So far, 2026 has been a down year for the S&P/ASX 200 Index (ASX: XJO).
Bank shares, consumer discretionary and health care have all struggled mightily for the year to date.
Because of this, many investors might have seen their portfolio dip, and experienced some volatility this year.
While it's no reason to panic, some investors might be weighing up adding some allocation towards small-cap or growth shares to provide some increased upside.
The case for investing in small-cap stocks is simple: significant upside potential.
Many of today's largest companies began as relatively small and under-researched businesses.
When a small-cap company succeeds, early investors can benefit from substantial share price gains.
It is also important for investors to understand that many small-cap shares rely heavily on funding, are yet to generate a profit, and can experience significant volatility on results and announcements.
With that in mind, one small-cap worth monitoring is VEEM Ltd (ASX: VEE).
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Company overview
Veem is an Australian Defence manufacturer, designer and manufacturer of disruptive, high-technology marine propulsion and large gyrostabiliser ('gyro') systems for the global yacht, fast ferry and commercial workboat market.
For the to date, its share price has fallen 30%.
On Monday, the company released a trading update.
It announced that it expects revenue for the financial year to be between $50m and $52m with EBITDA between $3.25m and $3.75m driven as previously advised by fulfilment of ASC orders received in late 2025 and the first quarter of 2026.
This will result in a significant increase in defence revenue in 2HFY26 compared to 1HFY26.
VEEM Managing Director Mark Miocevich said:
We have noted FY26 will be a transition year and 2HFY26 has continued to lay the foundations for a stronger FY27. We are pleased with the progress we have made with the factory extension and imminent arrival of machinery which will facilitate this growth into the future.
Morgans weighs in on the ASX small-cap
The team at Morgans increased its price target on this ASX small-cap following the trading update.
The broker said after a challenging 1H26, the company has seen an improvement in 2H26 driven by higher Defence revenue from the fulfilment of ASC orders in hand alongside a recovery in propulsion sales.
VEE has also completed construction of its ~1,000m2 factory extension, with the additional space to accommodate anticipated future growth in propulsion, defence, and engineering. Management expects FY26 revenue of $50-52m and EBITDA of $3.25-3.75m. Reflecting this guidance, we decrease FY26F revenue by 2% to $51.3m but increase EBITDA by 140% to $3.6m.
The broker has subsequently increased its price target to 85 cents per share (from 80 cents) and maintained a speculative buy rating.
From yesterday's closing price of 53 cents, this price target indicates more than 60% upside for the ASX small-cap.
We believe VEE's outlook remains positive with multiple growth opportunities across defence (eg, HII, Northrop Grumman, Hunter Class Frigate Program), propulsion (VEEM Extreme, Sharrow), and gyros (Mark III). While the timing of order flow can be uncertain and may drive near-term earnings volatility, the long-term earnings potential from these opportunities remains significant.
