Baron Capital, an investment management company, released its Q2 2026 investor letter for the "Baron Discovery Fund". A copy of the letter is available to download here. Baron Discovery Fund appreciated by 19.08% (Institutional Shares) in the quarter, underperforming the Russell 2000 Growth Index, which gained 25.71%.
This lag was primarily due to a momentum-driven "AI winners" trade, with these stocks largely contributing to the Benchmark's performance. The Fund experienced a 6.63% underperformance, largely driven by an underweight in strong-performing Momentum and Beta factors. The Fund prioritizes a long-term balanced portfolio over chasing momentum.
The letter discussed parallels between the current AI market and the late 1990s dot-com bubble. The firm remains focused on company fundamentals and long-term valuation. Please review the fund's top five holdings to gain insights into their key selections for 2026.
In its Q2 2026 investor letter, Baron Discovery Fund highlighted Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS). Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) is a technology company that offers mission-critical products, services, and solutions to defense, national security, and commercial markets. On August 11, 2026, Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) closed at $63.73 per share.
The one-month return of Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) was 28.28%, and its shares lost 7.30% over the past 52 weeks. Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) has a market capitalization of $11.96 billion. Baron Discovery Fund stated the following regarding Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) in its Q2 2026 investor letter: "Similar to Karman, shares of leading defense technology provider Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) declined during the quarter as sentiment toward high-multiple small- and mid cap defense companies weakened amid increased uncertainty surrounding the pace of defense budget growth and a reversal in momentum-driven investor flows.
We remain shareholders and used recent weakness to add to our position. The company continues to execute well, with strong visibility into additional contract wins across its core business and new opportunities emerging across previously nascent segments. We believe CEO Eric DeMarco has built one of the most innovative defense players and continue to see compelling long-term prospects for Kratos." Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) is not on our list of 40 Most Popular Stocks Among Hedge Funds Heading Into 2026.
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