That's according to Aron Pataki, global portfolio manager at Newton Investment Management.

As the Australian Financial Review reported, Pataki says the defence sector is a key area he's keeping an eye on in his hunt for growth stocks amid today's rising geopolitical turmoil and environment of fast rising interest rates.

Which could throw up some welcome tailwind for ASX shares with exposure to defence spending.

Russia's war in Ukraine sparks defence spending growth

With inflation rocketing after a decade of 'stubborn absence' and interest rates rising fast following 11 years of stable or falling rates, Pataki sees the advantage returning to active investors over passive investors.

According to Pataki (quoted by the AFR):

For decades, passive investing worked very well. It didn't really matter what you invested in, everything went up, and the mantra was whenever you have a dip, it's a brilliant buying opportunity. But I suspect the world might be more complicated than that going forward. Active investors like us will benefit where you need to be far more selective.

Russia's invasion of Ukraine has spurred governments the world over to rethink their defence spending, with further growth in defence budgets widely forecast over the coming years.

Having invested in global defence giants Lockheed Martin Corporation (NYSE: LMT) and BAE Systems plc (LON: BA), Pataki said defence is among the key sectors to watch "for runaway growth".

Which ASX shares have exposure to the defence sector?

Now, there are no ASX shares that can rival Lockheed Martin or BAE Systems for their sheer size.

At least, not yet!

But a number of small-cap shares trading on the ASX do have significant exposure to increased global defence spending. Though that's largely yet to filter down to their share price performance this year.

Electro Optic Systems Holdings Ltd (ASX: EOS), for example, develops electro-optic technologies for the aerospace market. The company's biggest revenue earner is its defence segment, which manufactures advanced fire control, surveillance, and weapon systems. Despite running sharply higher in the weeks following Russia's invasion of Ukraine, the Electro Optic share price is down 79% in 2022 amid slumping revenue figures.

DroneShield Ltd (ASX: DRO) is another ASX share that stands to benefit from increasing geopolitical tensions. DroneShield provides drone detection and disruption solutions to the defence sectors as well as commercial airports, prisons, and other critical infrastructure. The DroneShield share price is down 3% year-to-date, beating the benchmark performance.

Then there's Codan Limited (ASX: CDA). Codan develops electronics solutions with a strong focus on metal detectors. Codan sells its equipment to both private and government customers. The Codan share price is down 33% this calendar year despite reporting strong FY22 results. Those results included a 16% year-on-year increase in sales and a record underlying net profit after tax (NPAT) of $100.5 million.

Other ASX shares with a footprint in the defence sector worth exploring include Bisalloy Steel Group Ltd (ASX: BIS), Austal Ltd (ASX: ASB), and Quickstep Holdings Limited (ASX: QHL).

The post Could ASX shares in this sector be set 'for runaway growth'? appeared first on The Motley Fool Australia.

While finance and mining, dominated by large caps, have made hay over the past few weeks, it's still a volatile and uncertain time for small-cap ASX shares.

So it's worth being selective about smaller businesses before buying into them.

Cyan Investment Management portfolio manager Dean Fergie recently presented three ASX shares he's holding that are going gangbusters right now:

Australians have higher expectations about deliveries now

Delivery services platform Zoom2u Technologies Ltd (ASX: Z2U) gained a tidy 24% over March, and Fergie expects more growth to come.

"The delivery marketplace is well overdue to be disrupted with the incumbent, Australia Post, not being able to offer competitive delivery times, nor services such as driver tracking (due to union rules)," he said in a memo to clients.

"Zoom2U is well established in this market with a proven commercial driver network and user deployed tracking software. And we expect the news-flow and positive financial results to continue for this exciting business."

Like most tech stocks, Zoom2u has suffered a correction in recent months, dipping more than 29% for the year so far.

For Fergie, the company can take advantage of a recent cultural shift in Australia.

"We believe there is a step-change in customer expectations of delivery times, with the likes of Amazon.com Inc (NASDAQ: AMZN) and the food delivery platforms offering next day, same day or one-hour delivery windows."

A massive contract with Jetstar

Quickstep Holdings Limited (ASX: QHL) is an unusual business that not many investors may have heard of.

But Fergie has held this ASX share for a long time and feels like its time has come after the share price rocketed up 17% last month.

"Quickstep manufacturers composite parts for the F35 fighter jet and C130 bomber, provides commercial aerospace maintenance services, and produces high-end composite products for drone manufacturers."

The Cyan team recently visited Quickstep's Melbourne facilities in person and was told of "significant tailwinds" in all three of its business units.

"Indeed, post the end of March, Quickstep has announced a milestone three-year $30 to $35 million maintenance contract with Jetstar," said Fergie.

"We view this as both financially and strategically significant as Quickstep has dislodged offshore incumbents to bring the maintenance work to Australia."

Cheers to this ASX small-cap

The Mighty Craft Ltd (ASX: MCL) share price remained flat during March, but Fergie feels like it made the "most significant" announcement out of all his holdings.

"On the 30th March, it upgraded its medium-term ambitions for beer production from 12 million to 25 million litres," he said.

