Conestoga Capital Advisors, an asset management company, released its second-quarter 2026 investor letter. A copy of the letter can be downloaded here. The letter reports a positive market shift towards Small Caps, with the Russell 2000 Index achieving its best first half since 1991 and the Russell 2000 Growth Index up 25.7% in Q2, fueled by AI enthusiasm and semiconductor stocks. However, market leadership was uneven, mirroring the Tech Bubble: high-beta stocks outperformed while high-quality companies lagged, affecting Conestoga’s quality-focused strategies. Management expressed confidence in long-term outcomes, noting that speculative leadership won’t last as monetary policy tightens and market breadth improves. The firm remains committed to high-quality growth businesses, expecting these to regain favor as leadership broadens. The Conestoga Micro-Cap Composite achieved a solid second quarter with a 22.16% net return, although it underperformed the Russell Microcap Growth Index’s 28.98% return. During this period, Micro-Cap Growth surpassed all major equity benchmarks, which reflects improved investor sentiment towards smaller-cap stocks, but the gains were primarily driven by a limited set of high-beta, high-momentum stocks. In addition, please check the Strategy’s top five holdings to know its best picks in 2026.
In its Q2 2026 investor letter, Conestoga Capital Advisors highlighted Energy Recovery, Inc. (NASDAQ:ERII). Energy Recovery, Inc. (NASDAQ:ERII), which develops, manufactures, and distributes energy efficiency technology solutions, was divested from Conestoga Conestoga Micro-Cap Composite during the quarter. On August 6, 2026, Energy Recovery, Inc. (NASDAQ:ERII) closed at $8.73 per share, reflecting a market capitalization of $445.62 million. Energy Recovery, Inc. (NASDAQ:ERII) posted a one‑month return of 0.00%, while its shares lost 38.48% over the past 52 weeks.”
Conestoga Capital Advisors stated the following regarding Energy Recovery, Inc. (NASDAQ:ERII) in its Q2 2026 investor letter:
“Energy Recovery, Inc. (NASDAQ:ERII) develops energy recovery devices that improve the efficiency of desalination and industrial fluid systems. We exited the position as increasing geopolitical uncertainty in the Middle East, project timing delays, and the withdrawal of full-year guidance reduced near-term earnings visibility. Although we continue to believe in the long-term fundamentals of the desalination market, we concluded the investment thesis had become more dependent on factors outside the company’s control.”
Energy Recovery, Inc. (NASDAQ:ERII) is not on our list of 40 Most Popular Stocks Among Hedge Funds Heading Into 2026. According to our database, 20 hedge fund portfolios held Energy Recovery, Inc. (NASDAQ:ERII) at the end of the first quarter, up from 19 in the previous quarter. While we acknowledge the risk and potential of Energy Recovery, Inc. (NASDAQ:ERII) 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 Energy Recovery, Inc. (NASDAQ:ERII) and that has 10,000% upside potential, check out our report about this cheapest AI stock.
In addition, please check out our hedge fund investor letters Q2 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.
