Geopolitical tension and military violence have been rising feverishly since Russia’s unprovoked invasion of Ukraine in 2022, with Israel taking up arms against Palestine in 2023, a civil war between competing governments in Sudan unleashing that same year, the Assad regime in Syria falling in 2024 after a 53-year reign, followed by the US capturing Venezuelan president Nicolas Maduro and threatening to annex Greenland to ring in the new year.
Concurrent with this staggering loss of life, the MSCI World Aerospace and Defense Index outperformed the MSCI World Index over the past two years – including a 52.47 per cent return in 2025, more than double the world’s 21.09 per cent effort – propelled by rising defense spending across major economies, which are earmarking hundreds of billions of dollars in fresh capital to reinforce national security across the fundamentals of combat readiness. Here’s a breakdown:
- President Trump is keen on growing the US defense budget by more than 50 per cent from US$901 billion in 2026 to US$1.5 trillion in 2027, with an emphasis on drone technology, cybersecurity, munitions and the space industry, among others, to counteract what he has referred to as “these very troubled and dangerous times.”
- In Europe, defense spending has doubled over the past decade, rising from €191 billion in 2015 to €381 billion in 2025, with RBC Capital Markets estimating a 2026 budget in the €600 billion range allocated with a long-term focus on strengthening the bloc’s defense capabilities across land, air, sea, space and cyberspace.
- In Canada, a similar story is unfolding, with plans to triple defense spending to more than C$1.2 trillion over the next decade allocated according to a wholistic mandate covering everything from aircraft, to armored vehicles, to submersibles, plus associated equipment and infrastructure.
These initiatives coincide with NATO’s 2025 vote to increase defense spending among member states to 5 per cent of GDP by 2035, up from a 2 per cent target set in 2014, creating a unified front among Western nations on which defense technology companies can stoke innovation, deliver economic growth and create shareholder value through strong financial results.
The small-cap advantage
While large-cap players, such as Raytheon, Lockheed Martin, Rheinmetall and BAE Systems, will likely be the most immediate beneficiaries of the blaring spotlight on national security, winning the most lucrative contracts and garnering the most media attention, investors will likely only see modest near-term returns, given these companies’ monumental market caps, coupled with the fact that the bigger the company, the harder it is to earn the same return, all things being equal.
Small-cap defense stocks, on the other hand, offer a more attractive growth runway over the short to medium-term, thanks to price-value dislocations stemming from short operational histories and lack of market awareness, which are preventing high-quality businesses from creating the shareholder value they deserve.
Three high-conviction small-cap defense stocks to top up your watchlist
To isolate the most prospective small-cap defense stocks for Canadian and US investors, we turn to The Globe and Mail’s trusty stock screener, taking care to select for names with strong year-over-year (YoY) returns, indicating exposure to the ongoing global defense tailwind, combined with a multi-year history of positive net income, indicating leadership’s ability to continue generating cash and rewarding investors into the future. Here are the three most attractive stocks I turned up:
- Firan Technologies, up by 90.22 per cent YoY.
- Magellan Aerospace, up by 127.16 per cent YoY.
- Kraken Robotics, up by 165.72 per cent YoY.
Now, let’s put these companies to the test and see how they stand up to due diligence.
Firan Technology
Our first small-cap defense stock worth placing on your radar is Firan Technology, market capitalization C$352.43 million, a supplier of aerospace and defense electronics to clients around the world. The company divides itself into two units:
- Firan’s Circuits unit specializes in printed circuit boards tailored to high-tech industries, with operations in Toronto, California, Virginia, Minnesota and Massachusetts, as well as a joint venture in Tianjin, China.
- Firan’s Aerospace division designs, produces, certifies and services illuminated cockpits and electronic assemblies for defense equipment operators and manufacturers, operating out of Toronto, Calgary, Alberta, California and Tianjin, China.
