Key Takeaways
- • Jane White, co-founder, president and CEO of Granahan Investment Management, argues that small-cap investors should target businesses whose quality is improving before traditional quality screens recognize them.
- • The commentary notes that the least profitable quintile of the Russell 2000 Growth significantly outperformed the most profitable quintile in the second quarter of 2026, which the author attributes partly to factor performance and partly to genuine security selection.
- • More than 40% of Russell 2000 Growth Index companies are unprofitable as of Jan. 31, 2026, according to Furey Research Partners and FactSet, a figure the author cites to argue that passive ownership makes active management more valuable in small caps.
- • Illustrative examples cited include Red Hat (IBM acquired for $34 billion in 2019), SodaStream (PepsiCo acquired for $3.2 billion in 2018), and Axon Enterprise (valued at $46 billion today, versus $2 billion to $4 billion at earlier points).
- • The author concludes that traditional quality measures describe what a company has achieved, while fundamental research should identify what it is becoming.
Summary
In an opinion commentary published by Pensions & Investments on October 23, 2026, Jane White of Granahan Investment Management argues that the largest small-cap returns tend to come from companies before they appear high quality. She writes that investors have historically favored high return on invested capital, expanding margins, stable earnings, strong free cash flow and robust balance sheets, and that markets quickly price in established quality. As a result, she contends, small-cap investors are better rewarded for identifying businesses that are becoming exceptional.
White points to the second quarter of 2026, when the least profitable quintile of the Russell 2000 Growth significantly outperformed the most profitable quintile. She acknowledges that some observers have attributed active manager outperformance to simple exposure to lower-quality stocks, but argues this overlooks security selection among companies whose reported financials remained ordinary while their underlying economics improved. In her framing, traditional quality screens describe what a company has been, while fundamental research seeks to understand what it is becoming.
On the structural case for active management, White cites data from Furey Research Partners and FactSet showing that more than 40% of Russell 2000 Growth companies were unprofitable as of Jan. 31, 2026. Passive investors hold all of them regardless of business quality, she notes, while small caps receive less analyst coverage than large caps and offer wide dispersion between long-term winners and permanent disappointments.
To illustrate improving quality, White cites three categories of examples: innovators, such as Red Hat, which was valued at about $1 billion in 2002 and was acquired by IBM in 2019 for $34 billion; companies undergoing internal transformation, such as SodaStream, which had a market cap of about $350 million before new management repositioned it toward flavored sparkling water and PepsiCo acquired it in 2018 for $3.2 billion; and companies whose economics are now evident, such as Axon Enterprise, which she says moved from being viewed as a Taser manufacturer to a recurring-revenue public safety platform and is now valued at $46 billion. She also notes that some observers mistakenly treat these emerging companies as lower quality because they do not yet pass conventional screens. The piece is authored commentary reflecting the author's views rather than editorial reporting.
White points to the second quarter of 2026, when the least profitable quintile of the Russell 2000 Growth significantly outperformed the most profitable quintile. She acknowledges that some observers have attributed active manager outperformance to simple exposure to lower-quality stocks, but argues this overlooks security selection among companies whose reported financials remained ordinary while their underlying economics improved. In her framing, traditional quality screens describe what a company has been, while fundamental research seeks to understand what it is becoming.
On the structural case for active management, White cites data from Furey Research Partners and FactSet showing that more than 40% of Russell 2000 Growth companies were unprofitable as of Jan. 31, 2026. Passive investors hold all of them regardless of business quality, she notes, while small caps receive less analyst coverage than large caps and offer wide dispersion between long-term winners and permanent disappointments.
To illustrate improving quality, White cites three categories of examples: innovators, such as Red Hat, which was valued at about $1 billion in 2002 and was acquired by IBM in 2019 for $34 billion; companies undergoing internal transformation, such as SodaStream, which had a market cap of about $350 million before new management repositioned it toward flavored sparkling water and PepsiCo acquired it in 2018 for $3.2 billion; and companies whose economics are now evident, such as Axon Enterprise, which she says moved from being viewed as a Taser manufacturer to a recurring-revenue public safety platform and is now valued at $46 billion. She also notes that some observers mistakenly treat these emerging companies as lower quality because they do not yet pass conventional screens. The piece is authored commentary reflecting the author's views rather than editorial reporting.
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