Looking back over the last 12 months, it’s clear that defence stocks were some of the best shares to buy in February 2025.
With rising geopolitical tensions and a US push for Europe to rapidly increase its defence spending, defence contractors and suppliers have enjoyed enormous new order tailwinds. And investors have gone on to earn impressive returns:
- Rolls-Royce – up 98%.
- BAE Systems – up 51%.
- Babcock International – up 106%.
- Serco Group – up 84%.
But the question now is, are defence stocks still among the best shares to buy in 2026?
More growth potential?
Splitting £10,000 equally across these four defence stocks a year ago is now worth roughly £18,475 today before counting dividends. But if someone were to invest £10,000 today, what can they expect to have a year from now?
Institutional analysts have been asking the same question. And after analysing the new growth tailwinds these businesses are aiming to capitalise on, they’ve published a range of share price forecasts.
| Company | Analyst | Share Price Target | Potential Gain |
| Rolls-Royce | BofA Securities | 1,600p | +21% |
| BAE Systems | JP Morgan | 2,400p | +12% |
| Babcock International | Citi | 1,554p | +12% |
| Serco Group | RBC Capital | 370p | +23% |
It’s clear that the experts think there’s more growth on the horizon. And if these projections prove accurate, then this defence basket could deliver a solid 17% average return by this time next year, turning £10,000 into £11,700.
However, it’s important to recognise that forecasts are never guaranteed. And investors could be left disappointed with weaker results if a surprise spanner, like supply chain disruptions, is thrown into the works.
Nevertheless, a 17% potential gain is certainly nothing to scoff at. And it’s why I decided to take a closer look at this sector, discovering something potentially even more promising.
A hidden opportunity
With most institutional investors focused on the biggest names in defence, relatively little attention has been given to Melrose Industries (LSE:MRO). The industrial turnaround specialist turned aerospace pureplay has undergone a multi-year transformation that has deterred a lot of investors due to the complexity of its accounting.
But with the restructuring now nearing completion, this complexity is beginning to fade away. And the emerging business is showing tremendous promise, in my eyes. Revenues are steadily accelerating by double-digits, underlying profits are following suit, and free cash flow is back in the black for the first time in years.
Yet this may just be the tip of the iceberg.
By 2029, free cash flow is projected to reach £600m, up from the £100m expected for 2025. At the same time, the group’s £3.5bn estimated revenue for 2025 is also expected to reach as high as £5bn over the next three years.
These are certainly some ambitious targets. And they will require management to demonstrate impressive diligence and execution not just in terms of driving growth, but unlocking efficiencies as well – something that’s far easier said than done.
But if it can deliver, some of the latest forecasts are projecting Melrose shares to climb to as high as 840p. That’s roughly 25% higher than where the stock’s trading today, offering more growth potential versus its other aerospace & defence peers.
That’s why I think it could be a far better share for me to buy right now, and why I’ve already added it to my portfolio.
