Defense is important. Just ask any tribe, city-state, nation, or empire that’s ever existed. Thousands of years ago, proto-militaries made their homes safer by sharpening rocks to make spearheads. Today, people can invest in defense stocks to accomplish much the same thing.
Defense is so critical to civilization, in fact, that’s it’s become one of the largest industries known to man. According to the Stockholm International Peace Research Institute, the world spent as much as $1.8 trillion on military expenses in 2018. The leader in defense spending is, of course, the United States.
But in the sector, bigger doesn’t always explicitly mean better. A lot of innovation comes from small-cap companies that are acquired by or sell their technology to global leaders like Lockheed Martin (NYSE:LMT) and Raytheon (NYSE:RTN)—often for an enormous profit.
Today, we’ll be looking at some of the small-cap defense stocks that investors should keep an eye on.
Small-Cap Defense Stocks: Astronics
Astronics Corporation (NASDAQ:ATRO) is a leading provider of unmanned aircraft systems and tactical missile systems. The company primarily serves defense customers, but its solutions also have government and commercial applications.
ATRO is currently hovering at $18.24, very close to its 52-week low. The share price has fallen more than 28% since the company reported its fourth-quarter and full-year results on February 13.
Despite the price dip, the company’s full-year results were quite positive. Astronics surprised analysts by delivering a profit of US$1.60 per share, modestly beating expectations.
One of the reasons to be optimistic about this company’s future is that Astronics’ Director, Robert Brady, recently exercised options to buy 5,000 ATRO shares, bringing his total ownership in the company to 14.07%. This shows the confidence that management has in the company, which can easily translate to investor confidence.
While insider sentiment on Astronics has been positive, analysts remain split on the company’s future value. The most bullish estimates put a price target of US$35 on ATRO, while the bearish ones are saying US$19. Either way, that would represent growth from its current price.
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Small-Cap Defense Stocks: Kratos
Kratos Defense & Security Solutions (NASDAQ:KTOS) develops technology for customers in the US National Security space. The company specializes in unmanned systems, satellite communications, cybersecurity, and missile defense.
Like ATRO—and like most stocks since the coronavirus hit headlines—Kratos has been trading down lately. KTOS has lost 12.6% since the start of 2020 and has spent the last two weeks around the $16 mark.
In its fourth-quarter earnings report, the company posted $185.1 million in revenue, a 12.6% increase over its previous Q4. Its adjusted earnings came to $9.7 million, or $0.09 per share, which was largely in line with analyst expectations.
Since then, however, KTOS was awarded a $4.9 million contract to support US drone operations. It also received follow-on production orders for RF subsystems for a major missile program.
The missile program is where Kratos can shine, as it has produced several thousand such subsystems over the last decade and a half. In addition, missile defense systems represent a rapidly growing market that’s on track to be worth $35 billion by 2026.
Both of these small-cap defense stocks are down right now, but both also stand to skyrocket in the near future. As national security becomes less about mobilizing armies and more about unmanned drones and missile defense, the American military will look to more and more stocks like ATRO and KTOS.
For a closer look at drone stocks, check out this article.
Featured image: DepositPhotos © estebande
