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 Sturm, Ruger & Company, Inc. (NYSE:RGR) 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.
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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.’
Methodology
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).
A row of raw materials in pristine condition, waiting to be crafted into firearms.
Sturm, Ruger & Company, Inc. (NYSE:RGR)
Market Cap: $641 million
Number of Hedge Fund Holders: 15
Sturm, Ruger & Company, Inc. (NYSE:RGR) is an American firearms company that has a diverse portfolio of products, mainly serving three product lines – pistols, rifles, and revolvers. It is among the largest firearm manufacturers in the United States. The company primarily sells its products to domestic customers but also sells weapons to law enforcement agencies.
The firearms maker announced financial results for the third quarter of 2024 on October 30. Net sales for the quarter stood at $122.3 million, growing 1.16% year-over-year. Net sales for the nine months ended September 28 were at $389.9 million, compared to $413.2 million in the corresponding period in 2023. Diluted earnings per share in Q3 were logged at $0.28 per share. Diluted earnings per share for the nine months ended this year were at $1.15, down from $2.13 last year.
Despite a dip in sales this year, Sturm, Ruger & Company, Inc. (NYSE:RGR) has showcased resilience in a challenging market impacted by rising fixed costs and a competitive promotional environment. It continues to maintain a robust financial position with no debt. The company ended the quarter with $96 million in cash and short-term investments.
Sturm, Ruger & Company, Inc. (NYSE:RGR) returned $39.3 million to shareholders during the first nine months of 2024 through quarterly dividends and share repurchases. The Board of Directors has also declared a $0.11 per share quarterly dividend, payable on November 27.
The company is encouraged by the market showing signs of recovery. Its new products have also performed well this year, generating 31% of all firearm sales during the first nine months of 2024. Hedge fund sentiment toward the stock has improved as well. Amongst hedge funds tracked by Insider Monkey, 15 held investments in the company as of Q3 2024, up from 14 at the end of the second quarter. Sturm, Ruger & Company, Inc. (NYSE:RGR) is one of the best small cap defense stocks to buy now.
Overall RGR ranks 5th on our list of the best small cap defense stocks to buy. While we acknowledge the potential of RGR 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 RGR but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.