Baron Capital, an investment management company, released its first quarter 2026 investor letter for its “Baron SMID Cap EFT”. This is the first full quarter of results for Baron SMID Cap ETF (BCSM). A copy of the letter can be downloaded here. Baron SMID Cap ETF focuses on investing in small, fast-growing businesses that demonstrate significant long-term growth potential, possess durable competitive advantages, have exceptional management teams, and offer compelling valuations. The Fund declined 10.56% (NAV) in the first quarter, underperforming the Benchmark, the Russell 2500 Growth Index, which declined 3.52%. During this quarter, investors gravitated towards a select few companies benefiting from artificial intelligence (AI) spending, referred to as “AI winners,” while selling off those considered “losers.” This created a challenging environment for bottom-up investors, as market prices diverged from fundamental values. This disconnect, combined with the onset of conflict in Iran, impacted the portfolio’s performance during the quarter. In addition, please check the Fund’s top five holdings to know its best picks in 2026.
In its first-quarter 2026 investor letter, Baron SMID Cap EFT highlighted stocks such as 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 June 3, 2026, Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) closed at $58.43 per share. One-month return of Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) was 2.51%, and its shares gained 44.77% over the past 52 weeks. Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) has a market capitalization of $10.96 billion.
Baron SMID Cap EFT stated the following regarding Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) in its Q1 2026 investor letter:
“Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) is a defense technology provider that produces products including unmanned aerial vehicles, hypersonic test vehicles, small turbine and jet engines, solid rocket motors, ballistic missile defense transporters, radio frequency and microwave electronics, satellite ground station software, high energy lasers, and more. Kratos rallied along with the rest of the defense industry at the start of 2026 after President Trump announced a proposed $1.5 trillion defense budget. The company has also been winning meaningful defense contracts. After shares rallied from about $76 to start the year to nearly $131 at the mid-January high, we sold the position as it had reached our long-term valuation target nearly three years early. This is an example of our risk management process in action. Early in the second quarter we were able to repurchase our position at the low $70’s per share level.”
Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) is not on our list of 40 Most Popular Stocks Among Hedge Funds Heading Into 2026. According to our database, 46 hedge fund portfolios held Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) at the end of the first quarter, up from 41 in the previous quarter. While we acknowledge the risk and potential of Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) and that has 10,000% upside potential, check out our report about this cheapest AI stock.
In another article, we covered Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) and shared the list of best drone stocks to buy according to Wall Street analysts. In addition, please check out our hedge fund investor letters Q1 2026 page for more investor letters from hedge funds and other leading investors.
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Disclosure: None. This article is originally published at Insider Monkey.