"Mighty Craft is having some phenomenal success with its Better Beer brand which is expected to sell four million litres in FY22 despite only launching in November 2021."

As a brewing and distillation company, Mighty Craft is a natural beneficiary of the post-pandemic life as customers flood back into pubs and clubs.

But even considering that, Fergie reckons the business is outperforming.

"It is enjoying an outstanding recovery from the challenges of COVID," he said.

"We currently see a real disconnect between the current share price and true value of the Mighty Craft group of assets and brands, and expect [a] material re-rate when market conditions improve for emerging companies."

The post Beers and planes: 3 ASX shares killing it right now appeared first on The Motley Fool Australia.

Let's take a closer look and see what the carbon fibre composites manufacturer updated the ASX market with.

Business update

Investors are selling down the Quickstep share price after the company revealed a disappointing update.

According to its release, Quickstep advised it has received notice from Chemring Australia that its tender for the MJU-68B flare housings contract has not been successful. This follows a recent proposal in which Quickstep would supply MJU-68 decoy flares from its custom-built flare housing manufacturing facility during FY21 and FY22.

As a result of the decision, Quickstep has issued a formal protest to both the United States and Australian Departments of Defence. The company stated that it will provide an update to its shareholders if there are any further developments.

Quickstep noted that its FY21 guidance released in its half-year results did not include the proposed supply of MJU-68B flare housings.

Quick take on Quickstep

Founded in 2001, Quickstep is an Australian-based company focused on providing advanced composite materials for important industries. These include aerospace, defence, marine, automotive, and other transportation sectors.

Most notably, the company has an impressive list of clients such as United States behemoths, Northrop Grumman, and Lockheed Martin. In addition, BAE Systems and Boeing are also recognised partners of Quickstep.

Quickstep share price snapshot

The Quickstep share price has moved around 8% higher in the past 12 months but is down roughly 28% year to date. The company's shares were hit particularly hard during the middle of February, a week before it revealed its half-year scorecard.

Based on current valuation grounds, Quickstep has a market capitalisation of about $47.2 million, with over 716 million shares outstanding.

The post Why the Quickstep (ASX:QHL) share price is sinking 8% today appeared first on The Motley Fool Australia.

Four ASX shares that have failed to follow the market higher today are listed below. Here's why they are tumbling lower:

Brainchip Holdings Ltd (ASX: BRN)

The BrainChip share price has fallen 4% to 72 cents. This is despite there being no news out of the artificial intelligence services company today. However, it is worth noting that its shares are up 33% in the space of a month, even after today's decline. As a result, it looks as though profit taking could be weighing on the BrainChip share price today.

Crown Resorts Ltd (ASX: CWN)

The Crown share price is down almost 2% to $11.76. This decline also appears to have been driven by profit taking. With the Crown share price jumping 21% on Monday following a takeover offer, it appears as though some investors are cashing in now. Especially given how close Crown's shares are trading to the offer of $11.85 cash per share.

Qantas Airways Limited (ASX: QAN)

The Qantas share price has fallen over 2% to $5.21. A number of travel shares have come under pressure today. Investors may be concerned that the terrible floods in New South Wales and South Queensland could impact the Easter holiday period.

Quickstep Holdings Limited (ASX: QHL)

The Quickstep share price has sunk 8.5% to 6.5 cents. This follows the release of an update by the aerospace company after the market close on Monday. According to the release, Quickstep has been informed by Chemring Australia that its recent proposal for the supply of MJU-68B flare housings has not been successful. The company advised that the grounds for this decision are contestable. As a result, Quickstep has initiated a formal protest to the United States and Australian Departments of Defence.

The post Why BrainChip, Crown, Qantas, & Quickstep shares are tumbling lower appeared first on The Motley Fool Australia.

The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In this edition, Cyan Investment Management director and portfolio manager, Dean Fergie, reveals two Aussie businesses that are winning big contracts, and some ASX-listed foreign companies to avoid.

The Motley Fool: What's your fund's philosophy?

DF: Our philosophy is to find smaller, less well-known stocks that are commercially proven but not well-recognised and likely to go through a sustained growth phase for the next 3 to 5 years or more. 

We tend to avoid really speculative businesses and businesses that are mature, and look for the next ones that are up-and-coming.

MF: So is it fair to say that your investments are focused on smaller cap?

DF: Yeah. Our philosophy is that the bigger you get, the harder it is to grow at double digit-plus rates. So by definition you have to look down at the spine of the market.

COVID-19 crash 

MF: How's the fund going this year with all the volatility?

DF: The short answer is volatile. We took a lot of pain when COVID first came out and then have retraced some of that and more since that time.

MF: Did you manage to buy anything during the March dip?

DF: We bought quite a few stocks. I think we played it reasonably well. But you can probably always do a little bit better in hindsight. 

What I saw is the stocks or the funds that were really defensively positioned in March did really, really well. Then in April and May they all did relatively poorly and vice versa. 

We made some smart investment positions, but did we put all our money into that cohort of tech stocks that have done exceptionally well? No, unfortunately not.

