Small caps last week: Royce 2Q recap, Trump sons in spotlight, Chewy as top idea

During the second quarter of the year, micro and small caps outperformed their large-cap peers. Royce Investment Partners, which specializes in small-cap investments, explained what drove the rally and assessed its prospects going forward. Meanwhile, a fund backed by U.S. President Trump's eldest sons generated hundreds of millions in paper gains from micro-cap deals, according to a Bloomberg investigation. Finally, online pet supplies retailer Chewy emerged as a top investment idea for the year alongside names such as Nvidia and Hewlett Packard. These were the top small-cap stories for the week of July 6-10.

In the second quarter, the Russell Microcap index gained 25.6% and the Russell 2000 rose 21.5%, while the large-cap Russell 1000 advanced 15.1%. In his latest quarterly recap, Francis Gannon, cochief investment officer and managing director at Royce Investment Partners, said the rally was supported by spending on AI infrastructure, resilient consumer spending, and improving corporate earnings despite ongoing geopolitical tensions, persistent inflation, and volatile energy prices.

Gannon believes small-cap stocks are likely to maintain their leadership over a longer time horizon and says concerns about the impact of potential interest rate increases on the segment are overstated. "Most important from our standpoint is that the combination of small-cap valuations and earnings should be more than sufficient to keep the asset class in the leadership role," he wrote.

Dominari Holdings, a boutique investment bank with a market capitalization of around $66 million whose advisers and shareholders include Donald Trump Jr. and Eric Trump, has attracted the attention of retail investors. Dominari controls 90% of American Ventures Management LLC, whose paper gains from warrants Bloomberg estimated at hundreds of millions of dollars in an investigation.

The fund's strategy is built around warrants, financial instruments that give the holder the right to buy stock at a predetermined price. As the underlying stock rises, the value of those warrants can increase sharply. Bloomberg said the use of warrants shows a pattern across several transactions involving American Ventures and Dominari Holdings. In the micro- and small-cap market, where the fund invests, even relatively modest inflows can lift stock prices.

The stock of online pet supplies retailer Chewy ranks among the top investment ideas of one of the world's largest quantitative hedge funds, Two Sigma Advisors, investment website Insider Monkey reported. The list also includes Nvidia and Hewlett Packard.

Chewy shares have lost around 38% year to date. Expecting a more challenging consumer environment, the company lowered its 2026 revenue guidance despite continued growth in its key operating metrics. Analysts nevertheless remain optimistic about the company's prospects. BofA Securities, for example, says the expansion of Chewy's veterinary business, growth in its fresh and frozen pet food offering, and efficiency gains from AI are among the company's key strengths. This year, Chewy completed its $400 million acquisition of Modern Animal, a network of 29 veterinary clinics and a digital veterinary platform, after agreeing late last year to acquire the equine health platform SmartEquine.

Wall Street is upbeat on the stock. According to MarketWatch data, it has 20 "buy" and four "overweight" ratings from the 31 analysts covering the company, versus seven "hold" ratings and no "sell" recommendations. The average target price is $30.82 per share, implying about 50% upside.