Can Applied Aerospace & Defense (AADX) Convert Its Backlog Into Durable Earnings Growth?

Baron Capital, an investment management firm, published its Q2 2026 investor letter for the Baron Small Cap Fund. The fund achieved a 12.57% return for the quarter, which was lower than the Russell 2000 Growth Index's 25.71% gain. Small-cap stocks outperformed large-cap stocks, with AI infrastructure, semiconductors, and technology stocks driving much of the market's success.

Small cap stocks outperformed their larger counterparts, although growth remained concentrated in high-Beta and Momentum stocks, which the fund has historically been less engaged with. The fund's success was partly due to several AI-related and industrial holdings, but software and services stocks faced challenges due to concerns about AI's potential impact on their businesses.

Baron Capital sees potential for Applied Aerospace & Defense, Inc. (NYSE:AADX) as an investment, citing the company's scarce, IP-rich franchise, 87% sole source, and 89% proprietary portfolio. The firm believes that the company can convert a $1.1 billion backlog and $3.8 billion weighted pipeline into revenue, growing revenue organically at least at a mid-teens CAGR with expanding EBITDA margins to the high 20% range.