Investable Theme Opportunities Increasing for Small Caps Tied to Defense Spending
An increase in spending by the U.S. Department of Defense over the next several years is providing opportunity for a number of small-cap companies providing technology and other services to the government.
The U.S. defense budget is transitioning from a period of decline to a period of multi-year growth. 2013 was the inflection point in the overall budget and we think this trend should continue as the past two “up cycles” have lasted 10+ years each. Technology and cyber spending within the budget is growing faster than the overall budget. In addition, the competitive environment within Federal IT Services is also improving as many of the large prime contractors are either exiting the business or de-emphasizing this area, which is allowing smaller companies to gain market share. As a result, we are seeing record backlogs (which represents orders) for small-cap IT service companies.
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