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If you’re like us, you’ve perhaps been looking at your portfolio and wondering why some, or many, names have been getting crushed or barely moving, while it seems like everyone else is making returns hand over fist this year.
There seems to be a big bifurcation in stocks in 2026 so far, with almost anything AI, semis, or memory-related having gone vertical this year. I mean, look at both Micron Technology (MU) and Sandisk Corporation (SNDK) below. Up >170% and 480% just this year!
And though we half-jokingly mentioned it in our Q1 letter, the President is still taking it upon himself to tweet things that can move markets or individual names. Take, for example, his tweet just the other week, where, at a press conference, he tells the American people to “go buy a Dell,” and the stock takes off by 7% in a matter of minutes.
For portfolio managers, it seems nearly impossible to compete in a market where virtually all eyes, and dollars, have been cycling into this themed trade (mentioned above) or when you have the leader of the free world pumping stocks for whatever reason. It appears like a losing battle when you actually look at it for anyone deploying capital into quality, non-AI companies.
It’s frustrating, annoying, and makes you potentially question your strategy and investing skills in this market environment. While we, and many like us, have been thinking this way, we actually came across a post (LinkedIn link here) from a fellow manager that highlights this frustration very well.
George Hadjia is a fund manager for Bristlemoon Capital, a hedge fund based in Australia, and he basically said the quiet part out loud. This market is requiring fundamental managers to pivot from what’s worked historically, and what they marketed to LPs, to something more dynamic that might be unfamiliar, but where all the returns are currently located.
“The current mkt is faster moving, more narrative driven and if you’re constrained by fundamentals you probably won’t get there on many of the higher torque names that are further out on the risk profile and starting to look out to demand in 2030+. Feels like a huge spread in willingness of mkt to give credit to outer year cash flows for AI winners vs losers, which speaks to the prevailing confidence in the AI trade persisting.”
The point he’s making is that because the sector is red hot right now, investors are caring about future cash flows well and beyond what a fundamental manager is looking for or even used to looking for. This means that companies that are still doing well now, recording growth and improvement in margins/FCF, aren’t getting the flows because of just how much AI is sucking all the oxygen (flows) from these names.
I read an interesting take the other day that highlighted many managers/funds are using historical compounders or other high-quality companies to short and fund their AI trades on the long side. i.e., leveraging up to take advantage of this factor trade and selling down the aforementioned type of companies.
Further reinforcing the point that so many people are chasing this AI trade, which does have real earnings by the way, because that’s where the returns are. It’s not anyone’s fault, perhaps, but just a function of the market cycles that we’ve experienced over the last ~6 years since COVID.
Because of this, if you’re a small-cap or mid-cap manager, the odds of you being down this year or trailing the benchmarks are pretty high.
Trust me. I get it. It sucks.
You’re most likely sitting on companies that have great, and somewhat predictable outcomes, or other names that have reported well and not gotten the recognition they deserve.
To paint you a picture, I had a company report earnings the other week in the consumer discretionary space, which has had its stock slammed this year, only to post a triple beat and triple raise and sink >20% the day after earnings. Again, it was already well off the 2026 highs before reporting, so make that make sense. First time that’s ever happened to me, and my guess is it won’t be the last.
But the reason I’m writing this is that I know I’m not the only one in this predicament. Many of us believe in our strategies, but we are currently questioning them because they just aren’t working out right now. That’s not to say they won’t, but more time is needed for things to balance out, and when you’re seeing companies up 1, 2, or even 300% or more, it really puts your mental anxiety on high alert regarding underperforming.
The closest thing I can relate this to, from my perspective, is what we saw in 2020 and 2021 with the SPAC and meme mania.
There was a period of time when Cathie Wood (of Ark Funds) was posting insane numbers in her various ETFs. During COVID, in just under a year, her main ETF (ARKK) was closing in on a 300% gain.
Some even labeled her as the next Warren Buffett because of how well her performance was. Chamath Palihapitiya was another VC/fund manager who was also labeled the next Warren Buffett as well (Bloomberg / Business Insider).
It’s almost as if there was a change in the world order, and what had worked in the past (fundamental investing) for who is arguably the greatest investor of all time, was no longer as relevant in this new world. Hard to say and even harder to believe I’m writing that given the hindsight here.
Which brings me to this chart below that I believe represents what most of us are going through very well. I’m not saying we’re in the exact same environment (COVID was a mess of pre-revenue, pie-in-the-sky projections, pull-forwards, etc., where now is just an arms race to get AI scaled as quickly as possible), but the similarities of strategies “not working” are eerily similar.
Eventually, reality did set in, and Warren Buffett’s investing strategy proved to come out ahead over time. **Updated chart through the end of yesterday for comparison.
What we’re saying is, AI is the hottest thing now, just like many ‘futuristic" companies were back then. Again, not saying the AI companies of today aren’t worth what they’re worth or won’t be something great in the future, but just like investors were pouring money into the hottest trades in 2020/2021, they’re doing the same now. This means leaving behind companies that are doing well, posting good numbers, or even perhaps going through temporary decelerations of extreme growth.
All of which can be rectified once enough time has passed, and flows start returning again. Until then, apart from a pretty crap 1H’26 so far for non-AI names, it’s either leave your existing strategy behind to ‘catch up’ and try your best not to record underperformance, or stick to your strategy, what you know best, and bet that it will pay off over time.
At the end of the day, we’re supposed to be investors, not traders. Investing in things means it will take time for investment theses to come to fruition, and thus, eventual returns to follow suit.
Until that eventually happens, painful drawdowns and underperforming benchmarks might be the (hopefully) short-term costs of what could be a very fruitful investment track record if you believe in the strategy that has worked for you.
As tough as it is to grasp right now, just remember that this too shall pass.
Until next time,
Paul Cerro | Cedar Grove Capital Management
Personal Twitter: @paulcerro
Fund Twitter: @cedargrovecm
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