Conflict and volatility in the Middle East are entering their ninth month, and there aren't many signs that it'll come to an end soon.
In fact, every time instability in the region looks like it's cooling, it quickly spikes back up again.
The best-case scenario is that we can expect a gradual de-escalation in the region, which will slowly return shipping routes to normal and lower inflation concerns worldwide.
But I'm concerned that, rather than winding down, the war could actually escalate a lot further in 2027.
If that's the case, surely governments around the world will need to revisit their defence budget again?
Which could translate into more demand for ASX defence stocks like DroneShield Ltd (ASX: DRO), Electro Optic Systems Holdings Ltd (ASX: EOS), and Austal Ltd (ASX: ASB).
So, should I buy ASX defence stocks before the end of 2026? Has the ongoing war already been priced into the market, or have some of these companies already run past fair value?
Let's take a look.
DroneShield shares
DroneShield shares have fallen around 69% from a year-to-date high in January to $1.47 at the time of writing.
The ASX defence stock started falling following concerns that its growth prospects are out of kilter with its share price growth earlier this year. They accelerated further following a run of announcements. Including news of an investigation by the Australian Securities and Investments Commission (ASIC), a disappointing FY26 result, and some leadership changes.
But it looks like the shares could finally be trading below fair value, and primed to benefit from an increase in demand.
TradingView data shows that half of analysts have a strong buy rating. The average $1.96 target price implies a potential 34% upside over the next 12 months, at the time of writing.
EOS shares
EOS shares are trading at $8.98 at the time of writing. It's been a bumpy ride for the ASX defence stock this year, with its shares fluctuating anywhere between $5.86 and $12.26. They're now down around 10% for the year-to-date.
The share price is highly volatile because, although the company has been able to secure and execute several large contracts, it also suffers from logistical issues and costs, and investor concerns that the shares have run too far ahead.
But going forward, EOS expects continued strong demand, driven by defence spending and escalating global interest in counter-drone technology. And the experts agree that there is a lot more room for growth.
TradingView data shows all analysts have a strong buy rating on EOS shares. The $15.11 average target price implies an upside of around 67%, at the time of writing.
Austal shares
Austal shares have fallen around 47% from an all-time high in January, to $4.61 each at the time of writing.
The shares have mostly fallen off the back of losses in its US shipbuilding division, and also an earnings downgrade earlier this year, which the stock has struggled to recover from.
But there are green shoots of recovery. More recently, there are media reports that the company is still weighing up two competing offers for its US operations. The final verdict could propel the shares higher again.
The experts are bullish too. The majority have a strong buy rating on Austal shares. The $5.68 average target price implies a potential 23% upside ahead for the ASX defence stocks.
The post Should I buy ASX defence stocks before the end of 2026? appeared first on The Motley Fool Australia.
Motley Fool contributor Samantha Menzies has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended DroneShield. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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