Baron Capital, an investment management company, released its Q2 2026 investor letter for the "Baron Small Cap Fund." Baron Small Cap Fund gained 12.57% (Institutional Shares) in the second quarter, trailing the Russell 2000 Growth Index's 25.71% return. A copy of the letter can be downloaded here. U.S. equities rebounded sharply after March's selloff related to the U.S.-Iran conflict, with AI infrastructure, semiconductors, and other technology stocks driving much of the market's gains.
Small caps also outperformed large caps, although performance remained concentrated in high-Beta and Momentum stocks, areas where the Fund has historically had less exposure. The Fund benefited from several AI-related and industrial holdings, but software and services stocks remained pressured by concerns that AI could disrupt their businesses. Looking ahead, management believes broader market participation, attractive small-cap valuations, improving industrial growth, and stronger earnings could support future returns despite continued uncertainty around oil prices, inflation, and interest rates.
In addition, please check the Fund's top five holdings to know its best picks in 2026. In its second-quarter 2026 investor letter, Baron Small Cap Fund highlighted Applied Aerospace & Defense, Inc. (NYSE:AADX). Applied Aerospace & Defense, Inc. (NYSE:AADX) designs, engineers, and manufactures integrated aerospace and defense subsystems for space and defense applications.
On August 18, 2026, Applied Aerospace & Defense, Inc. (NYSE:AADX) closed at $17.79 per share. The one-month return of Applied Aerospace & Defense, Inc. (NYSE:AADX) was 2.89%. Applied Aerospace & Defense, Inc. (NYSE:AADX) has a market capitalization of $3.07 billion.
Baron Small Cap Fund stated the following regarding Applied Aerospace & Defense, Inc. (NYSE:AADX) in its Q2 2026 investor letter: "Applied Aerospace & Defense, Inc. (NYSE:AADX) is a premier provider of mission-critical structures and components for the aerospace and defense industrial base. During its IPO, we were drawn to the company's scarce, IP-rich franchise, with an 87% sole source and 89% proprietary portfolio. The company sits deep in the supply chain across three attractive end markets – defense aviation, space launch, and C5ISR/Precision Strike – producing reusable landing systems for launch vehicles, control surfaces for next-generation fixed-wing aircraft, and solid rocket components among other offerings.
We see a multi-pronged path to durable growth ahead as the company converts a $1.1 billion backlog and $3.8 billion weighted pipeline into revenue. We expect the company to grow revenue at least at a mid-teens CAGR organically with EBITDA margins expanding to the high 20% level over time." Applied Aerospace & Defense, Inc. (NYSE:AADX) is not on our list of the 40 Most Popular Stocks Among Hedge Funds. While we acknowledge the potential of Applied Aerospace & Defense, Inc. (NYSE:AADX) as an investment, we believe certain AI stocks offer greater upside potential and carry less downside risk.
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