The business has delivered significant sales increases over the past five years, from C$79.3 million in 2021 to C$184.5 million over the trailing 12 months, while growing net income exponentially from C$256,000 to C$13.8 million, respectively, supported by more than 50 per cent of revenue stemming from high-margin technology, as well as a series of strategic acquisitions that have increased the company’s US, military and aftermarket presences.
Firan is seeing demand across market segments as of Q3 2025 and is positioned to continue capitalizing on it thanks to a strong backlog of C$137.1 million, up by 12 per cent from Q4 2024, low net debt of only 0.3X trailing 12-month EBITDA, C$5.5 million in operating cash flow and a tight 25.17 million shares outstanding, all of which sets the company up to patiently source and close new deals and do its part to allay geopolitical tensions.
Firan Technology stock (TSX:FTG) last traded at C$14.
Magellan Aerospace
Our second small-cap defense stock earning the spotlight tracks Magellan Aerospace, market capitalization C$1.32 billion, an integrated aerospace company that specializes in assemblies and systems for aircraft and engine manufacturers, as well as defense and space agencies, supported by 30 years of progressive expertise since going public in 1996.
Magellan’s diversified product portfolio, including everything from engine shafts, to wings and landing gear, to rockets and satellites, coupled with a long-tenured leadership team steeped in global aerospace and defense experience, including with major industry players, has allowed the company to attract high-profile partners, including GE, Airbus and Pratt & Whitey, that are a testament to its tier-1 status.
These partners, in turn, have allowed Magellan to parlay its expertise into solid growth, from C$688.3 million in revenue in 2021 to more than C$1 billion over the trailing 12 months, justified by earnings per share jumping from a C$0.02 loss to a C$0.79 gain, respectively, substantiating leadership’s ability to spread the company’s wings without losing sight of the bottom line.
Magellan earned C$12.6 million in net income in Q3 2025, up by more than 116.7 per cent YoY, amidst higher revenue in the areas of wide body aircraft, casting, engine shafts, as well as maintenance and repair, boasting the flexibility of C$72 million in cash and only 57 million shares outstanding to continue purifying its leverage to higher defense spending as threat perceptions rise across the world.
Magellan Aerospace stock (TSX:MAL) last traded at C$23.17.
Kraken Robotics
Our third and final small-cap defense stock making waves among investors tracks Kraken Robotics, market capitalization C$2.31 billion, a company offering 3D imaging, power and robotic systems that collect sub-sea intelligence and help to protect ocean assets and geology for clients in more than 30 countries, including Boeing, Lockheed Martin, Teledyne, Shell, ConocoPhillips, as well as the US, UK and Canadian navies.
Backed by a decorated leadership team, thoroughly learned in the area of underwater systems and services, Kraken has progressively found a firmer footing in the marketplace, growing revenue from C$12 million in 2012 to an estimated C$120-135 million in 2025, while keeping profitability front-and-centre, as evidenced by:
- Growing EBITDA on the order of 10x from C$3.2 million in 2021 to an estimated C$26-34 million in 2025 at increasingly value-accretive margins.
- Finding its way into positive net income, generating C$5.5 million in 2023, C$20 million in 2024 and C$16.4 million over the trailing 12 months.
Bolstered by record shipments of subsea batteries and synthetic aperture sonars to defense customers, as well as resilient organic growth in sub-sea imaging services in Q3 2025, Kraken is optimistic about fostering momentum in 2026, with numerous customer demonstrations and accelerating request for proposals activity setting expectations high about adding new contracts to the books.
A series of sub-sea battery deals announced in January, collectively representing C$35 million in sales, sets a prospective tone for the rest of the year.
Kraken Robotics stock (TSXV:PNG) last traded at C$7.52.
Join the discussion: Find out what investors are saying about these high-conviction small-cap defense stocks on the Firan Technology Group Corp., Magellan Aerospace Corp. and Kraken Robotics Inc. Bullboards and make sure to explore the rest of Stockhouse’s stock forums and message boards.
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