Baron Capital Bets on Small-Cap Reversal After Decade of Large-Cap Dominance

Small-cap stocks are outperforming their large-cap peers in 2026, and Baron Capital believes the trend has room to run. The Russell 2000 has risen roughly 13% year to date, outpacing the S&P 500’s near 10% gain. That leadership persisted through a volatile week marked by Democratic victories in both chambers of Congress, which raised concerns about a potential slowdown in artificial intelligence data-center investment.

“The outlook is strong” for small caps, Cliff Greenberg, portfolio manager of Baron Capital’s small-cap fund, said Friday at the firm’s investment conference in New York City.

Greenberg noted that nearly a decade of underperformance has left small caps relatively cheap and overlooked. Over the past ten years, the Russell 2000 has delivered a total return of 159%, while the S&P 500 has returned more than 300%. Yet the Russell 2000 currently trades at about 16 times trailing twelve-month earnings, a steep discount to the S&P 500’s multiple of roughly 25 times, according to FactSet data.

Cooling inflation could provide an additional tailwind for smaller companies. While the latest consumer price index report came in hotter than expected, Brent and WTI crude prices have fallen 12% and 6%, respectively, over the past month. Sustained declines in energy costs could ease inflationary pressures further.

Baron’s Small Cap Fund (BSCFX) has gained 8% this quarter and is up approximately 3% for the year. The portfolio’s largest holdings include industrial conglomerate Vertiv, software firm Guidewire, casino operator Red Rock Resorts, and healthcare provider RadNet. The fund maintains a heavy tilt toward industrials at 30% of assets, followed by information technology at 22.4%.

Greenberg highlighted four specific positions at the conference:

Shake Shack — Greenberg sees a long growth runway driven by restaurant expansion. The company opened 21 new company-operated locations in the third quarter and targets 1,500 locations long term. Baron initiated a position in the second quarter, citing a forward price-to-earnings ratio of about 59, well below the five-year average of 162. Shares have risen nearly 15% over the past month.

Waste Connections — The third-largest solid waste company in North America serves roughly 9 million customers across 46 U.S. states and six Canadian provinces. Greenberg emphasized its strong market share and attractive valuation. Approximately 40% of revenue comes from exclusive or franchise contracts, with the remaining 60% in competitive markets. The U.S. accounts for 86% of sales. The stock is up more than 8% in 2026.

Doncasters — Held via DPC Holdings, Doncasters manufactures highly engineered precision cast components for aerospace and industrial gas turbines. Greenberg noted its outsized exposure to the industrial gas turbine market relative to larger competitors, a point Rothschild & Co highlighted in July. The company went public in June; after an initial post-IPO pop, shares have declined 22% over the past month.

Texas Roadhouse — The casual dining chain, known for steaks and ribs at accessible price points, has grown to 830 locations across 49 states since its 1993 founding, with additional brands Bubba’s 33 and Jaggers. Greenberg praised management’s consistent expansion. The company opened five company-owned locations in the third quarter — including two Bubba’s and one Jaggers — and has over 15 openings scheduled for the fourth quarter, tracking toward roughly 35 total openings across its three brands in 2026. Shares have risen about 17% over the past year.

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