The Russell 2000 small-cap index has risen 13% in 2026, outperforming the S&P 500's nearly 10% increase, despite concerns that recent political changes could hinder the growth of artificial intelligence data centers.
Cliff Greenberg, portfolio manager at Baron Capital, emphasized that small caps have been undervalued relative to larger companies, trading at 16 times trailing earnings compared to the S&P 500's 25 times. He noted that cooling inflation could further support small-cap growth, although recent consumer price index data was higher than expected.
Greenberg's Baron Small Cap Fund has gained 8% this quarter and 3% year-to-date, with significant holdings in industrials and technology.
He highlighted four specific companies: Shake Shack, which is expanding its restaurant footprint and has a low forward PE ratio; Waste Connections, a leading solid waste services provider with a strong market position; Doncasters, a manufacturer of precision engine components that recently went public; and Texas Roadhouse, which continues to grow its restaurant locations.
Each of these companies presents unique growth opportunities, particularly in a potentially improving economic landscape