After Intel, what small caps could benefit from government stakes in defense firms?

On August 22, Intel announced that the U.S. government would own nearly 10% of the company, converting government grants into shares. The government became Intel’s largest shareholder and acquired the stake at a 17.5% discount to the prevailing market price. Following the deal, Intel warned investors that the arrival of a state shareholder could pose risks to its overseas business, including the potential for additional regulations and restrictions.

In July, the U.S. Department of Defense took a 15% stake in MP Materials, a rare earths producer, overtaking China’s Shenghe Resources, which holds about 8%. The DoD will guarantee a floor price of $110 per kilogram for the two most-popular rare earths, a price nearly twice the current Chinese market level, which has languished at low levels and has long deterred investment, Reuters reports. In addition, the U.S. Department of Energy has announced up to $1 billion to advance and scale technologies in mining, processing, and manufacturing of critical minerals and materials. 

In late August, Commerce Secretary Howard Lutnick said the Trump administration is considering taking stakes in defense contractors, including Lockheed Martin, Boeing, and Palantir.

Research shows that when the state has a significant stake in a company, efficiency tends to decline, Freedom Finance Global analyst Sergey Glinyanov points out. One reason is slower innovation: government involvement can limit a company’s ability to adapt quickly to market conditions.

This is not always the case for defense enterprises, given their strategic importance, Glinyanov added. Still, the government’s objectives may not be maximizing profits, he warned.

While the market speculates which large corporations could be the next government target, Noble Capital Markets points out that smaller companies may also benefit from "heightened federal interest."

Many smaller contractors play critical yet less visible roles in the military supply chain, Noble writes. These firms often specialize in advanced components, niche technologies, cybersecurity solutions, or unmanned systems. Noble argues that government scrutiny of prime contractors could create opportunities for subcontractors to capture a greater share of defense budgets.

In addition, direct or indirect investment by the U.S. could help shore up balance sheets and provide access to growth capital that is often scarce in the sector, Noble adds.

Canaccord Genuity, in an August 14 report, highlighted U.S. government support as the key driver of growth in rare earth metals production. The investment bank noted that MP Materials’ deal with the U.S. government will also benefit small-cap USA Rare Earth, one of the country’s largest suppliers of rare earths and magnets. Canaccord raised its target price on the stock by 23% to $21 per share and reiterated its “buy” rating, implying upside of about 30% from current levels.

The U.S. Department of the Interior has added dysprosium and niobium to its list of critical minerals where domestic production is virtually absent. This reinforces the strategic importance of NioCorp’s Nebraska project, Maxim Group analysts say. They raised their target price from $5 to $7 per share, implying 30% upside, and reiterated their “buy” call. Maxim underscored the project’s potential to produce rare earths and the likelihood of state support that could reduce its cost of capital.

Glinyanov of Freedom Finance Global recommends focusing on companies with maximum localization of production in the U.S. that already supply major integrators. Among them is Innovative Solutions & Support, a manufacturer of avionics components and flight-control systems. Freedom has a target price of $16.90 per share, for about 40% upside, versus a Wall Street average of $15.55 per share. According to MarketWatch, one analyst rates the stock a “buy,” and another a “hold.”

Glinyanov’s second pick is M-tron Industries, which produces resonators and oscillators used mainly in radio electronics. Rising defense and space budgets, together with a rebound in commercial avionics, are driving demand for its products, he noted. M-tron counts Lockheed Martin and Boeing among its major clients. Freedom’s target price is $61 per share, about 15.5% above current levels. Aside from Freedom, only one Wall Street analyst covers the stock, who has a “buy” rating and a $64 per share target price.

The AI translation of this story was reviewed by a human editor.