Introduction: The Little Guys Are Winning
Imagine a gold rush.
Everyone is sprinting toward the same mountain — the famous one, the one you can see for miles. They’re pushing and shoving to get to the big, obvious nuggets sitting right on top. Names like Nvidia. Names like Apple. Names like Microsoft. Everyone knows them. Everyone wants a piece.
But here’s the thing about gold rushes that most people forget: the ones who quietly got rich weren’t always the miners. Sometimes it was the guy selling pickaxes. Sometimes it was the woman running the laundry service. Sometimes it was the small supply shop on the edge of town that nobody noticed—until suddenly, it was worth a fortune.
That’s exactly what’s happening right now in the world of artificial intelligence investing.
While millions of investors flood into the famous, expensive AI giants, a group of tiny, barely known companies—called microcap stocks — have been quietly doing something extraordinary. They’ve been outperforming almost everything else in the stock market. Not by a little. By a lot.
Over the past year, microcap stocks as a group beat small-cap stocks. They beat large-cap stocks. They even gave the mighty S&P 500 a run for its money. And one specific fund that focuses on these tiny companies — the Royce Micro-Cap Fund — delivered an absolutely jaw-dropping 68.2% return in just 12 months.
So what’s going on? How are these little companies that nobody talks about beating the giants that everyone obsesses over? And most importantly — what does this mean for everyday investors like you and me?
Let’s take a closer look. Simply. Clearly. It’s like you’re explaining it to a kid at the dinner table.
First, Let’s Talk About What a Microcap Stock Actually Is
Okay, picture the stock market like a school cafeteria.
At the “cool kids” table, you’ve got the biggest companies in the world — Nvidia, Apple, Amazon. These are the large-cap stocks. “Cap” is short for “market capitalization,” which is just a fancy way of saying how much a company is worth in total. These big kids at the table are worth hundreds of billions of dollars. Some are worth over a trillion.
Then there’s the middle tables — the small-cap stocks. These companies are still real businesses, still traded on stock exchanges, but they’re worth somewhere around a billion dollars or so. Not tiny, but not giants either.
And then, way over in the corner of the cafeteria? There’s a whole group of kids that most investors barely notice. These are the microcap stocks. These are companies with a median — meaning the middle value — market value of around $287 million. That sounds like a lot of money to you and me, but in stock market terms, that’s tiny. These are the companies where five analysts in the whole world might be following them. Where the name doesn’t show up on the financial news every morning. Where most people walk right past.
But here’s the twist in our story.
Those kids in the corner? They’ve been quietly doing their homework. And their report cards are blowing everyone else’s out of the water.
The Numbers That Made People Stop and Pay Attention
Let me paint you a picture with some numbers — and I promise to keep it simple.
Over the past year (through May 2026), the Russell Microcap Index — which tracks these tiny companies — outperformed the indexes that track bigger companies. It beat the Russell 2000 (small caps). It beat the Russell 1000 (large caps). It beat broad market indexes.
And then there’s the Royce Micro-Cap Fund. This is a specially managed investment fund run by two guys — Jim Stoeffel and Andrew Palen — who spend their entire careers hunting for diamonds in the rough among these tiny, overlooked companies.
Their fund returned 68.2% in one year. To put that in plain terms: if you had put $10,000 into this fund a year ago, you’d have about $16,820 today. The similar index — which just tracks all the tiny stocks together, without anyone picking the best ones — returned 62.2%. Both are extraordinary numbers.
For comparison, the S&P 500 — the most famous stock market index in the world — historically returns about 10% a year on average. These microcap strategies nearly tripled that.
So how did they do it? What’s their secret? And why does AI have everything to do with it?
The AI Connection Nobody Expected
Here’s where the story gets really interesting.
When most people think about investing in AI, they think about the obvious companies. Nvidia, the chip-making king that makes the powerful processors needed to run AI programs. The big tech companies building the AI tools you actually use — ChatGPT, Google Gemini, and others. These are the famous faces of the AI revolution.
But think about it this way: when a city builds a new skyscraper, who benefits? Sure, the company that owns the building gets a lot of the attention. But there are thousands of workers and businesses behind the scenes — the concrete suppliers, the steel fabricators, the electrical equipment makers, the window installers. Every single one of them has work because of that skyscraper.
AI is building one of the biggest “skyscrapers” in the history of technology. Data centers — the massive buildings full of computers that actually run AI — are being built everywhere. They need enormous amounts of electricity. They need advanced computer chips. They need specialized equipment to manufacture those chips. They need materials to build the facilities. And they need energy — lots and lots of energy.
All of those “behind the scenes” needs? That’s where tiny microcap companies come in. And that’s exactly what the Royce Micro-Cap Fund figured out.
Meet the Hidden Winners of the AI Boom
Let me introduce you to a few of these companies. Their names might not ring a bell, but their stock performance certainly will.