I think more than ever it's a really important time to be diversified. Because if you've got all your stocks in a really defensive basket, or a really aggressive basket, or technology-laden, or value-based, there'll be times when you'll do incredibly well and times where you'll do incredibly poorly. And it's very uncertain when those periods are going to be. 

Buying and selling 

MF: What do you look at closely when considering buying a share?

DF: The ability to scale… Obviously that leads to technology businesses, specifically software, but also businesses that can grow organically or that are embarking on potentially a new kind of business angle that's not largely been explored already. 

We look at a lot of tech businesses, financial services, and we're quite big in education. We've dabbled quite successfully in some food businesses — one of our early investments that was successful was Bellamy's Australia Limited (ASX: BAL). Professional services as well.

MF: What triggers you to sell a share?

DF: Disappointment in terms of management execution, or potentially if there's new competitors to come into the market, or just companies [that] disappoint on an earnings front. 

If you think you're losing money on something, or if something's changed, just sell out. Take the capital loss and move into something that's more successful. That's the way we look at things.

MF: Even if the company is doing reasonably well, would you sell out because it's reached a certain target that you might have set for yourself?

DF: Yeah, there's an element of that. I guess what happens is that if you have stocks that become very successful, they become quite a large part of your portfolio. We have a hard limit of not having any one position more than 10% of our portfolio. So when you have businesses that rise exponentially, you're forced to sell them down. I think that's sensible. 

One of the beauties of stocks is that you have these incremental changes to your holdings. It's not like buying a house where you're either all in or all out. You can fine-tune your exposure to stocks relatively easily and cost-effectively. 

That's one of the great advantages of the stock market that I think a lot of investors don't really take advantage of. They want to buy everything at the bottom and sell everything at the top, and that's unrealistic. 

So we just buy more stocks at lower prices and sell more of them at higher prices, and not try and be too binomial about those decisions.

What's coming up?

MF: Where do you think the world is heading at the moment?

DF: I wouldn't be alone in saying that the broader economy has got a lot of challenges ahead. But what we're seeing in 2020 is that there's been a massive disconnect between economic outlook and the stock market. They just don't reflect each other anymore. 

A lot of that has actually been driven by incredibly low interest rates. Just emotionally, investors don't want to leave their money in any kind of defensive asset class if it's not giving them any return. 

So every opportunity where there's a market dip, they've looked at getting into the stock market. And even the biggest funds, the pension funds, and massive super funds tend to be allocating more towards equities. On top of that, you've got a massive amount of retail day traders in the market sending stocks sky high with massive volumes. 

So whilst I think the near-term economic outlook does look challenging, I don't think it's necessarily a bad thing for the stock market because even if you've got businesses that are earning 3% or 4% earnings yields and potentially 1% or 2% dividend yield fully franked, that's a better outcome, if you're prepared to take the capital risk, than leaving your money in the bank right now.

At the end of the day, that's what drives the stock market, demand versus supply.

MF: That situation you just described, do you think it's a fundamental structural change that's here to stay? Or do you think the situation will return back to "normal"?

DF: It will depend on the direction of interest rates. They clearly can't go very much lower unless they go negative and I don't think that's looking like a realistic outcome. 

I would suggest that a lot of that rotation into stocks has already happened. The All Ordinaries Index (ASX: XAO) is not back to pre-COVID highs, but it almost is. Certainly the smaller end, the Emerging Companies Index, is 10% above where it was pre-COVID. 

So you're seeing a lot of money flow back into the stock market really, really aggressively. And it almost creates its own demand. It's almost like this elastic band in that you rail against the bullishness of the stock market till it runs so far that you just give up and cave in — and go and buy stocks like everyone else. 

But there are patches of the market that look crazily overvalued.

When we saw a potential vaccine come out and all those tech stocks tumble within the space of a day, I think that was a little bit of a warning sign — a canary in the coal mine — that it just can't go on forever. 

Sooner or later, all investors are going to come back to buying things on fundamentals. 

Overrated and underrated shares

MF: What's your most underrated stock at the moment?

DF: One stock that we've held for a while and just hasn't performed like we expected is a business called Quickstep Holdings Limited (ASX: QHL), which is an advanced carbon fibre manufacturer. 

They do a lot of work for the defence force… It's capped at sort of $60 million [market capitalisation], it does about $80 million in revenue, and is moderately profitable. 

They just penned a deal to buy a maintenance division of Boeing Co (NYSE: BA), which will add to their revenue. We look at that on just basic earnings multiples and revenue multiples and think it looks really cheap. 

Then when you look at it versus a number of these other advanced manufacturers in terms of like Titomic Ltd (ASX: TTT), AML3D Ltd (ASX: AL3), and Amaero International Ltd (ASX: 3DA)… it just looks ridiculously good value. So that's one we like. 

It's been a long slog for them to get where they are now, but they've got a lot of cash on their balance sheet. Contracts with global defence force businesses like Boeing, Lockheed Martin Corporation (NYSE: LMT) and Northrop Grumman Corporation (NYSE: NOC) — I just think it looks like a no-brainer in terms of a business to buy into, but the market just hasn't recognised it yet.

