State of Small-Cap Defense Investing 2026 Pt. II: Small-Caps at Sea and in the Sky

If you read Part One, the thesis is fresh. Several tailwinds are buoying small-cap defense stocks as big changes happen across the Federal procurement and defense contracting scene:

My conclusion to Part One was that the opening sits mostly in small caps, where a contract that's a rounding error for a prime is a transformation.

There are more names here than we can squeeze into a single sitting, so we'll move through them across this and the next couple of editions, starting with the gaps closest to the physical fight today: sea and sky.

A word on how I think about small-caps, because it shapes everything that follows. At this end of the market (sub-$2B, give-or-take), individual companies sometimes matter less on their own traditional fundamentals than they do as a vehicle for exposure to a larger thematic trend. A small-cap at the fore of a major sea change can outrun what its standalone numbers would predict, because the wave, not the 10-Q, is doing the heavy lifting. Therein lies the opportunity.

It's also where people get hurt, so the discipline is sequential. Identify the trend first. Then vet the individual name against its peers and competitors for whether it can actually survive long enough to capture the wave, because the goal here is multi-year positioning, not a swing trade. The trend earns the company a look, but the fundamentals decide whether it earns a place (even if traditional Benjamin Graham-style metrics are less than relevant across most of these cases).

Put differently, the theme doesn't replace the fundamentals, but instead tells you which fundamentals matter. The cleanest way to hold a structural theme is to spread exposure across three roles, and most of the names across this series fall into one of them:

A complete basket usually wants some of each of these small-cap defense stock sectors to capture as wide a swath of the overall trend as possible. With that framing, let’s dive in (pun intended).

The Strait of Hormuz crisis put two maritime problems on the table at once. The near-term problem was mines, and the answer the Navy reached for was autonomy. Even while writing this series, seafaring autonomy made major waves after the US Navy, using private company Saronic’s unmanned Corsair platform, successfully rescued an Apache helicopter crew.

The longer-term, strategic problem, is naval capacity and expansion. The answer is much harder: a scramble to kickstart shipbuilding and seafaring innovation and build capacity that the United States let atrophy after decades of disregarding the near-peer fight.

On the autonomy side, the cleanest pure-play is Kraken Robotics, hovering at the upper edge of small-cap territory at ~$1.56B USD ($2.19B CAD) following the Canadian stock’s staggering 140% one-year run-up.

Kraken, a key publicly traded suppliers in the Anduril ecosystem, makes synthetic aperture sonar, pressure-tolerant subsea batteries, and the underwater robotics that mine-countermeasures work increasingly runs on.

And it's been proving exactly that capability in the water.

In late 2025, Kraken demonstrated its KATFISH towed sonar launching and recovering autonomously from a UK Royal Navy unmanned surface vessel; in early 2026, it repeated the feat off İstanbul from a Turkish USV, streaming 3-centimeter sonar imagery to an onshore command center for real-time classification of mine-like objects, with several navies watching.

By May it had signed an MoU to build automatic target recognition into the system, pushing toward fully autonomous seabed-warfare and mine-hunting. This is the near-term Hormuz problem, solved by a small-cap, on camera.

The longer-term growth story is consolidation. In March, Kraken struck a $615M CAD deal ($480M cash/$135M in equity) to acquire the parent company of Sonardyne, Covelya Group, a cluster of established underwater technology firms. In the long run, this expands both its scale and its NATO footprint as member navies modernize aging mine-hunting fleets. Better yet, combined net leverage post-deal is just 0.8x, which heads off any overleveraging concerns.

Recent financials inflected hard, boosted by battery demand tied to Anduril's expansion and pushed further by the same defense tailwinds alongside a very real, emergent near-peer maritime threat. Q1 2026 revenue rose 35% year over year, and management is guiding to roughly $165M to $175M CAD for the year on a standalone basis, more than 65% growth at the midpoint.

Valuation. Kraken trades at a price-to-sales multiple in the mid-twenties and a triple-digit P/E. The growth has to keep showing up, and a single stumble on Covelya integrations or a lumpy order quarter could compress that multiple fast.

A second subsea pure-play sits right alongside Kraken. Coda Octopus makes real-time 3D volumetric sonar, the Echoscope, plus diver-vision systems and a new NANO line built for small platforms and unmanned underwater vehicles. The defense applications run straight through this series: mine countermeasures, threat detection, and obstacle avoidance for autonomous craft. It is also the rare micro-cap here that is solidly profitable, with gross margins near 70%, more cash than debt, expected U.S. Navy orders for its DAVD diver systems, and plans to strengthen European naval capabilities at a time when our brothers across the pond are desperately looking to reinforce their defense infra. At roughly a $132M market cap it is small and thinly traded, but it is a clean, cash-generative way to own the same seabed-warfare theme.

