Small defence stocks are reaping the benefits of increased military spending Investors who are prepared to do their research have a chance
It's common to ignore small defense stocks. In January 2024, very few, if any, investors were familiar with the microcap Filtronic. For the better part of 15 years, the company, which creates and manufactures communication system components, struggled to break even and was dependent on cash infusions from shareholders to stay afloat. When Filtronic and SpaceX formed a strategic alliance in April 2024, everything changed. It changed its fortunes over the next two years by landing a number of ground-breaking contracts with Elon Musk's space company. Since the start of 2024, the share price has increased by almost 1,800% and revenue has almost quadrupled. Filtronic is just one of many small, publicly traded businesses that have changed as a result of the money that has flooded the international defense market in the last two years. Due to their inability or unwillingness to invest in small or mid-caps, the majority of these small businesses go unnoticed by major institutional investors. That means there's a fantastic opportunity out there for investors who are willing to put in the extra legwork.
Small defense stocks: looking past the major players in the world.
The so-called "primes"industry titans that oversee multibillion-pound or multibillion-dollar contracts given out by government agenciesdominate the global defense sector. These big companies, like Northrop Grumman, BAE Systems, and Lockheed Martin, oversee hundreds of subcontractors, manage intricate supply chains, and are ultimately held accountable when things go wrong. In certain ways, these primes also serve as lenders and banks to the subcontractors that comprise the industry's essential supply chains. Most defense contracts are multi-year projects that require years to design and implement, and each long-term project involves tens or hundreds of suppliers. The primes are responsible for managing the project's cash flows and individual supplier payments, which would be difficult for government agencies to supervise.
Primes are the only entry point into the defense sector for the majority of institutional investors. Filtronic's market capitalization is still less than £1 billion, despite its explosive rise over the last two years. This is far too little for a major fund manager to take a significant stake without having an impact on the share price. By comparison, Lockheed Martin, Boeing, and Northrop Grumman's market capitalisations range from £70 billion-£180 billion. The primes, however, are not as powerful as they may believe.
According to a recent study by the Bruegel think tank, the ten biggest military contractors in Europe account for between 67 and 90 percent of all public military procurement spending in important nations like the UK, Poland, and Germany. Just ten strategic suppliers received 39% of UK procurement spending in the 2024-2025 fiscal year, with BAE Systems accounting for 16.3% of all core Ministry of Defence spending. Since records started in 2008, this is the largest percentage ever given to a single supplier. However, this statistic is somewhat deceptive. Consider the company's current contract to build eight Type 26 Global Combat Ships for the Royal Navy, which was agreed upon in 2017 at a cost of £3.6 billion. The company projects that some of the 3,000 small and medium-sized businesses (SMEs) in its supply chain will receive about 40% of the total cost of manufacturing the vessels.
This also applies to the other Type 26 agreements that were made with Norway and Canada. BAE estimates that it has 5,800 suppliers in the UK and spent 5.8 billion with these SMEs in 2024, supporting 61,000 jobsnearly 20 percent more than the group's direct employee base. Similar structural dependence can be seen in Germany, where the massive international primes like Rheinmetall are supported by the defense Mittelstand, the SMEs that make up the core of the German economy.
Increasing small defense stocks.
When it comes to supporting small defence stocks, the US is undoubtedly the world leader. It has been actively working to increase contract awards to small businesses for a long time. The Department of War regularly publishes statistics on its efforts to award contracts to small businesses and breaks down the targets set for primes and subcontractors. The department increased prime contract awards to small businesses by £4.9 billion during the 2024 federal fiscal year.
Additionally, the US boasts a network that leads the world in business scaling and supply chain integration. Its Accelerate the Procurement and Fielding of Innovative Technologies (APFIT) program, which offers up to £50 million directly to SMEs or non-traditional defense contractors to expand the US military's supply chain and boost resilience, has assisted SMEs in transitioning from the venture capital stage to the growth stage in recent years. Gremlin Low-Cost Munition, for instance, received £35 million in funding towards the end of last year to provide the US Marine Corps with reasonably priced, precision-strike capabilities. This was part of a larger effort to design and mass-produce inexpensive missiles.