Another one that's going great guns at the moment is a hospital software provider called Alcidion Group Ltd (ASX: ALC). Again, they just signed a $9 million deal with a hospital in the UK. And they've got more than 20 million bucks in recurring revenue. They're getting very close to profitability. Global rollout. Reference sites.

MF: I see that one's spiked up this month?

DF: Yeah. It hasn't really done too much in the last 6 to 12 months. Everyone got pretty excited, went from I think about 6 cents to about 30, and has sort of come back.

With a lot of stocks, they run on momentum and then they kind of lose a bit of momentum and people get bored and they want to be on the next big thing regardless of what it is. So often you need a new contract or something new to excite people about it. 

I think [Alcidion]'s one of these businesses that just hasn't been big on announcing new contracts, but they've signed some that are really, really significant for a business that size. 

And you've seen that with the success of companies such as Pro Medicus Limited (ASX: PME) and the like. When those businesses get some success, certainly overseas, they can become very, very big businesses. 

MF: What do you think is the most overrated stock at the moment?

DF: I look at businesses like these Israeli technology ones like Weebit Nano Ltd (ASX: WBT), Dotz Nano Ltd (ASX: DTZ), Audio Pixels Holdings Ltd (ASX: AKP). 

They're all speculative businesses that are doing nothing in terms of revenue, keep sucking in investor cash, and don't make money. And they've got valuations in the hundreds of millions of dollars and I'm not necessarily sure that they've got anything particularly special. 

I'd say the same thing about businesses like Titomic — [they] don't really do much and they're still capped at a couple of hundred million bucks.

MF: Do you think there's a phenomenon these days of amateur investors egging each other on in internet forums?

DF: Oh, no doubt. A lot of investors will buy stocks because they're going up. It's pure speculation, but they just want to be in something because they think it'll be worth more next week than this week, not because they understand it, not because they think they're buying it at a cheap price, just simply because it's going up. 

You look at Kogan.com Ltd (ASX: KGN), Temple & Webster Group Ltd (ASX: TPW), Adore Beauty Group Ltd (ASX: ABY) as well. They've all got good business models, but the selling product online is not necessarily a business that's got huge barriers to entry. I mean, anyone can open up a Shopify store. 

Sure, you don't have the customer base, you don't have the reputation, you don't have the buying power, but they're not businesses that I think should be trading on 6 times sales and 100 times earnings. I can't see them scaling up any time soon. 

There's a lot out there that I would be very, very wary of on a purely valuation perspective.

Looking back

MF: Which stock are you most proud of from a past purchase?

DF: Afterpay Ltd (ASX: APT) is the obvious one. 

MF: Do you still hold it?

DF: No, we sold out a while ago. 

One that we bought quite a while ago is RAIZ Invest Ltd (ASX: RZI). That one did struggle for a while. It's an online investing platform — I think they offer a really, really good product. Their app's got great functionality. 

They're getting a lot of long-term customers — more people are interested in investing. I think that's a business that's got tailwinds from the structural change that people want to think more about investing in stock markets and not leave their money in the bank. 

Secondly, it's a technology play and it's getting good growth both here and they're looking to launch overseas as well. So that's one that I think will go really well. 

But probably our two biggest winners we've ever had are Afterpay and Bellamy's and, oddly enough, we made a lot of money out of Experience Co Ltd (ASX: EXP) for a while before it kind of went really badly.

Stocks never go up and down in a straight line. And that's one where we got in early and managed to get out enough of them that we ended up getting a good return for our portfolio over a period where it went up 2 or 3 times before they… struggled a little bit.

MF: Has COVID-19 changed or altered your investment methods at all?

DF: What's happened is that investors, if you think of yourself as a traditional strong "numbers and valuation" player… then you would have left a hell of a lot of money on the table. 

I think you're naive to think that the market is just driven by valuations. It's not. It's driven by sentiment, excitement, enthusiasm, momentum, those sorts of things. And they will drive stocks much higher than might be, in your view, intrinsic value. And they can all disappear overnight. 

So you've got to appreciate that there's a lot of other drivers in the market other than pure financial fundamentals and try and kind of second guess where other investors are going to either see risk or opportunity in the market — and try and take advantage of that.

Advice for your readers is try and blend a little bit of fundamental analysis with what you see as an opportunity and excitement towards positions. 

Probably the highest profile stock float this year has been Adore Beauty because it's a mainstream business. A lot of females know about it. It's run by a female founder. It's a great news story. 

But it was, we thought… incredibly expensive. 

People I saw were saying "Oh look, you know, there's a girl… and she wants to buy shares because she thinks it's a really good company." 

You've got to put a framework of what you're buying around it. What are you getting for your money? And if you don't know that, you shouldn't really be investing because it's not that straightforward.

The post This cheap ASX share is supplying US giants: fundie appeared first on The Motley Fool Australia.

At the time of writing, shares in the carbon fibre composites manufacturer are trading up 4.94% to 8.5 cents.

What's the agreement?

Quickstep has agreed to the terms to purchase Boeing Defence Australia's aerospace maintenance, repair and overhaul (MRO) capability.

