This article looks at the 8 Best Small Cap Defense Stocks to Buy Now. In this article, we are going to take a look at where Smith & Wesson Brands, Inc. (NASDAQ:SWBI) stands against the other small cap defense stocks. 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.
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.’
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).
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An overhead aerial shot of a gunsmiths workshop, surrounded by tools of the trade.
Market Cap: $589 million
Number of Hedge Fund Holders: 15
Smith & Wesson Brands, Inc. (NASDAQ:SWBI) is a firearm manufacturing company headquartered in Maryville, Tennessee. It is one of the leading makers of long guns, handguns, rifles, and other shooting equipment. The company has been operating since 1852 and sells its products to various customers, including competitive shooters, firearm enthusiasts, security agencies, individuals desiring personal protection, sportsmen, and hunters.
In its recent Q1 2025 Earnings Call on September 5, Smith & Wesson Brands, Inc. (NASDAQ:SWBI) reported net sales for the quarter at $88.3 million, down 22.7% year-over-year, driven by softer firearms demand amid broader inflationary pressures on consumer spending. The gross margin of 27.4% was 0.8% higher compared to the same period last year. This was primarily attributed to increased absorption on higher production, a price increase that went into effect in January, and lower inventory reserve adjustments and relocation costs. The company also saw an increase in interest expense during the quarter, which coupled with the lower revenue, resulted in a net loss of $2.1 million.
Despite a challenging quarter, Smith & Wesson Brands, Inc. (NASDAQ:SWBI) has maintained its outlook for the fiscal year. It has been encouraged by the successful launch of new products and saw positive momentum in demand toward the end of Q1. The company expects sales to grow significantly during the second fiscal quarter as it enters the busy fall season. Sales growth is anticipated to be 5% to 10% higher year-over-year, which will also further improve gross margin.
From a balance sheet perspective, Smith & Wesson Brands, Inc. (NASDAQ:SWBI) accelerated share repurchases during the quarter and bought back nearly 871,000 shares worth $13 million. It also paid $5.9 million in dividends and ended Q1 FY2025 with $35.5 million in cash and $70 million in line of credit borrowings.
The sentiment around the stock is generally bullish. Wall Street analysts have a consensus Strong Buy rating for SWBI, with a share price upside potential of 38%. According to Insider Monkey’s database for Q3 2024, 15 hedge funds held a stake in the company. Smith & Wesson Brands, Inc. (NASDAQ:SWBI) is among the best defense stocks to buy now.
Overall SWBI ranks 6th on our list of the best small cap defense stocks to buy. While we acknowledge the potential of SWBI as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than SWBI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
