Not just MIC giants: which small-caps benefit from Israel's defense programs

The escalation between Israel and Iran has become a point at which demand for defense and software solutions for modern operations is growing faster than supply chains can adapt. In the Israeli market, this has markedly increased interest in defense and technology companies: on Monday, March 2, the Tel Aviv Stock Exchange's main index, TA-125, was adding about 6% at one point. At the end of trading on March 3, the index closed withan increase of 4.75%.

Structural factors such as fiscal policy and exports also play a significant role. In the draft budget for 2026, defense spending is approved at the level of 112 billion shekels (about $34 billion), compared to 110 billion shekels in 2025, which confirms the high pace of modernization and procurement programs. Israeli defense exports have reached a new high: according to the Israeli Defense Ministry, they will exceed $14.7 billion in 2024, up 13% year-on-year. In such an environment, small and medium-sized companies supplying specialized components - from cameras and secure communications to electronics and software solutions to counter drones - can grow faster than the sector as a whole.

We selected eight Israeli small-caps, all of which share a focus on key segments of defense technology: surveillance systems, secure communications, munitions and counter-drone solutions. The investment logic here has less to do with current tensions and more to do with how quickly countries adapt new needs and translate them into real purchases and long-term contracts.

The positive scenario depends on three factors: continued high defense budgets, the ability of companies to scale production without disruption, and the absence of significant regulatory or export restrictions.

This portfolio is more risky: there may be increased volatility on news and a noticeable gap between expectations and actual results. It is suitable for investors who are ready for fluctuations: it is important to realize that the geopolitical agenda can both accelerate growth and sharply slow it down.

NextVision Stabilized Systems - manufactures micro-stabilized cameras and optical systems for drones and ground platforms used for reconnaissance and high-precision data transmission. In January 2026, it announced a large $60 million order with deliveries through the end of 2029.

The key driver on the 6-12 month horizon is the accelerated expansion of the UAV fleet and modernization of existing surveillance systems, where such modules often become a bottleneck in supply chains. The main risks are high valuation and sensitivity to the pace of new orders: any slowdown after a peak in purchases could quickly impact investor expectations. Since the beginning of the year, NextVision shares have added about 87%; on Monday, March 2 the stock was up 15.3%. Jefferies and Freedom Broker maintain "buy" recommendations, but their target prices of NIS 285 and NIS 183, respectively, are already below the current value of about NIS 394.

Aryt Industries Holding operates in the electronic fuzes and ammunition components segment through its subsidiary Reshef Technologies. The key driver remains maintaining elevated production levels and replenishing stockpiles, including export shipments, amid risks from missile and drone threats. Reshef is the main supplier of these fuzes to the Israel Defense Forces (IDF).

The market perceives the company as one of the beneficiaries of the munitions cycle, but the stock remains sensitive to news background and regulatory signals. Significant risk is related to corporate governance issues: in February 2026, the regulator reported action as part of a probe into suspected insider trading. Since the beginning of the year, Aryt Industries securities have added about 38%. There is currently no coverage from analysts.

Gilat Satellite Networks provides equipment and end-to-end satellite communications solutions for civil and defense applications - from mobile terminals to network infrastructure. The company has deep expertise in "terrestrial segment" satellite communications and turnkey end-to-end solutions for mobile customers, including defense and aviation. The company points to increasing demand from defense customers, aviation communications and multi-orbit architectures as one of the main growth drivers.

Risks include competition from large international suppliers and price pressure in individual projects. Gilat shares are simultaneously traded on Nasdaq and TASE, which expands the investor base, but increases sensitivity to the global news background. Since the beginning of the year, Gilat's quotes in the U.S. have grown by about 30%. Freedom Broker analysts advise to buy Gilat shares: they believe that in the perspective of two months the company's quotations may rise to $19, which means a 12.4% growth from the closing price of March 3. Needham maintained a "buy" recommendation with a target price of $20. William Blair maintains an "above market" rating without disclosing a target price.