Base in Tullamarine, Victoria, Boeing Australia Component Repairs (BACR) manages a wide range of aircraft structures for both commercial and military use. The company fields recent experience working with Boeing, Airbus, Embraer and Bombardier aircraft. This includes fighter aircraft such as the F/A Hornets, military transport planes C-130J Hercules and helicopter CH-47 Chinooks.

In addition, Quickstep advised it was seeking to expand the scope of MRO work offered. The company hopes to carry out service functions on the stealthy F-35 jet alongside other military and commercial contracts. As key approvals all require major regulatory bodies to be on board, Quickstep is working towards obtaining the certifications needed.

Terms of the deal

Under the purchase agreement, Quickstep will acquire operating assets, inventories and certain contracts from BACR for $2.64 million.

A top tier Australian bank has committed to funding the purchase of a refinanced package for Quickstep's existing long-term loan. Pleasingly for the company, the rate will be offered at a reduced margin.

Completion of the deal is expected to be at the end of the calendar year, provided Quickstep obtains necessary approvals. It's anticipated that the acquisition will be positively contributing to earnings per share (EPS) by the second year of operation.

Should BACR terminate the agreement if Quickstep fails to uphold its end of the bargain, a termination fee will apply. This will be payable to BACR for the amount of $2 million.

What did management say?

Commenting on the acquisition, Quickstep CEO Mark Burgess said:

We are delighted to soon be welcoming highly capable aerospace employees from the BACR business to Quickstep. The acquisition of this important national capability aligns well to our business strategy, positions us to grow our defence sustainment business and opens up new opportunities in the high value commercial aftermarket as we move toward post- pandemic recovery.

Boeing Defence Australia, vice president and managing director Scott Carpendale added:

We're pleased that this agreement will offer Quickstep the ability to grow its unique sovereign capability to the benefit of regional commercial and defence customers. We look forward to continuing to work with Quickstep on new opportunities to increase their support of Boeing customers locally and globally.

Quickstep share price summary

The share price for Quickstep hasn't been too positive for the past year. Shareholders would have seen their value drop by more than 40% if they bought 12 months ago. However, the Quickstep share price has made a strong recovery in November alone, gaining more than 15% from 7 cents.

The post Why the Quickstep (ASX:QHL) share price is up 5% today appeared first on The Motley Fool Australia.

In late-morning trade, shares in the aerospace manufacturer are up 4% to 7.8 cents after earlier reaching as high as 8.1 cents.

Let's see how the Quickstep share price performed for the first quarter of FY21.

Trading update

For the period ending 30 September, Quickstep reported a robust performance while crediting its risk management process for COVID-19.

Total sales came to $22.6 million, an increase of 16% over the prior corresponding period. This is in line with production efforts at its facilities, which are continuing to meet all contract delivery schedules.

Operating cash flow was $1.4 million after funding headcount reductions to deliver annual savings of $1.5 million. The cost to implement these changes was $500,000. Quickstep said that inventory management was crucial in mitigating COVID-19 supply chain risks.

Net bank debt decreased by $800,000 over Q1 FY20 to $5.6 million. Total debt including capitalised interest stood at $8.8 million.

The company recorded a cash balance of $2.5 million at the end of the quarter, up from $1.7 million on June 30. Furthermore, $700,000 is available in restricted term deposits.

Operational highlights

F-35 fighter jet

Quickstep noted that its F-35 production contract is continuing at full-rate, and is being delivered to plan. The first batch of its components are on track, with the 10 new parts awarded by defence giant, Northrop Grumman. All remaining shipments are due to be delivered by the end of the current calendar year.

Volume production on the F-35 vertical tails contract with Marand has amplified over the past 12 months.

MJU-68 decoy flares

Quickstep has completed testing on the final batch of MJU-68 flare housing. The company is awaiting formal approval from the United States Department of Defence before the end of 2020 and is in discussions to address production requirements.

The countermeasure program's objective is to establish a reliable secondary source of income for Quickstep.

C-130J transport plane

Demand for the C-130J military aircraft has been consistent, and negotiations are taking place with Lockheed Martin on new product initiatives.

Micro-X Nano lightweight xray machine

Production is ongoing, and the machine is being used by medical staff in the fight against COVID-19. Contracted deliveries are running through FY21, including the latest Lockelec train ramp.

Outlook

Quickstep said its outlook for the remainder of FY21 was strong. Customer revenues are expected to increase between 5% to 10%, excluding any major contract wins. In addition, commercial aerospace production volumes look to stabilise in the next 12 months, with full recovery anticipated in FY23.

The company will focus research & development spend on implementing its AeroQure process in the commercial aerospace market. While current volumes are down, the company believes AeroQure's cost reduction offer over rival firms can win new customers.

No material guidance was given for the end FY21, but Quickstep foresees further opportunities emerging post COVID-19.

The post The Quickstep (ASX:QHL) share price is shooting higher today. Here's why appeared first on The Motley Fool Australia.

How did Quickstep perform in FY20?

Quickstep is a global provider of advanced composite solutions to the aerospace, defence, automotive and other advanced manufacturing sectors. This year's significant growth was due to contributions from many existing clients and projects. 

