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Some of the UK’s top-performing shares of 2025 have been defence companies. But Cohort (LSE:CHRT) hasn’t been one of them – the stock has fallen 20% since the start of the year.
I think, though, that there isn’t a lot wrong with the underlying business. And I can see clear reasons for positivity in both 2026 and beyond as the new year comes into view.
Defence spending
One of the big investment themes of 2025 has been defence. With NATO members set to increase their spending, several military equipment and technology stocks have done well.
Given this, Cohort’s decline makes the stock something of an outlier. But the obvious question investors will be asking is when will it perform if not in a banner year for the industry?
It’s a fair question. And it’s made all the more pressing by the fact that the company has made a number of acquisitions recently that should keep things moving forward.
While the firm’s recent results look relatively weak, I think there’s reason to believe some of the current challenges will be short-lived. So I expect 2026 to be a stronger year for the stock.
Product cycles
In its interim results, Cohort reported a 4% decline in operating income despite a 9% increase in revenues. And it’s fair to say profits going backwards wasn’t on the agenda.
The decline in margins, however, was due to the mix of products in different cycles. The firm’s projects make the most money when they’re in early stages involving design and research.
When they move towards development, they become less profitable as the need for materials and machinery increases. And this is what has been weighing on Cohort’s margins.
The firm, however, anticipates a return to earlier-stage work in the next six months. So there’s reason to think margins – and profits – are likely to recover in the near future.
Under-the-radar
Cohort is something of an under-the-radar company, which is ironic since detection is one of its core competencies. It’s a collection of smaller subsidiaries focused on defence technology.
Instead of aircraft or ammunition, it focuses on communications systems and sensors. And its products often appear in larger defence programmes, rather than as standalone projects.
Acquisitions have been a key source of growth for the company. But this brings an inherent risk of overpaying for a business that’s exacerbated by the firm’s decentralised structure.
A falling share price, however, goes some way towards offsetting this risk. And that’s why I think the stock is worth considering at today’s prices from a long-term perspective.
A defence opportunity
In some ways, Cohort being a supplier of technological systems makes it more attractive than bigger defence firms. It generally means lower capital requirements and higher margins.
This hasn’t been the case recently, which is why the stock is down. But the firm is attributing this to an unfavourable coincidence of projects in later stages of development and delivery.
The company expects this to improve in the near future and if it does, the stock could do very well in 2026. I’ve been watching it for some time and I’m interested in it for my own portfolio.
