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| Quarter | Letter Date | Fund Name | QTD | YTD | Tickers | Themes | Quick Take |
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"Conestoga's Small Cap strategy lagged in 2Q26 as AI-driven speculation created historic market concentration, with semiconductors up 98% and high-beta stocks dominating. Portfolio companies delivered superior fundamentals—14.3% sales growth versus 8.4% for the benchmark—but quality factors underperformed."
Conestoga's Small Cap Composite returned 14.32% net in 2Q26 but lagged the Russell 2000 Growth Index's 25.71% return, which delivered its strongest first-half performance since 1991. The underperformance reflected one of the most concentrated and momentum-driven advances in recent Small Cap history, with AI-related semiconductors rising 98% and the highest beta stocks contributing 38% of index returns. Despite this headwind, portfolio companies delivered superior operating results, with sales growth of 14.3% and EBITDA growth of 20.0% versus 8.4% and 12.1% for the benchmark. The manager believes the speculative leadership centered on AI scarcity dynamics will not persist as supply constraints ease and market leadership broadens. With the Russell Reconstitution removing $575 billion of AI beneficiaries and the rate backdrop shifting toward potentially tighter policy, the manager expects quality characteristics—strong balance sheets, durable earnings, and high returns on capital—to become increasingly valuable. The firm remains confident in portfolio fundamentals and committed to its quality-focused, long-term compounding approach.
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