $66 price target and a Buy rating on Ducommun Incorporated (NYSE:DCO).
Ducommun Incorporated (NYSE:DCO) has a market cap of $613.7 million, as of April 27, and has gained 5.09% over the past 6 months. The stock is placed seventh on our list of the best small-cap defense stocks to buy now according to hedge funds.
At the end of the fourth quarter of 2022, 13 hedge funds were bullish on Ducommun Incorporated (NYSE:DCO) and disclosed stakes worth $84.8 million in the company. Of those, GAMCO Investors was the top shareholder in the company and held a position worth $19.1 million.
Kaman Corporation (NYSE:KAMN) is an American designer and manufacturer of products for the aerospace and defense industry. The company has three business segments: Engineered Products, Precision Products, and Structures. As of April 27, the stock is offering a forward dividend yield of 3.79% and has a market cap of $609 million.
As of March 2023, Kaman Corporation (NYSE:KAMN) has 1 Buy rating and 1 Hold rating from Wall Street analysts. The stock has an average price target of $31.50, which represents an upside of 45.36% from current levels. Kaman Corporation (NYSE:KAMN) is one of the best small-cap defense stocks to buy now.
On February 23, Kaman Corporation (NYSE:KAMN) announced earnings for FQ4 2022. The company generated a revenue of $197.14 million, up 12.56% year over year, and reported an EPS of $0.42. The company outperformed EPS expectations by $0.17.
Kaman Corporation (NYSE:KAMN) was held by 15 hedge funds at the end of Q4 2022. These funds held positions worth $106.7 million in the company. As of December 31, GAMCO Investors is the dominant investor and has a stake worth $56.9 million.
Some of hedge funds' top small-cap picks from the defense sector include Astronics Corporation (NASDAQ:ATRO), AAR Corp. (NYSE:AIR), and Triumph Group, Inc. (NYSE:TGI).