For instance, the company provided increased volumes on the Lockheed Martin C-130J Hercules wing flaps, as well as securing additional market share on F-35 Vertical Tail and a new order for 10 additional F-35 centre fuselage parts. This was combined with new orders in rail and medical devices. FY20 also saw Boeing emerge as an increasingly important partner for the company. 

As well as the headline 44% increase in NPAT, financial results were strong throughout FY20. For instance, Quickstep saw an increase in total sales of 12% compared with FY19, and was able to achieve a statutory earnings before interest and taxes margin of 10.1%.

The company also continued its efforts to increase efficiency. In FY20, this included beginning the move to a paperless workshop floor, new Eastman cutting machines, and optimised materials cutting. The latter has lead to $100,000s in savings per annum.

Optimistic future outlook

In addition, the company disclosed an optimistic view of the future. For example, recently announced increases to Commonwealth defence expenditure, and changes to procurement regulations, represent potential significant additional tailwinds.

Moreover, Quickstep highlighted the opportunity in sectors like unmanned aircraft, guided weapons and aircraft maintenance, repair and overhaul. Accordingly, the company expects to make further investments in domestic business development.

At the time of writing, the Quickstep share price is 1.32% up for the day at 7.7 cents per share.

The post Quickstep (ASX:QHL) share price edges up on positive FY20 results appeared first on The Motley Fool Australia.

Both Australia and Japan have a well developed defence contracting sector. Therefore, I think it will be the more innovative companies in the sector that will benefit from this strengthened relationship. That is, companies with one-of-a-kind technology. Here's a closer look at 3 ASX shares that fit the bill.

Space technology

Electro Optic Systems Hldg Ltd (ASX: EOS) is one of Australia's leading defence companies formed in 1983 from the privatisation of Commonwealth of Australia space activity. Its products are based on proprietary sensor technology. 

The company is continually developing technology to help with over 500,000 pieces of space debris travelling at around 30,000 km per hour. This represents a serious threat to satellites, the international space station and more.

In this area, Electro Optic has an Australian-based space situational awareness (SSA) network. This monitors and tracks orbiting space-based objects. For instance, satellites and debris, using ground-based radar and optical stations.

The company also uses its sensors in the development of vehicle mounted, battle tested, remote weapons stations. Consequently, last Friday, Electro Optic Systems announced that it was in negotiations with the Commonwealth Government for 251 remote weapons stations (RWS) to be purchased over 12 months.

Artificial intelligence

Brainchip Holdings Ltd (ASX: BRN) is a company working in artificial intelligence (AI). It was started by a 40-year pioneer in information technology, a professional who is still with the company as its chief technology officer. The company already has successful AI products and is currently working on a first-of-its-kind technology, a neuromorphic system-on-a-chip.

Neuromorphic systems are large-scale systems of integrated circuits. Therefore, as the name implies, they mimic the human nervous system. Neuromorphic computing is considered the 5th generation of artificial intelligence by the Artificial Intelligence Board of America. 

The company has existing products used across defence and security already. It is a leading provider of security software to the casino industry for a range of security applications such as currency identification, player behaviour patterns, and game table operations.

Major airports use the product for facial recognition of terrorist suspects. In addition, unnamed European police departments have deployed the product in subways to search for known criminals. 

With the new product in advanced stages of development, the potential for further application of a system that learns for itself is very broad.

Advanced composite materials

Xtek Ltd (ASX: XTE) is a company with a patented technology called XTclave for curing and consolidating composite materials. The company has already installed an industrial sized machine in their Adelaide premises. This is large enough to support ~$40 million in revenues per year, and Xtek is also looking to install another one at its recently acquired US base.

Xtek's technology manufactures high-quality void-free, precision ballistic and structural composite solutions. This includes, armour, lightweight tactical and human carriage equipment, robotic mechanical systems and unmanned craft.

For instance, the company is the primary provider to the Australian Department of Defence for portable X-ray equipment, demolition remote firing systems, and explosive ordinance robots. Furthermore, it sells the Xtek Tac2 Sniper Rifle as well as small unmanned aerial systems (SUAS). Agencies of the US Department of Defense and allied military services use the latter.

Finally, the company also manufactures a range of ballistic armour, which is up to 30% lighter than current benchmarks due to the company's patented technology.

Foolish takeaway

The Australian defence sector is large and includes other great companies like Austal Limited (ASX: ASB), Quickstep Holdings Limited (ASX: QHL), and Bisalloy Steel Group Limited (ASX: BIS).

However, in the case of closer Australia and Japan ties, I think those companies offering a hard to replicate capability are more likely to see early success. 

Moreover, all of the companies mentioned also have either direct applications, or potential applications, in space exploration. 

The post 3 ASX shares that could benefit from Australia and Japan deepening ties appeared first on The Motley Fool Australia.

"We have moved into a new and less benign strategic area, one in which the institutions and patterns of cooperation that have benefitted our prosperity and security for decades are now under increasing, and I would suggest, almost-irreversible strain".

