The small-cap Russell 2000 has doubled the return of the S&P 500 this year, proving that investors shouldn’t count out small caps for their portfolio. At the 2026 Morningstar Investment Conference, Miles Lewis of Franklin Templeton, Scott Brayman of Champlain Investment Partners, and Mike Valentine of Wasatch Core Growth joined David Carey of Morningstar to discuss small caps, offering up some picks in the space.
Valentine pointed out that 18% of the small cap market was trading above 30x sales in the tech bubble, and we’re currently approaching this peak. Lewis added that the small cap market is extraordinarily narrow this year, something that’s already been happening in large caps for a while. The top 200 Russell 2000 stocks are driving more than 40% of the returns, meaning 1800 stocks are doing very little.
What to look for in small caps
When looking for quality small caps, Valentine said seeks truly exceptional companies that can grow and are looking into the future. He wants to see sustainable durability of cash flow.
Brayman added that he wants to see excellent management teams, noting that often it seems like those with the best charisma and storytelling abilities are the best. However, he needs to see discipline around capital allocation. They must have their own operating system similar to how his investment processes are disciplined. Brayman wants management teams that improve year over year.
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