First, the bad news. The best time to get into aerospace and defense stocks was about nine months ago. That would have positioned investors for the strong growth that occurred in the fourth quarter of 2025 and accelerated in early March after the United States and Israel initiated a military conflict with Iran.
Now for the good news. There's still an opportunity to invest in some small-cap defense stocks that trade for less than $20 as of recent trading.
Last year, at this time, investors could have bought Red Cat Holdings Inc. (NASDAQ: RCAT) for around $5.30 a share. It recently closed near $15. A similar case could be made for Amprius Technologies Inc. (NYSE: AMPX). One year ago, shares traded hands for around $2.10. AMPX also recently closed near $15.
Both RCAT and AMPX are still good picks, but both stocks have almost moved into mid-cap status. Here are three true small-cap defense stocks that can give investors picks-and-shovels exposure to the defense sector.
A Picks-and-Shovels Play on the Military Drone Boom
While Red Cat builds drones, Amprius powers them, and Unusual Machines Inc. (NYSE: UMAC) supplies the critical components (e.g., motors, FPV cameras, and flight controllers) that go into tactical drone platforms used by the U.S. military and enterprise customers.
All of its products are NDAA-compliant, which matters because the government is actively restricting the use of foreign-made drone components. As an example of the company’s direct ties to active military procurement, Unusual Machines received a $3.75 million purchase order from Performance Drone Works in December 2025 to support the AM-FPV program.
The company posted its first-ever profitable quarter in Q3 2025, recording $1.6 million in net income on $2.1 million in revenue, with gross margins expanding to 34%. Year-to-date revenue through Q3 was up 55% year-over-year. Unusual Machines reports earnings on March 9, and analysts expect to see revenue of $3.59 million.
Management is targeting a $30 million annual revenue run rate to reach break-even, and Needham named UMAC stock a top pick for 2026, projecting 149% revenue growth. The Unusual Machines analyst forecasts on MarketBeat show four analysts rating the stock a Buy with an average 12-month price target of $20, an upside of around 30%.
5G Connectivity Powering Mission-Critical Communications
Inseego Corp. (NASDAQ: INSG) is the connectivity infrastructure play of the group. The company makes 5G and 4G mobile broadband solutions—including the iconic MiFi brand—alongside rugged industrial routers and cloud management platforms for government agencies, transportation companies, and enterprise customers. Its devices meet stringent government supply chain security requirements and are available on GSA Schedule contracts.
Four of its 5G products carry Verizon Frontline-Verified designation, validating their use in mission-critical communications for law enforcement, fire, and EMS. At Mobile World Congress in February 2026, Inseego launched the MiFi PRO M4 enterprise router with Wi-Fi 7 and standalone 5G, alongside an updated Inseego Subscribe SaaS platform that automates government procurement workflows. This adds a recurring revenue stream, improving the business model's durability.
Q4 2025 revenue came in at $48.4 million, the company’s third consecutive quarter of sequential growth, with adjusted EBITDA of $6 million and a 12.4% margin. Inseego is approaching profitability. Four analysts cover INSG stock with a consensus price target of $16.50, implying approximately 50% upside from the stock's recent close near $11. Craig-Hallum carries the most bullish target at $20.
High-Risk Battery Technology With Defense Drone Potential
SES AI Corp. (NYSE: SES) is the highest-risk, highest-reward name on this list. The stock recently closed near $1.55, which qualifies it as a penny stock. As its name implies, SES AI develops AI-enhanced lithium metal batteries for electric vehicles, drones, urban air mobility, and robotics. Its batteries are engineered for applications where performance and weight matter most. This makes the company a natural fit for tactical drone platforms.
SES AI is executing a pivot that makes the stock more compelling. The company launched its Molecular Universe platform in 2025, using AI to accelerate battery materials discovery, and reported six breakthrough materials currently being tested by more than 40 customers. It is also converting manufacturing capacity at its South Korea facility from EV to drone form factor and is actively working toward NDAA compliance. If successful, the company will be a direct play on U.S. defense drone procurement.
Revenue more than doubled quarter-over-quarter in Q3 2025 following the UZ Energy acquisition, and the company’s asset-light model supports a break-even point estimated at $32 million in annual revenue. The SES AI analyst forecasts on MarketBeat show two analysts covering SES stock with a consensus price target of $4.00, giving the stock potential upside of more than 250%.