On the surface-autonomy side, Ocean Power Technologies pairs its PowerBuoy energy platform with WAM-V uncrewed surface vehicles and a maritime-domain-awareness package aimed at persistent air, sea, and subsea surveillance. The pitch is autonomous, long-endurance watch-standing for naval and border missions. The caution is financial: OPTT is an early-stage micro-cap (sub-$70M) with a long history of losses and dilution, so it belongs in the speculative bucket, sized accordingly.

For the hull-count problem, the bluntest small-cap is Conrad Industries, a family-controlled Gulf Coast shipbuilder that builds tugs, barges, ferries, and government support vessels and has historically run profitably and paid dividends. The structural tailwind is real as the U.S. scrambles for shipyard capacity, but Conrad trades over-the-counter with thin volume, so liquidity is the gating issue for most readers rather than the thesis.

There is also an undersea angle to the critical-minerals story. Odyssey Marine Exploration (OMEX) has pivoted from shipwreck recovery to deep-sea polymetallic nodules carrying nickel, cobalt, copper, manganese, and rare earths, and is positioning as a U.S.-controlled source as security of supply becomes policy. One large flag: Odyssey is merging with American Ocean Minerals in a roughly $1 billion all-stock deal, with a 1-for-25 reverse split, and the combined company is expected to trade as AOMC after a close targeted for late Q2 or early Q3 2026. This is a pre-revenue, permitting-and-regulation story, the highest-risk kind. The mid-cap proof of concept to watch alongside it is The Metals Company (TMC), a larger deep-sea nodule developer that has carried the sector's narrative and regulatory fights.

Though drone stocks have gotten plenty of play over the past year, the reality is that cheap and attritable sUAS are already a crowded trade with brutal margin pressure that will only increase. The harder, more durable problem is disabling them cheaply, and counter-UAS is where the dual-use demand gets genuinely large, because the buyers are not only militaries. Critical infrastructure, energy facilities, airports, and private estates all want affordable, portable protection, much of it soft-kill rather than kinetic when factoring in civilian infrastructure and domestic airspace regulatory issues.

For direct counter-UAS exposure, DroneShield is an Australian specialist in radio-frequency sensing, electronic warfare, and sensor fusion, selling both bespoke and off-the-shelf counter-drone systems. It is one of the best small-cap drone defense pure-plays, sitting at ~$1.92B in market cap ($2.73B AUD) with the trade-offs of a foreign listing in F-shares and the volatility that has come with the whole counter-drone trade.

The product portfolio leans into both ends of the C-UAS spectrum. On the detection side, the RfPatrol family provides handheld and body-worn passive RF sensing that identifies, classifies, and locates drones and their operators in real time.

On the defeat side, the DroneGun line offers handheld jammers, with larger fixed-site and vehicle-mounted systems for permanent perimeter coverage at military bases, airports, and critical infrastructure.

The AI and machine learning library underneath both sides is what DroneShield argues differentiates the offering. Its threat library continuously ingests new drone signatures, which matters in an environment where adversary drone designs evolve faster than traditional procurement cycles can keep up.

This month’s newest contract, with the US Department of War's Joint Interagency Task Force 401 (JIATF-401), is the kind of proof point that turns a niche specialist into an institutional counter-UAS supplier. Initial value of $19.3 million USD, with up to $5.6 million in additional end-user options over five years.

The Task Force buy covers mobile and fixed-site hardware, software subscriptions, and services, which is the recurring-revenue mix the company has been building toward. Recent analyst commentary frames DroneShield as having shifted from lumpy contract wins to repeat institutional procurement across NATO and US defense channels, which is the more important structural read than any single contract.

If counter-UAS is genuinely transitioning from a supplemental capability to a procurement category in its own right, and the Pentagon standing up a dedicated task force suggests it is, then DroneShield sits close to the cleanest pure-play position available in public C-UAS exposure.

DroneShield comes with several layers of risk that other small-cap defense names don't carry. The ASX primary listing means US investors access the name via OTC F-shares, which is materially less liquid than the direct ASX listing and trades on delayed pricing rather than real-time during US market hours. The Australian Securities and Investments Commission disclosed an investigation in May 2026 that the company has stated it will fully cooperate with. Scope hasn't been detailed publicly, but it's a regulatory overhang worth pricing into any position sizing decision.

