When most investors think of defence stocks, they picture giants like BAE Systems PLC (LSE:BA.) or Thales. But some of the most compelling opportunities right now, according to RBC Capital Markets, are to be found lower down the market cap spectrum in what the City calls SMIDs.
That stands for small and mid-cap companies, and while the acronym may not be familiar to private investors, the underlying idea is simple. These are listed businesses that are smaller than the global defence titans, but large enough to be well-established.
Crucially, they often offer faster earnings growth, more focused product lines, and the potential for rerating.
RBC has just launched coverage on three such names: Cohort PLC (AIM:CHRT), Chemring Group (LSE:CHG), and QinetiQ Group PLC (LSE:QQ.).
All are UK-listed. All are defence suppliers. And all, says RBC, could benefit as Western governments ramp up spending in response to heightened geopolitical threats.
Here is what private investors should know.
Cohort: Smart kit for modern warfare
RBC rates Cohort ‘Outperform’ with a price target of 1,570p. That is around 10% above where the shares were trading at the time of the note.
The firm specialises in naval electronics, counter-drone systems and satellite communications.
These are areas of rising importance as defence spending pivots to advanced technology. Its recent £135 million Royal Navy order for the Ancilia system, along with contracts for sonar tech and communications terminals from Italy and Australia, reflects growing international demand.
The company has more than doubled in value since early 2024, which may deter new buyers. But RBC believes upgrades are still on the table. Its order book is now 40% above historical norms and includes multi-year programmes that extend well into the 2030s.
Cohort is also relatively conservative with its forecasts, leaving room for upside. RBC models 16% annual earnings growth over the next three years in its base case, but sees potential for 27% if margins and acquisitions come through more quickly.
Chemring: Explosives, cybersecurity and a hidden re-rating story
Chemring may sound old-fashioned, a name long associated with flares and countermeasures, but it is modernising fast. Its business is split between its Energetics division, which makes high-grade explosives for NATO militaries, and Roke, a cybersecurity and electronic warfare specialist.
RBC sees real upgrade potential here too, assigning a 500p target price from 420p currently and a bullish view on capacity growth in Energetics.
Chemring is boosting production by 275% by 2028. Much of this expansion is happening at its Norwegian site, one of the few facilities in Europe equipped to produce high explosives for long-range missiles.
There are a near-term risk. Orders have slowed during the UK’s Strategic Defence Review, which has created uncertainty over 2025 numbers. But RBC believes this is temporary, and that order momentum should pick up in the second half.
Chemring trades at a 22% discount to the sector on 2025 earnings, despite offering 21% annual earnings growth. That is well above the sector median of 18%. RBC sees scope for this valuation gap to close quickly if the order flow improves.
QinetiQ: Potential, but delivery is the sticking point
QinetiQ has frustrated investors of late. The company issued a profit warning in March, cut forecasts, and continues to face questions about its US operations, particularly after its acquisition of Avantus.
RBC is more cautious here, rating the shares ‘sector perform’ with a 450p target.
That reflects a belief that while the shares look undemanding on valuation, trading at just 13.7 times 2025 earnings, confidence needs rebuilding. Growth guidance has been lowered, and investors are waiting to see if promised restructuring efforts in the US will bear fruit.
There are still positives. QinetiQ is cash-generative, offers a 6% free cash flow yield and is returning capital through share buybacks. But for now, RBC wants to see delivery before turning more positive.
Final word: Why SMIDs matter
For private investors, the appeal of small and mid-cap defence stocks lies in their combination of earnings growth, product specialisation and potential valuation upside.
These are not early-stage startups, but nor are they global behemoths.
They sit in the sweet spot. Agile enough to grow quickly, established enough to deliver, and often overlooked by larger funds focused on index heavyweights.
As RBC points out, this part of the market is not without risk. Shorter order cycles, project delays, and market sentiment can all hit performance. But for investors looking to gain exposure to long-term defence trends, names like Cohort and Chemring deserve a closer look.