TAT Technologies operates at the intersection of aviation and defense, manufacturing aircraft assemblies and components, as well as repair and maintenance of key units. The main driver of the business is high utilization of aviation infrastructure and growing demand for equipment maintenance services in the context of increased readiness requirements, including military and government programs.

In August 2025, TAT announced a three-year contract to service the Boeing 777 platform with expected revenues of approximately $12 million, confirming its growing presence in overseas markets. In January 2026, another three-year contract was awarded, for landing gear maintenance for a major US commercial airline for $14 million with an option to extend, further increasing revenue visibility in the service segment.

The key risk is related to the cyclical nature of the aviation industry: when transportation and delivery volumes decline, demand for maintenance may weaken. At the same time, the company is actively building up its international presence, primarily in the US, where its main repair facilities are concentrated. Since the beginning of the year, TAT shares are up about 25%. Truist, Lake Street and Benchmark maintain a "buy" recommendation with target prices in the $58-61 range. JonesTrading rates the stock at $50, Stifel rates the stock at $47, while Freedom Broker maintains a "hold" recommendation with a $43 target. The current share price is around $56.8.

Orbit Technologies develops satellite communications systems for mobile platforms - aviation, maritime and ground vehicles. The key driver for the coming weeks is an agreement for Kratos Defense & Security Solutions to acquire the company for $356.3 million, with the deal expected to close by the end of March 2026. Until such deals are finalized, the market typically trades the stock near the announced buyout price. In late February 2026, Kratos Defense & Security Solutions announced plans to raise about $1.2 billion, part of it to buy Orbit Communications Systems. This reduces the risk of deal disruption due to financing, but the key uncertainty remains the timing of the closing and regulatory approvals.

The deal involving a U.S. defense contractor underscores the strategic value of niche satellite communications technologies. Orbit shares are up about 2.4% since the beginning of the year. There is no analyst coverage.

Mobilicom develops secure communications and control systems for drones and ground robotics that are resistant to interference. In February 2026, the company reported winning a competition to integrate its solutions into a new UAV reconnaissance platform and the first order from an Israeli manufacturer with a future deployment in India. The main driver is the mass adoption of drones and increasing requirements for cyber defense and communication reliability.

The key risks are the small scale of the business and the possible need for additional financing, which for a Nasdaq-listed security could mean share dilution. Mobilicom shares are down 5% since the beginning of the year, while they have gained about 144% over the past 12 months. Litchfield Hills Research maintains a "buy" recommendation with a target price of about $12 versus a current value of about $5.9, implying double-digit upside potential, but also increased risk. The company has two ratings from analysts and both are Buy.

Axon Vision develops computer vision software modules for military platforms - target detection, classification and tracking, including counter-UAVs. In January 2026, the company announced an order from Leonardo DRS for about $350k for evaluation testing of C-UAS systems in 2026. The key driver is Axon Vision's transition from pilot projects to serial deliveries: in case of successful tests, the potential of the US market is significantly higher than the domestic Israeli market, The Defense Post wrote.

According to Globes, the Israeli Ministry of Defense has already purchased dozens of EdgeUAV systems, and Axon Vision reported an order for about $2 million from an Israeli defense customer in 2025. The main risk is commercialization: with strong technology, the military procurement cycle remains long and competition is high. The stock is up 41% since the beginning of the year and has soared more than 100% in the past three months. There is no analyst coverage.

ParaZero Technologies started out as a developer of safe drone landing systems, but today it is focusing on DefendAir, an anti-drone solution for law enforcement agencies. In February 2026, the company announced an additional order for DefendAir from a second unit in the Israeli defense establishment, an important signal of recurring demand, Business Insider wrote.

Potential growth driver remains the expansion of anti-drone defense in Israel and Europe. The key risks are micro-capitalization and high volatility: any pause in orders is quickly reflected in quotations. ParaZero shares are up nearly 65% since the beginning of the year, adding about 12% more on Monday, March 2 alone. There is no analyst coverage.

Does not constitute individualized investment advice.