Dan Veru on Small Cap Investing, Deregulation, and AI Opportunities in 2026

Small Cap Performance and Strategy

• 🎯 Mid and small caps are currently performing exceptionally well, with a particular strength in quality small caps.
• 💡 The key strategy for small caps is to focus on profitable companies, as many in the Russell 2000 are unprofitable, making traditional metrics difficult to assess.
• 📈 Profitable small caps trade at a more attractive valuation (15.8x P/E) compared to the S&P 500 (22.2x P/E).

Tailwinds for Small Caps

• 🏦 A deregulating environment is creating a tailwind for small caps, fostering M&A and consolidation.
• 📉 Monetary policy shifts, including more rate cuts and the end of quantitative tightening, are beneficial for small caps.
• 💰 Regulatory reform is acting as another tax cut, particularly favoring small cap banks which are currently trading at a discount.
• 🏢 Bonus depreciation for capex spending, including land costs for new plants, is a significant incentive.

AI and Small Cap Opportunities

• ⚡ The AI story extends beyond large caps, with opportunities in the small cap space.
• 🏗️ Companies like MYR Group are benefiting from data center construction.
• 🧰 Mueller Industries provides piping and tubing for data center cooling.
• 💡 SMEC manufactures semiconductors used in AI-related technologies.

Stock Picks for 2026

• 👓 Warby Parker is recommended for its customer experience and reasonable pricing, with potential AI integration through Google partnerships.
• 🏦 Renaissant, a regional bank, is positioned to benefit from consolidation and disruption in its market.
• 🔬 Repen services the biotech industry, offering growth potential without the binary risks of drug development.

Market Outlook and Risk-Reward

• 📉 With low valuations in the small cap space, the risk-reward profile is currently favorable.
• ✅ Focusing on quality, profitable small cap names with proven track records is a sound strategy for outperforming the market.