The Prime Minister's many references to the Indo-Pacific region also raises the possibility of additional defence spending from other countries in our region over the coming years.

Which ASX shares are likely to benefit from the defence spending spree?

Some of the companies below already have sizable contracts with the ADF. Others are likely to see increases in revenue from this newly announced spending program. Less clear is the impact on ASX shares of any additional regional spending resulting from increasing global tensions.

Shipbuilding

The announcement of the $270 billion investment in Australia's defence forces made mention of ship building activities already underway. On 1 May, Austal Limited (ASX: ASB) announced it had won a $324 million contract from the Royal Australian Navy to design and construct 6 Cape-class patrol vessels. This addition will grow the nation's fleet to 18. Furthermore, in June the company announced a US$43 million modification to a previously awarded Littoral Contract Ship (LCS) contract with the United States Department of Defence. 

Highlighting the importance of Austal to the US defence forces, the company also announced in late June the provision of US$50 million in funding from the US government. This is to maintain, protect, and expand US domestic production of steel shipbuilding capabilities for capital projects over the next 24 months.

In February, Austal had a forward order book of $4.9 billion and has announced several contract wins during the lockdown period. In fact, the company upgraded its earnings guidance for FY20. It is on schedule to deliver earnings before interest and taxes of $125 million, up by $15 million or 13.6% on the prior corresponding period.

Advanced weaponry

Electro Optic Systems Holdings Limited (ASX: EOS) saw its share price rise by 23.31% on Monday. This was on top of a 10.8% increase the previous week. 

The company has been hot property since the Prime Minister's speech. On Friday, Electro Optic Systems announced that it was in negotiations with the Commonwealth Government for 251 remote weapons stations (RWS) to be purchased over 12 months. Electro Optic is the global market leader in lightweight remote weapons systems.

The company sells a range of products for the defence sectors. These include a communications platform it recently acquired after purchasing the satellite communications business, Audacy Corporation. So while it is an early beneficiary of the $270 billion defence spending, I certainly don't think this will be the last contract the company will win under the plan. 

While Electro Optic is necessarily opaque, we do know it has a range of active defence contracts with various navies in NATO as well as previous RWS sales in South East Asia. I expect Electro Optic will continue to benefit from additional sales within the South East Asian region in the near future. 

Defence materials

There are a number of small-cap defence contractors with proven track records listed on the ASX. Many of these are likely to benefit from increased defence spending both locally and from within the region. 

One such example, with a market cap of $71 million, is Quickstep Holdings Limited (ASX: QHL). The company is Australia's leading independent manufacturer of advanced carbon fibre composite components. These are used across the defence aviation sector. 

Quickstep is an approved supplier for the international Joint Strike Fighter (JSF) program – the largest military aerospace program in the world. Quickstep supplies more than 30 individual components with content on every aircraft produced. It has has an international client base and saw total sales lift by 14% in H1 FY20.

Unlike Electro Optic and Austal, this company is not a primary supplier of machines, it provides materials to others. Nonetheless, it has a rolled gold client list, including; Lockheed Martin, BAE Systems, and Boeing Defense. As defence spending rises not only in Australia but also within the region, I expect Quickstep to be a beneficiary.

The Quickstep share price has jumped 25% since the Prime Minister's speech outlining the $270 billion defence plan.

Foolish takeaway

The companies listed above are active defence contractors with robust and largely local supply chains. Additionally, all three have mature manufacturing capabilities and are trusted suppliers to both the ADF and US defence forces. As the $270 billion defence spending starts to roll out, I'm confident these companies will benefit, both locally and internationally.

The post 3 ASX shares for the $270 billion defence plan appeared first on The Motley Fool Australia.

While the following companies may not make you the kind of wealth that Henry Ford accumulated from the automotive sector, they could well help drive your portfolio higher.

AMA Group Ltd (ASX: AMA) provides investors with exposure to numerous auto sector markets, including panel crash repair, vehicle protection products such as bull bars, and the wholesale distribution of automotive accessories. The group reported a flat profit year-on-year in financial year (FY) 2014 of $8.7 million. With management confident that it can consolidate the panel crash repair industry, AMA could be set for solid growth in the coming years.

ARB Corporation Limited (ASX: ARP) has been an outstanding investment for many investors with the company growing its earnings over the past decade thanks to a suite of popular vehicle accessories such as roof racks, bull bars and canopies. The stock price has increased by 143% in the past five years and has outperformed the S&P/ASX 200 (INDEX: ^AXJO) (ASX: XJO) over the last year with a gain of 13.5%. While the mining boom has put a dent in ARB's growth profile, the quality and popularity of the company's products should see the group continue to do well.

Quickstep Holdings Limited (ASX: QHL) is a relative minnow on the ASX with a market capitalisation of just $70 million, but it already boasts some major contracts which should see significant revenues flow to the group over the next two decades. Currently Quickstep's patented manufacturing technology – which efficiently produces an advanced composite – is primarily used in the aviation industry with contracts for producing composite parts for the Joint Strike Fighter projects. However, Quickstep's capabilities are also expected to become increasingly popular within the high-performance and electric powered car manufacturing process.

