Alger Small Cap Focus Fund Q2 2026 Portfolio Review

Credo Technology Group was a top positive contributor, with investors responding favorably to its rapid revenue growth and rising hyperscale demand. Weak spots included Karman Holdings, GeneDx Holdings, and Forte Biosciences as key detractors, implying a mixed quarter driven more by stock-specific performance than broad fundamentals.

Analysis

The tape is rewarding names with visible demand pull and punishing anything that still needs perfect execution to justify the multiple. That is especially true in AI infrastructure: suppliers with hyperscale attach rates can see revenue acceleration translate into margin expansion and a higher durability multiple, because the market starts to underwrite share gains rather than just growth. The second-order effect is that adjacent networking and datacenter vendors can also rerate, while slower-moving peers risk looking like laggards even if their businesses are fine.

In healthcare, the dispersion says investors are not paying for “biotech optionality” right now; they want evidence that revenue converts into repeatable utilization and reimbursement-backed cash flow. That creates a relative tailwind for diagnostics/platform names with clearer operating leverage, and a headwind for smaller clinical-stage or early-commercial stories where trial or launch risk can overwhelm any scientific upside. The loser basket is not just the obvious detractors — it also includes any comp in genomics or pre-profit biotech that relies on future narrative rather than current proof.

Near term, the main risk is that this is a factor trade masquerading as stock picking: if hyperscaler spend decelerates or healthcare reimbursement data disappoints, these names can give back quickly over 1-3 months. Over 6-18 months, the key question is whether these companies can convert demand into sustained free cash flow; if not, multiple compression will offset growth. The contrarian view is that the move may be overdone in the highest-beta winners: good growth is already being capitalized aggressively, so any guide miss or margin stall should hit hard.

Key Decisions for Investors

• Long CRDO on any post-earnings or market-wide AI pullback; target 1-3 month continuation if hyperscale demand remains intact. Falsify if next-quarter revenue growth or gross margin inflects down despite strong order commentary.
• Pair trade: long GH / short WGS over the next 1-2 quarters. The thesis is that the market will keep paying for clearer monetization and reimbursement visibility while penalizing noisier genomics execution. Exit if WGS shows a sustained utilization or payer inflection.