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Diamond Hill Capital, a First Eagle Investment Management company, issued its Q2 2026 investor letter for its "Small Cap Strategy". The letter can be downloaded here. The strategy returned 24.01% in the second quarter, outperforming the Russell 2000 Index's 21.49% return. Performance was positively affected by stock selection in health care and industrials, while the Fund's underweight position in information technology was the largest relative detractor as AI-related companies drove market gains. Small-cap equities benefited from strong earnings, resilient economic conditions, and easing geopolitical concerns, with technology leading sector performance while energy declined alongside lower oil prices. Despite the market's focus on AI, the Fund's strongest contributors came from businesses outside the theme, particularly in health care, defense-oriented companies, and tangible-asset industries. Looking ahead, the Fund remains focused on resilient, underfollowed companies tied to infrastructure, defense modernization, and essential industries where disciplined capital allocation and long-term demand can support value creation. Also, check the fund's top five holdings to see its best picks in 2026.

In its second-quarter 2026 investor letter, Diamond Hill Capital Small Cap Strategy highlighted Ducommun Incorporated (NYSE:DCO) as a leading contributor. Ducommun Incorporated (NYSE:DCO) provides engineering and manufacturing services for products and applications used in the aerospace and defense, industrial, medical, and other industries. On September 02, 2026, Ducommun Incorporated (NYSE:DCO) closed at $165.60 per share. Over the last month, Ducommun Incorporated (NYSE:DCO) declined 17.80% and its shares gained 81.24% over the past 52 weeks. Ducommun Incorporated (NYSE:DCO) has a market capitalization of $2.55 billion.

Diamond Hill Capital Small Cap Strategy stated the following regarding Ducommun Incorporated (NYSE:DCO) in its Q2 2026 investor letter:

"Shares of aerospace and defense manufacturer Ducommun Incorporated (NYSE:DCO) rose as both of its primary end markets strengthened simultaneously for the first time in years. Missile revenue increased by nearly a quarter, supported by funded Department of Defense contracts calling for substantial production increases, while commercial aerospace returned to growth following a prolonged period of lower activity."

Ducommun Incorporated (NYSE:DCO) is not on our list of the 40 Most Popular Stocks Among Hedge Funds. As per our database, 31 hedge fund portfolios held Ducommun Incorporated (NYSE:DCO) at the end of the second quarter which was 18 in the previous quarter. While we acknowledge the potential of Ducommun Incorporated (NYSE:DCO) as an investment, we believe certain AI stocks offer greater upside potential and carry less downside risk. If you're looking for an extremely undervalued AI stock that also stands to benefit significantly from Trump-era tariffs and the onshoring trend, see our free report on the best short-term AI stock.

In a prior article, we noted Ducommun Incorporated's (NYSE:DCO) shares surged 104% year-to-date, outperforming major industry names. In addition, please check out our hedge fund investor letters Q2 2026 page for more investor letters from hedge funds and other leading investors.

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Disclosure: None. This article is originally published at Insider Monkey.