As the equity rally shows signs of broadening beyond mega-cap technology, veteran value investor John Rogers of Ariel Investments is turning his attention to small-cap stocks that he believes are undervalued relative to their long-term potential. In a recent CNBC appearance, Rogers warned that the current AI-driven market surge could end similarly to the dot-com collapse, making a case for rotating into high-quality, overlooked names.
Why Small Caps Now?
Rogers argues that the market has become excessively concentrated in a handful of AI beneficiaries, leaving many fundamentally sound small-cap companies trading at attractive valuations. He expects that as the rally spreads, these discounted names will benefit from a re-rating. This view aligns with recent market dynamics, where the Magnificent 7 stocks have hit a decade-low valuation premium over the S&P 500, suggesting investors are starting to look elsewhere for returns.
Covista (CVSA): Betting on Healthcare Training
Covista, a for-profit education provider specializing in healthcare professional training, is Rogers' first pick. The stock has already gained 20% year-to-date, but Rogers sees a much larger runway. He points to structural doctor and nurse shortages globally as a long-term tailwind that the market is underpricing. CEO Stephen Beard has been praised for optimizing operations and maintaining a strong academic pipeline. Rogers believes Covista's essential role in addressing a critical global crisis gives it significant upside as valuation metrics reset.
Lazard (LAZ): Riding the Deregulation Wave
Lazard, the premier investment bank, is down about 20% in 2026, making it a compelling turnaround play in Rogers' view. He notes that deal activity is accelerating in a deregulated environment, which should boost advisory fees. Rogers highlighted the leadership of CEO Peter Orszag and president Ray McGuire, calling the latter a "brilliant investor." With a high-performing asset management arm, Lazard is well-positioned to capture increased M&A and advisory revenue as financial sector activity picks up.
Knowles (KN): Micro-Acoustics with a Moat
Knowles, a Chicago-based producer of micro-mechanical microphones and audio processing solutions, has surged roughly 90% this year. Rogers favors Knowles for its exposure to structural tech trends like smart automation and hearing health, but without the volatility of speculative AI plays. The company's steady margins and deep economic moat fit Ariel's patient investing philosophy. Wall Street currently rates Knowles as "Overweight," with price targets as high as $50, implying over 20% upside from current levels.
Broader Market Context
Rogers' strategy comes as the AI-driven stock rally diverges from a sluggish US economy, a disconnect that Moody's has also highlighted. For investors seeking opportunities beyond the tech giants, Rogers' picks offer a value-oriented approach grounded in real-world demand and structural growth. His track record and disciplined framework suggest that these small-cap names could benefit as the market's focus shifts.
This article is for informational purposes only and does not constitute financial advice.