Ultra Clean Holdings — Up 342% in One Year
Imagine you’re Nvidia, and you make the world’s most powerful AI chips. Before you can make those chips, someone has to make the machines that make the chips. And before those machines work, someone has to make the ultra-precise parts and systems that go inside them.
That “someone” — one layer further back in the supply chain — is a company called Ultra Clean Holdings.
Ultra Clean provides systems and subcomponents to big semiconductor equipment companies like Applied Materials and Lam Research. Those companies then sell their chip-making equipment to the giants like Nvidia and others. Ultra Clean is two steps behind the famous names, deep in the supply chain, and almost nobody outside the industry talks about it.
But over the past year? Ultra Clean’s stock went up 342%. That means if you put in $10,000, you’d have roughly $44,200. Its market value grew to about $3.84 billion.
And analysts who follow the company think it’s not done yet. They project the company’s revenue will grow at a rate of about 24% per year for the next few years. Despite the massive price run-up, the fund managers believe the stock is still reasonably priced compared to what the company is expected to earn.
Ichor Holdings — Up 353% in One Year
Playing a very similar role to Ultra Clean, Ichor Holdings is another company that supplies specialized systems and components to semiconductor equipment manufacturers.
Ichor’s stock climbed an astonishing 353% in one year. That’s nearly 4.5 times your money if you got in at the right time.
Its market cap grew to about $2.49 billion. Seven Wall Street analysts follow the company — which is still a very small number compared to the dozens or even hundreds of analysts who follow companies like Apple or Microsoft.
The lesson here? Sometimes the picks and shovels are more valuable than the gold mine itself — especially when everyone else is ignoring the shovel shop.
But It’s Not Just Chips and Semiconductors
Here’s something that surprises most people when they first hear it: the AI boom isn’t just an electronics story. It’s an energy story too.
Think about it. Data centers — the giant buildings full of computers that run AI — use an almost unbelievable amount of electricity. Training a single large AI model can use as much electricity as hundreds of homes use in a year. And there are thousands of data centers being built right now, all around the world.
That means the demand for power is exploding. And that creates opportunities far outside the obvious “tech” space.
The Royce Micro-Cap Fund recognized this and invested in some energy-related companies that most people would never connect to AI.
NPK International — Mats for a New World
NPK International makes and rents out recyclable composite mats. You’ve probably never thought about composite mats before, but they’re incredibly important. They’re used to build stable ground surfaces for power transmission lines and for oil and natural gas exploration. As the energy infrastructure gets upgraded to serve all these new power-hungry data centers, companies that help build and maintain that infrastructure become more valuable.
Mistras Group — Making Sure Things Don’t Break
Mistras Group provides inspection and testing services. They check on equipment — pipelines, power plants, aerospace equipment, civil engineering structures — and make sure it’s working safely. As the energy sector ramps up to meet AI’s power demands, the need for ongoing safety inspections and testing grows right along with it.
Riley Exploration Permian — Natural Gas for the Digital Age
Riley Exploration Permian is a natural gas producer. The fund’s managers were very specific about why they love this company: natural gas is becoming increasingly important for powering the massive data centers that run AI. “We love that space,” said Jim Stoeffel, one of the fund’s managers.
Who would have thought? An AI investing strategy that leads you to a natural gas producer in the Permian Basin.
The People Behind the Strategy
The Royce Micro-Cap Fund is part of Royce Investment Partners, a New York-based firm that is a subsidiary of Franklin Templeton, one of the biggest investment companies in the world.
Royce manages about $11.3 billion in total assets. Of that, about $1.3 billion is in their microcap strategy. The Royce Micro-Cap Fund itself holds about $371 million, while a related product called the Royce Micro-Cap Trust holds about $798 million and trades on the New York Stock Exchange.
Jim Stoeffel has been co-managing the fund for 10 years alongside his partner Andrew Palen. They describe their approach as a “manual, intensive process” — which means they actually research individual companies one by one, rather than just buying every microcap stock automatically.
They tend to look for profitable companies (which is why they underweight biotechs — many of which are burning through cash on research without yet making money). They look for companies in technology and industrials — sectors where the AI boom is creating real, measurable demand.
And their process is working. Over the past three years, the fund averaged 27.4% annual returns. Over five years, it averaged 11.1% per year. Over ten years, 13.7% per year. These are strong numbers by any measure.
How Small Is Small Enough? Understanding the Numbers
The fund typically invests in companies with market caps ranging from $500 million to $700 million when they first buy in. But here’s the fun part — if a company does really well, its value grows. Ultra Clean, for example, grew to $3.84 billion. The fund doesn’t necessarily sell just because a company got bigger. Stoeffel said it’s not unusual for them to hold stocks that have grown up to $6 billion.
This is one of the hidden advantages of microcap investing: when you find a good company when it’s tiny, you can ride the entire wave of its growth from small to large. You’re not just getting a small piece of a giant company’s future. You’re getting in early on a company’s whole journey.