Where DroneShield handles the soft-kill side of the C-UAS stack, Powerus is building the kinetic answer. The West Palm Beach-based company, founded in 2025, manufactures small-form-factor interceptor drones designed to kill enemy UAS on terminal approach. The flagship Guardian-1 is a six-pound battery-powered interceptor with a 100mph cruise speed, 211mph burst, 10-mile range, and 28-minute endurance. It uses radar-assisted target designation handed off to camera-guided final approach, and the company claims hundreds of confirmed interceptions across operational use cases.

The newly-unveiled Guardian-2 keeps the form factor and adds semi-autonomous targeting plus broader sensor and radar integration capacity, with explicit "designed and built in the United States" sourcing.

A May 2026 contract win is what makes Powerus a name to know. The US Air Force Special Operations community ordered Guardian-2 interceptors at scale (specifics undisclosed) after a successful Air Force Special Warfare proof-of-concept test that named the interceptor as a kinetic answer to the sUAS threat. That contract sequence (eval, demo, operational adoption) is the same shape DroneShield's institutional procurement turn followed. The Air Force calling out kinetic interceptors as part of its standing C-UAS doctrine is structurally important regardless of which company ends up filling the slot.

There’s some nuance to the governance and corporate wranglings of the stock, though. Powerus is wrapping up its public debut via reverse merger with Aureus Greenway, a Trump family-backed golf course holding company. The combined entity trades as PUSA, though the deal isn’t quite done. Investors include Eric and Donald Trump Jr.; the advisory board lists former CJCS Gen. CQ Brown (ret.) and former Trump Russia-Ukraine envoy Lt. Gen. Keith Kellogg (ret.). The business model is also unusual: Powerus runs as a roll-up of Ukrainian drone companies and battlefield-tested technology, acquired specifically for U.S. military resale. That gives Powerus a credible "battlefield-learned" provenance story, since Ukraine has been the live counter-UAS R&D lab for three years, while introducing integration risk on a portfolio of recently-acquired Ukrainian assets.

The risk stack here is dense. Powerus is roughly a year old as a company, going public via SPAC reverse merger with a golf-course holding shell, which carries every standard SPAC execution risk (post-close share unlock cliffs, sponsor incentive alignment, dilution from redemptions).

The political concentration is also multi-directional: high-level access and procurement tailwinds tied to specific administration relationships, with the symmetric downside of those tailwinds reversing under a different White House.

The Ukrainian-asset roll-up model adds integration risk on a portfolio of assets acquired across jurisdictions and operational conditions that don't always translate cleanly into U.S. production lines. The "hundreds of confirmed interceptions" claim also sits with the company rather than an independent test authority.

On the soft-kill (think jamming and electronic warfare countermeasures) and secure-comms side, Mobilicom supplies cybersecure datalinks and an electronic-warfare-resistance suite that hardens drones against jamming and takeover, the SkyHopper and ICE product lines. It carries the credentials that matter in this market, including Blue UAS framework selection, FCC Trusted Drone status, and NDAA-vetted compliance, logging Tier-1 design wins and orders tied to loitering-munition and Army programs. The hard truth is scale: quarterly revenue is still well under a million dollars, so this is a micro-cap option ($~77M) on an adoption glidepath, not an established supplier.

The C-UAS dual-use story extends past defense procurement and into public safety, where Wrap Technologies is the small-cap to track. WRAP is best known for the BolaWrap remote restraint device used by over 1,000 law enforcement agencies in 60 countries, with the company now extending into C-UAS adjacent layers via two existing products (the PAN-DA and the 1KC Kinetic Anti-Drone Cassette) and a late-May 2026 announcement of drone-mounted non-lethal payloads incorporating directional light, laser dazzlers, and sensory deterrence systems. The pitch is dual-use: critical infrastructure protection, border security, and corrections markets that need to defeat or deter drones without escalating to kinetic force. At roughly $74M market cap, trading near 52-week lows with ongoing cash burn (Q1 2026 net loss of $4.5M) and a prior Nasdaq listing compliance episode in the rear view, this is the speculative end of the C-UAS book.

Part III drops early next week. We’ll move from the contested-domain layer to the consumables-and-eyes layer: small-cap munitions stocks (where powder, propellants, rocket motors, and fuse architecture actually live) and small-cap sensors and electronic warfare (where detection, classification, and signal advantage get built). Both halves cover what sustains the platforms in this edition once contact is made.

Hit reply with thoughts, corrections, or names worth a closer look. If you’re seeing this outside of your inbox, shoot me an email here. Keep digging, and see you next time.