Ariel’s John Rogers likes these small-cap names as the market rally broadens

John Rogers said the AI trade is creating extreme short-term volatility and that the broader market looks expensive, while highlighting undervalued Chicago small caps he likes. He named Covista as a bullish pick, citing demand for for-profit medical education; shares are up 20% year to date. He also reiterated positive views on Lazard and Carlyle as cheap financial stocks, and said he owns Littelfuse and Knowles, which have surged about 89% and 90% this year.

Analysis

The market’s current setup is increasingly a barbell: crowded AI leadership on one side and neglected, cash-generative small caps on the other. That creates a reflexive dynamic where even modest fundamental upside in off-the-radar names can re-rate sharply as allocators look for “non-AI” exposure with cleaner earnings leverage. For Chicago-linked financials, the real second-order winner is not just advisory fees but operating leverage from a pickup in capital markets activity, sponsor exits, and restructuring work if rates stay elevated longer than consensus expects.

The key risk is that these names are not just cheap for a reason, they are also illiquid enough to be whipsawed by positioning shifts. If AI breadth broadens even a little, the valuation gap may not close through a rush into value; instead, these stocks can simply get ignored for another 2-3 quarters while multiples stay compressed. The better entry point is often not on bullish commentary, but on any drawdown caused by risk-on factor rotation back into megacap growth.

For the industrial small caps mentioned in the data, the market may be underappreciating that supplier wins can cascade: once one niche hardware vendor gets rerated, adjacent component names often benefit from portfolio rebalancing rather than incremental fundamental news. That usually creates a 1-3 month momentum window, but it can reverse quickly if management guidance doesn’t accelerate next quarter. The asymmetric setup is strongest where the business has visible earnings quality and low narrative risk, while the weakest is where the bull case depends on sustained sentiment rotation rather than near-term estimate revisions.

The contrarian view is that the “AI sucks all the oxygen” framing may itself be the trade. If the broad market is indeed expensive and crowded, the next leg may be a sharp factor unwind, not a gentle rotation — meaning the right expression is not just long value, but long quality value and short the most crowded AI proxies. In that scenario, the best risk/reward comes from pairs and call spreads, not outright long-only exposure.

Key Decisions for Investors

• Build a starter long in LFUS over the next 1-2 weeks on any market strength, with a 3-6 month horizon; target 15-20% upside if the market continues rotating toward profitable industrial compounders, and cut if the stock loses relative strength versus small-cap value by more than 8%.
• Add KN on pullbacks rather than chasing strength; use a 2-4 month horizon and size for a 2:1 reward/risk, since the name can outperform sharply if investors continue paying up for overlooked compounders, but can retrace quickly if the AI trade re-accelerates.
• Fade crowded AI leadership with a hedge: long LFUS/KN basket vs short a liquid AI-heavy basket or QQQ call spread for 1-3 months, targeting factor rotation rather than single-name alpha; this reduces beta and monetizes any broadening of market participation.
• For CBOE, avoid paying up here on the commentary alone; use it only as a defensive hedge if volatility spikes, because the current setup favors the company as a volatility transmitter more than a clean re-rating target.
• If small-cap value gets sold off in a growth-led tape, use that weakness to add — the best entry is when non-AI names de-rate on no fundamental news, because the reversion can be fast once allocation flows normalize.