Compare that to buying Nvidia today. Sure, Nvidia is an incredible company. But it’s already one of the most valuable companies in the world. The easy gains — the ones that made early investors rich — those are already behind us. With microcap stocks, the early-innings opportunities are everywhere, because most of the financial world isn’t looking.
The Risks You Should Know About
Now, here’s where I have to be honest with you — because no good story leaves out the hard part.
Microcap stocks are riskier than large-cap stocks. There are a few reasons for this.
First, these companies are smaller. If something goes wrong — a product fails, a major customer leaves, the economy turns — a small company has less cushion to absorb the blow than a giant like Apple.
Second, there are fewer people watching. With fewer analysts following these companies, there’s less public information available. That can be an advantage (you find things others miss) but also a disadvantage (you might also miss warning signs that a larger research team would catch).
Third, the stocks can be more volatile — meaning their prices can jump up and down more dramatically in short periods of time. A single news story can move a microcap stock by 20% in a day.
Stoeffel himself hinted at this when he mentioned that when biotech stocks have a great run — driven by some drug approval or research breakthrough — his fund tends to underperform, because he’s not heavily invested in that area. Every strategy has its moments.
And the fund’s 1.24% annual expense ratio means you’re paying $124 per year on every $10,000 invested, before any taxes or trading costs. That’s not outrageous for an actively managed fund, but it’s higher than simply buying a passive index fund.
What This Means for Everyday Investors
So what do we actually do with all of this?
Here are a few simple takeaways:
1. The AI wave is bigger than the obvious names. Nvidia gets all the headlines. But the AI boom is creating demand across dozens of industries — from semiconductor equipment to energy to industrial services. Looking beyond the obvious names can reveal opportunities others are missing.
2. Small companies can grow fast. A 342% return in a year on a company most people never heard of. That’s the power of finding a good small company early. Of course, not every small company works out — but the ones that do can be life-changing for a portfolio.
3. The supply chain is full of opportunity. You don’t have to own the flashiest company in a trend. Sometimes the best investments are in the companies that supply the companies that supply the famous company. Boring? Maybe. Profitable? Potentially very.
4. Expert management can add value — but it costs money. The Royce Micro-Cap Fund beat its index by about 6 percentage points over one year. That gap more than pays for the fees, at least in the short term. Over longer periods, it’s harder to consistently beat the market, so choose actively managed funds carefully.
5. Diversification still matters. The fund holds 158 stocks. That’s not all-in on one bet. Even within the exciting world of microcap AI-related stocks, spreading across many companies reduces the risk that any single failure wipes you out.
The Bigger Picture: Why This Moment Is Different
We are living through one of the most significant technological shifts in human history. Artificial intelligence isn’t just a trend. It’s changing how businesses operate, how scientists do research, how doctors diagnose diseases, how teachers teach, how engineers design — pretty much everything.
And when something that big happens, money flows. Money flows into the obvious places first — the big tech companies, the chip makers, the AI platforms. But then it flows deeper, into the infrastructure, into the supply chains, into the energy producers, into all the tiny, unglamorous, essential companies that make the whole thing actually work.
That’s the river the Royce Micro-Cap Fund has been fishing in. And by the look of the results, they’ve been catching a lot of fish.
For everyday investors, the lesson isn’t necessarily “go buy this specific fund tomorrow.” It’s something broader and more important: don’t only look where everyone else is looking.
The gold rush has many mountains. The famous one has a lot of people on it already. But if you’re willing to hike a little further, look a little harder, and think a little differently — there are still nuggets waiting to be found.
Conclusion: The Quiet Winners of the AI Age
Let’s bring it back to where we started.
A gold rush. Everybody running toward the obvious mountain.
While the crowd was chasing Nvidia and the big tech giants, a small group of patient, careful investors were quietly walking in a different direction. They were looking at the companies making the equipment that makes the chips. The companies providing power infrastructure for data centers. The natural gas producers fueling the digital age. The inspection services keeping the energy grid running.
These tiny, overlooked companies — microcap stocks — delivered some of the most extraordinary returns of the past year. Ultra Clean Holdings: up 342%. Ichor Holdings: up 353%. The overall Royce Micro-Cap Fund: up 68.2% in twelve months.
The AI revolution is real. Its impact on investing is enormous. And it reaches far deeper into the economy than most people realize.
The next time you hear about artificial intelligence changing the world, don’t just look at the flashy headlines. Look at the supply chains. Look at the energy companies. Look at the tiny businesses in the corners of the cafeteria, doing their homework quietly.
Because sometimes, the most extraordinary gains come from the places nobody thought to look.
Disclaimer: This article is for informational and educational purposes only and does not constitute investment advice. Past performance of any investment fund does not guarantee future results. Please consult a qualified financial advisor before making any investment decisions.