Similar initiatives are being developed by the UK and its European partners, but progress is sluggish because of financial limitations and the sector's current concentration. Just 4% of the UK Ministry of Defence's (MoD) overall budget, which remained unchanged from year to year, was spent directly with SMEs last year. However, if the government approves all of the MoD's funding plans, there are plans to increase the current annual spending of 2.5 billion to 7.5 billion by May 2028. The government has promised to increase defense spending to 2.7 percent of GDP starting next year and to 5 percent by 2035. However, the Treasury has not yet approved the ten-year Defense Investment Plan, and reports point to a funding gap of about 28 billion in the current plans. Nevertheless, the Defence Office for Small Business Growth was created by the government in January 2026 to serve as a "single front door" for interaction with SMEs. Additionally, a 140 million drone and counter-drone technology program has been established, directly involving 11 smaller so-called micro-enterprises and 20 British SMEs.
Searching the rough for diamonds.
Finding the diamonds in the rough is getting harder as more money enters global defense primes. Nonetheless, these small defense stocksbusinesses on the periphery of the marketoffer an expanding opportunity. The issue is that there aren't many actively managed investment funds with a focus on defense on the market. Exchange-traded funds (ETFs), which must track the biggest, most liquid companies in the industry, dominate the market. Furthermore, the majority of active funds lack the in-depth technical and industry-specific knowledge necessary to comprehend how warfare is evolving in the future and where governments are setting spending priorities.
One exception is the Finserve Global Security Fund. With an experienced advisory board, this Swedish actively managed equity fund focuses on cybersecurity, defense, and the space sector. The fund, which is based on the manager's strategy of "capturing structural, long-term mega-trends" with the potential for "above-market growth," is full of intriguing ideas but is not accessible to investors in the UK. One such concept is Nordrest (Stockholm: NREST), which uses its meals-ready-to-eat (MRE) division to profit from higher defense spending. An army marches on its stomach, as the saying goes, and Nordrest is one of the five participants in NATO's MRE program. These five companies supply the quick-to-heat meal kits that are given to soldiers on patrol or during exercise. Since the start of 2025, the company's shares have increased by about 180 percent due to its participation in NATO contracts.
Despite having a sizable catering division, the company's major MRE contracts account for about 60% of its total revenue. Despite being a minor player in the defense industry with a £410 million market capitalization, Nordrest is a significant player in a market that is not going away anytime soon. To meet the growing demand from NATO members, the management has announced plans to double Nordrest's MRE capacity over the next several years. When minority interest is taken into account, the stock trades at about 11 times EV/Ebita on 2026 estimates. This is modest for a company that is growing organically at a rate of about 15 percent per year and compounding further through bolt-on acquisitions purchased at lower multiples.
Along with Hyundai and Samsung, Hanwha Ocean (Seoul: 042660) is one of the "big three" shipbuilders in South Korea. It was formerly known as Daewoo Shipbuilding and Marine Engineering. Since the company's bold decision to challenge the US primes in their home market at the end of 2024, shares have increased by more than 230 percent. The company entered the nearly £1 trillion US Navy procurement system in December 2024 when Hanwha Ocean (40%) and Hanwha Systems (60%) jointly purchased Philadelphia Shipyard. The shipyard is currently incurring losses, but the firm has earmarked £5 billion to turn it around.
As part of the US government's Make American Shipbuilding Great Again campaign, the investment will enable Hanwha to take advantage of a Korea-US agreement. The US commerce secretary and Korea's trade minister formally agreed on a £350 billion investment framework in May 2026, with £150 billion set aside for shipbuilding cooperation. The American shipyard's productivity will increase in part thanks to Hanwha's investment. The US produces only one ship annually, whereas the group produces one ship per week from each yard in its home market. With an overall backlog equal to three and a half years' worth of revenue, this will supplement the group's already substantial order book.
A play about the emergence of drones.
Exail Technologies is another company in Finserve's portfolio (Paris: EXA). The development of drone warfare in defense systems over the last five years has been one of the most intriguing developments. By making significant investments in unmanned warfare, a relatively small player on the global stage can retaliate against a major superpower, as demonstrated by the conflict in Ukraine. This company is a play on that trend. With a 95% win rate on naval and mine-hunting tenders since 2019, the French defense technology company Exail has established itself as the world leader in unmanned mine countermeasures. Since the start of 2025, the company's shares have increased by more than 700 percent, and its market capitalization has surged to approximately £3 billion, as the impact of drone and unmanned-weapons platforms has become evident. The UMIS drone system is the company's main offering. In a market where competitors typically rely on multiple suppliers to build systems, it is the only product of its kind.