The post 3 stocks that could drive your portfolio higher appeared first on The Motley Fool Australia.

To pick winners accurately is arguably more art than science in the micro-cap end of the market and investors need to do substantial qualitative research, tyre kicking, and competitor analysis.

The following three stocks all have market capitalisations under $70 million, exciting technology and potential to reach much higher levels.

Quickstep Holdings Ltd (ASX: QHL): Market cap $69.6 million

Quickstep has developed technology allowing for the speedy, accurate and high durability manufacturing of composite components for industries including automotive and aerospace. So far its major orders have come from large projects connected with the U.S. and Australian Air force including the high profile Joint Strike Fighter for which the company is manufacturing parts.

Bluechiip Ltd (ASX: BCT): Market cap $9 million

Bluechiip has developed a novel wireless tracking solution which has numerous applications and does away with the need for labels, bar codes or radio frequency identification devices (RFID). The company is still in the early stages of gaining acceptance, but has a potential customer base which includes the healthcare, defence and logistics industries.

Atcor Medical Holdings Limited (ASX: ACG): Market cap $14.2 million

Atcor has developed the SphygmoCor system which it describes as the "global gold standard in diagnosis and patient management, pharmaceutical clinical trials and research." The system provides a quick and non-invasive method for obtaining data such as central blood pressure and arterial stiffness. It's difficult to predict the outcome of this system but the market potential would appear very large.

The post These 3 innovative technology companies could be set to soar appeared first on The Motley Fool Australia.

There is perhaps just one disadvantage about large cap stocks – they are not small! "What?" I hear you gasp. You see, the law of nature is that big things usually struggle to get bigger. While growth brings its own complications, the wealth which can be gained by owning a fast growing, small company is certainly desirable.

So while the following three stocks may not suit all investors, if you are looking to own a portfolio of stocks which can grow at an above average rate to meaningfully increase your wealth by the time you retire, then small and mid-cap stocks are often the place to be looking.

Here are three companies which are reporting growing sales and could be worth keeping an eye on.

1) Quickstep Holdings Limited's (ASX: QHL) share price has rallied 33% over the past 12 months. In comparison the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) is up around 14%. The carbon fibre manufacturer has had a number of exciting announcements recently including the receipt of a new US$11.2 million purchase order for 19 sets of wing flats for the Lockheed Martin C-130J Super Hercules aircraft. Quickstep is also manufacturing parts for the F-35 Lightning II Joint Strike Fighter.

2) Dicker Data Ltd's (ASX: DDR) share price has soared 84% in the past year. The firm recently completed a company transforming acquisition and as a result underlying pre-tax profits in FY 2015 are expected to jump to $30 million, which roughly doubles the earnings base of the company pre-acquisition. Going forward Dicker Data is also forecasting it will capture significant synergies, of which only around $6.5 million are captured in the FY 2015 guidance.

3) RHINOMED FPO (ASX: RNO) is an early stage medical device company whose share price has gained 31% over the last year. While the results are obviously off a very small base, Rhinomed's respiratory and nasal technology has recorded a jump in earnings from $9,000 in the March quarter, when its Turbine product was launched, to $201,000 in the June quarter.

The post 3 small-cap stocks for your watchlist appeared first on The Motley Fool Australia.

Zenith's results also highlights the significant "value add" which can be accomplished by stock picking and particularly by avoiding losers. Another advantage of focusing on smaller companies is their potential to grow revenues and earnings at much faster rates than larger, more established firms.

The following three firms all have exciting products and businesses which appear to be at inflection points that could see them grow substantially in the next few years.

1)      Newsat Limited (ASX: NWT) was listed on the ASX in 1999. In 2005 the company acquired Australian land-based teleport assets in Perth and Adelaide. In 2011 Newsat acquired seven orbital slots which have allowed it to progress its plan to transform the company into a satellite owner and operator. With the completion and launch date for the first satellite approaching, Newsat is set for a company changing event.

2)      Quickstep Holdings Limited (ASX: QHL) is best known for providing advanced composite material parts to the Joint Strike Fighter (JSF) program. Its contract wins are thanks to the patented manufacturing technologies that Quickstep has developed which allows it to build high strength, high performance parts at a competitive cost. With current contract wins that are forecast to potentially produce over $800 million in revenues, the company is set to boost revenues substantially from current levels.

3)      Nearmap Ltd (ASX: NEA) provides geospatial mapping technology for clients ranging from corporates to governments through a clever combination of a busy plane taking high definition aerial photographs and  software that provides easy-to-use and useful delivery of its product to clients. The company's revenue and bottom line have been growing rapidly since the implementation of a new subscription business model, with Nearmap recently reporting revenues of almost $8 million and net profit after tax of $760,000 for the half year.

Foolish takeaway

Not everyone is comfortable owning small caps, preferring the comfort of owning large, blue-chip stocks that everybody else owns. This "comfort amongst the crowd" can create wonderful opportunities for investors prepared to seek out opportunities amongst less followed and less researched smaller companies.

The post Take flight with these 3 small-cap stocks appeared first on The Motley Fool Australia.