Unlocking AADX's Potential: From Backlog to Sustainable Profitability

Baron Small Cap Fund's Q2 2026 Overview

In the second quarter of 2026, Baron Capital's Baron Small Cap Fund achieved a 12.57% gain for its Institutional Shares. This performance, while notable, did not match the Russell 2000 Growth Index's 25.71% return. The market saw a significant recovery following the U.S.-Iran conflict-related selloff in March, primarily driven by advancements in AI infrastructure, semiconductors, and other technology stocks. Small-cap stocks generally outpaced large caps, with high-Beta and Momentum stocks leading the gains, areas where the Fund typically has less exposure. The Fund benefited from its holdings in AI-related and industrial sectors, though software and services stocks faced pressure due to concerns about AI's disruptive potential. Looking forward, management foresees broader market participation, attractive small-cap valuations, improving industrial growth, and stronger earnings as key drivers for future returns, despite ongoing uncertainties regarding oil prices, inflation, and interest rates.

Applied Aerospace & Defense: A Strategic Investment Highlight

Applied Aerospace & Defense, Inc. (NYSE: AADX) was specifically highlighted in Baron Small Cap Fund's Q2 2026 investor letter. AADX specializes in designing, engineering, and manufacturing integrated aerospace and defense subsystems, serving critical space and defense applications. As of August 18, 2026, AADX's shares closed at $17.79, reflecting a one-month return of 2.89%. The company boasts a market capitalization of $3.07 billion, indicating its significant presence in the industry.

Core Strengths and Market Position of AADX

Baron Small Cap Fund identifies Applied Aerospace & Defense as a premier provider of mission-critical structures and components within the aerospace and defense industrial base. The company's Initial Public Offering (IPO) attracted Baron Capital due to its unique, intellectual property-rich franchise, characterized by an impressive 87% sole-source and 89% proprietary portfolio. AADX holds a crucial position deep within the supply chain, catering to three attractive end markets: defense aviation, space launch, and C5ISR/Precision Strike. Its product offerings include reusable landing systems for launch vehicles, control surfaces for next-generation fixed-wing aircraft, and solid rocket components, among others.

Future Growth Projections and Backlog Conversion

The company is poised for durable growth through multiple avenues. AADX's substantial $1.1 billion backlog and a robust $3.8 billion weighted pipeline are expected to translate into significant revenue. Baron Capital anticipates that AADX will achieve organic revenue growth at a mid-teens Compound Annual Growth Rate (CAGR), with EBITDA margins projected to expand into the high 20% range over time. This optimistic outlook is grounded in the company's ability to convert its extensive order book into sustained financial performance, reinforcing its role as a key innovator in its specialized fields.