This article looks at the 8 Best Small-Cap Defense Stocks to Buy Right Now.
The NYSE Arca Defense Index is up 31.24% year-to-date, as of the close on November 17, comfortably surpassing the S&P 500’s returns of 13.70% during the period. Astronics, a small-cap firm, topped the index, soaring over 200% this year, with several leading drone-makers also making significant gains.
Small- and mid-cap defense stocks have surged in 2025 amid rising demand for AI-powered drones and unmanned vehicles which provide a bird’s eye view during intelligence, combat, reconnaissance, and surveillance operations, and can strike targets with pinpoint accuracy. Moreover, these are also cheaper to deploy and reduce dependence on ground forces in high-risk missions.
According to a report by TD Cowen in September, the Department of War’s 2026 budget request for drones and counter-drones was 53% higher than the actual spend in fiscal 2024, and 78% more than the funding in fiscal 2025.
Seaport Research Partners analyst Richard Safran does not see the shift towards adaptable systems as a surprise, given the U.S. government’s signaling and spending in recent times. He was quoted as saying the following by Reuters in September:
“These trends are predictable because you need to pay attention to what the government is saying — and more importantly, follow the money.”
Jonathan Siegmann, the Research Managing Director at Stifel, expects companies that invest in cost-friendly, upgradeable, technology-backed combat systems to gain from the changing trends.
Considering these factors, there has been an uptick in traditional defense contractors adapting to the modern battlefield by expanding their capabilities through mergers and acquisitions of smaller firms, especially in the areas of artificial intelligence, communications, and cybersecurity.
With that said, let’s now shift focus to the best small-cap defense stocks to invest in.
Our Methodology
We used screeners to identify U.S.-based small-cap stocks in the aerospace and defense industry. From there, we narrowed the list to only those companies that were pure-play defense stocks, had received past defense contracts, or were currently working on defense contracts. Lastly, we selected the top 8 stocks with the highest average share price upside potential as of the close of business on November 14, and ranked them in ascending order of their upside. Additionally, we also included data on hedge fund holdings in these companies as of Q2 2025 to provide further insight into investor interest.
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 427.7% since May 2014, beating its benchmark by 264 percentage points (see more details here).
8 Best Small-Cap Defense Stocks to Buy Right Now
8. Cadre Holdings, Inc. (NYSE:CDRE)
Share Price Upside Potential: 12.90%
Number of Hedge Fund Holders: 19
Cadre Holdings, Inc. (NYSE:CDRE) is among the 8 Best Small-Cap Defense Stocks to Buy Right Now, with an upside potential of 12.90% as of the close of business on November 14.
On November 6, B. Riley lifted its price target on the stock to $62 from $50 while maintaining a Buy rating. The adjustment followed the company’s third-quarter earnings beat. In a research note to investors, the firm said Cadre was on track for continued growth, amid robust demand across public safety and nuclear end markets.
In Q3, Cadre Holdings, Inc. (NYSE:CDRE)’s net sales surged 42.5% year-over-year to $155.9 million, with the gain attributed to strong demand for armor and duty gear products and recent acquisitions. Gross profit margin improved from 36.6% in the prior year’s quarter to 42.7%.
Net income stood at $10.9 million for the three months, up from $3.7 million in Q3 2024, driven by improved gross profit. Diluted EPS stood at $0.27, up from $0.09 during the same period last year. EPS beat estimates by one cent.
The company reaffirmed its full-year outlook for 2025. Net sales are expected in the range of $624 million to $630 million, with adjusted EBITDA between $112 million and $116 million. The company did not provide guidance for net income, citing challenges in projecting certain metrics.
During the earnings call, Cadre’s management cited current national defense initiatives, rising spending worldwide, and an increase in global safety threats as tailwinds that could drive sustainable growth for the company over the long run.
Cadre Holdings, Inc. (NYSE:CDRE) manufactures and distributes safety equipment for law enforcement, military, and nuclear markets. The stock has had impressive returns in 2025, gaining 33% year-to-date.
7. Ducommun Incorporated (NYSE:DCO)
Share Price Upside Potential: 18.20%
Number of Hedge Fund Holders: 20
Ducommun Incorporated (NYSE:DCO) is among the 8 Best Small-Cap Defense Stocks to Buy Right Now. On November 6, the company reported its third-quarter fiscal 2025 financial results.
Net revenue was reported at $212.6 million, a new quarterly record and up 6% year-over-year, attributed to a strong show by the company’s defense business. This was the third successive quarter of double-digit growth for the segment, driven primarily by its missile franchise.
Gross margin stood at 26.6%, improving by 40 bps from last year. Adjusted EBITDA was posted at $34.4 million, increasing 40 bps year-over-year, and marking the third back-to-back quarter of exceeding the $30 million figure. This represented 16.2% of revenue, putting the company on track to achieve its financial goal of 18% adjusted EBITDA by 2027.
Ducommun Incorporated (NYSE:DCO) reported a net loss of $64.4 million, compared to net income of $10.1 million in the prior year’s quarter. This was the result of a litigation settlement and associated costs. However, adjusted net income stood at $15.2 million, or $0.99 per diluted share, surpassing estimates by four cents.
Chairman, President, and CEO Stephen G. Oswald highlighted weakness in commercial aerospace and described ongoing destocking as a major headwind. However, he welcomed the Federal Aviation Administration (FAA)’s decision to approve an increase in Boeing’s monthly 737 production cap, which could help in reducing inventory in the system.
The company reaffirmed its full-year 2025 guidance and brushed aside concerns that tariffs could impact financial results, since about 95% of its revenue is generated domestically in the United States.
The stock has had an impressive run in 2025, gaining 43.53% year-to-date, as of the close on November 14.
Ducommun Incorporated (NYSE:DCO) provides manufacturing solutions to customers in the global aerospace, defense, military, space, and industrial markets.