Here, the Royal Navy is far ahead. The Royal Navy is deploying a ship equipped with technology that can detect and destroy sea mines remotely without endangering people as part of the UK's efforts to spearhead an international mission to reopen and defend the Strait of Hormuz. It will be among the first of its kind to operate in a combat zone. Exail may benefit from the publicity surrounding this mission. In order to support the Royal Navy's next-generation autonomous mine countermeasures, it has already established a cooperative partnership, which may lead to new markets. Due to the historic increase in defense spending, navies all over the world are retiring minesweepers from the Cold War era and replacing them with autonomous drone systems (a £3 billion opportunity by 2030). Exail has a good opportunity to profit from this trend. Last year, the company recorded an 87 percent increase in revenue and has an order backlog equivalent to around a year and a half of sales. In 2026, it hopes to increase revenue by even more double digits.
Supplying the fasteners.
It is evident how deeply ingrained the supply chains supporting the world's armies are in the economy and how many options there are for investors when you begin to trace them. For instance, under long-term production agreements, Scanfil (Helsinki: SCANFL) produces printed circuit boards, electromechanical assemblies, and complete defense electronics units for European defense primes. The Swedish company Invisio (Stockholm: IVSO) produces tactical communication headsets that protect infantrymen's hearing and work with conventional military radios. The kit is sold to Nato armed forces across about 50 countries. Bittium (Helsinki: BITTI), which creates and produces encrypted tactical radios for various NATO militaries, is a play that is comparable.
In the UK, Chemring Grorup (LSE: CHG) is worth a look. This company manufactures energetic materials for munitions as well as equipment like infrared flares and decoy systems that shield military planes and ships from missile attacks. The only significant rival of Chemring in the European market for sophisticated plastic explosives is the French state-owned Eurenco Group.
Chemring's total revenue increased by just 2% last year due to delays in UK government spending commitments at the company's information and sensors division. However, revenue and underlying profit increased by 17% and 37%, respectively, on the countermeasures and energetics side (explosives). With a 35% increase, the company's order book now represents three to four years' worth of revenue in this division.
Chemring currently reports 500 million in revenue; by 2030, it hopes to reach 1 billion. According to Panmure Liberum, group earnings before interest and tax could increase to 170 million, up from 74 million today, at a 17.2 percent margin, up from 14.2 percent, if the company can meet this goal (which analysts think it can). If private equity doesn't buy the company first, that is. The company's future has been the subject of long-running rumors, with analysts speculating that the group's acquisition may be imminent.
Porvair (LSE: PRV), valued at 391 million, provides specialized filtration systems for military aerospace applications, such as fuel filtration for forward operating bases and hydraulic filtration for helicopter gearboxes and fast jets like the F-35. The company claims that aerospace-related demand is higher than anticipated, but it doesn't go into great detail about its contracts with defense clients. Additionally, it is witnessing a minor increase in the nuclear industry's demand for its equipment.
On the ground are boots.
One of the greatest ways to invest in the specialized protective equipment market is through Avon Technologies (LSE: AVON). The company produces respiratory equipment, including gas masks, and head protection for first responders and the military around the world. As nations upgrade their equipmenta large portion of which is from the Cold Warit, like all of its peers, is profiting from increased demand from NATO. Avon Technologies' exposure to US government agencies hurt the company's revenue in the first half of the fiscal year. Demand for head protection equipment fell by double digits as a result of the government shutdown, which revealed contract awards. However, the headwind ought to be brief. The company's order book in this division increased by 19% due to interest in respiratory products, and it now has 16 NATO countries as customers.
Avon agreed to a 50% increase in the revenue ceiling on a significant contract with NATO to supply boots and gloves for chemical, biological, radiological, and nuclear defense as a gauge of demand. This kit provides the business with a steady stream of income because it has a set lifespan after which it is no longer useful. Although it is problematic that US spending accounts for about half of the group's revenue, management is working hard to diversify the base. Avon's stock is ready for a rerating as long as this continues and growth persists. Zeus analysts have projected a 60% increase in profits over the next four years, along with a roughly 33% increase in revenue. Additionally, a cash-rich, debt-free balance sheet offers room for mergers and acquisitions to broaden the portfolio and take advantage of growing defense spending worldwide.
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