My Stocks and Shares ISA has largely missed the recent run-up in defence stocks. But could there still be an opportunity for me in a name outside the FTSE 100 and the FTSE 250?
While shares in other defence firms have surged, Cohort‘s (LSE:CHRT) trading below where it was in January. And I think the stock’s well worth considering before the end of the year.
The case for the defence
Cohort is actually a collection of smaller businesses. But instead of machinery or weapons, its subsidiaries specialise in things like surveillance, threat detection, and cybersecurity.
On the face of it, that should fit extremely well with the UK’s government’s focus. The 2025 Strategic Defence Review recommended these as key themes for future investment.
Cohort might expect to benefit, but the latest results were underwhelming. Earnings before interest and taxes (EBIT) are set to be below the previous year’s (admittedly strong) results.
Despite this, the firm’s standing by its full-year guidance for £291m in revenues and £35m in EBIT. And those numbers make the stock look attractive to me with a market value of £523m.
Business model
Cohort has a business model I like a lot. It involves acquiring smaller companies and helping them to grow by providing financial support or enabling them to enter new markets.
The firm operates on a highly decentralised basis. This can be a risky strategy, since it can lead to a lack of oversight and means the firm relies on managers for every individual subsidiary.
There are however, reasons why Cohort takes this approach. Making decisions without going through a central office makes subsidiaries more efficient and responsive to customers.
This is what I think matters most in the long term. And a business like this in an industry that’s showing promising signs of long-term growth could be a very attractive proposition.
A recipe for outperformance?
The strategy of buying businesses and helping them grow is one that has proved successful for a number of other companies. In the UK, Halma and Diploma are both good examples.
It’s no coincidence that these have been two of the FTSE 100’s top-performing stocks over the last 10 years. And that’s without the boost I expect higher defence spending to give Cohort.
This approach isn’t an automatic guarantee of success. It can go wrong if management misjudges a potential acquisition target and there are also examples where this has happened. So far though, Cohort has a good record. And its size means it can look to take advantage of opportunities that are just too small to attract the attention of larger private equity investors.
On the radar
Cohort’s share price has been falling since the middle of the year. And I agree that the stock looked expensive when it was trading at almost £18. At £12 though, the equation looks very different to me. If the stock hangs around at these levels in December, I’ll be thinking seriously about adding it to my Stocks and Shares ISA.
The UK has some outstanding companies that buy businesses and help them grow. Cohort’s one of these and I think it has a good claim to being the most attractive right now.
