A Deep Value Stock That Could Triple and Still Be Undervalued

• GeoTeam
• December 1, 2023

A BigCapMicro at an Inflection Point

It’s not often that you see a stock growing its sales and earnings, selling at a P/E of 3x, right under its book value per share, where cash makes up the majority of its book value. I’m looking at one right now that could more than triple to trade at a P/E of around 10x and still be cheap. More on this in a second.

I’m not a big fan of labeling stocks as growth or value stocks. Even Warren Buffett mocks such classifications, saying:, 

“Growth is part of the value equation.” Investors should pay somewhat more for faster growing businesses, though the premium is often more than we can justify. But when the market underprices growth, buying faster growing businesses is value investing. They’re not two different categories and I just cringe when I hear people talk about now it’s time to move from growth stocks to value stocks or something like that because it just doesn’t make any sense.”

His assertion, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price,” prompts me to ask the question – why can’t we just find companies that are about to experience some nice growth, trading at ridiculously low valuations?

So, when it comes to labeling a stock, my intrigue lies in the concept of ‘Deep Value.’ 

A literal definition of Deep Value is a strategy which selects the cheapest stocks in a universe of stocks based on their valuation multiples. My tweak on this is to find stocks selling at cheap multiples that are also going to grow or realize some catalyst to lift valuation multiples.

Despite its merits, the Deep Value strategy faces challenges as markets evolve and become more efficient. 

We need to ask ourselves why the market is missing something that we’re not seeing to justify a company’s low valuation. There could be a reason a stock is selling at a low valuation – does it have a lot of debt on the balance sheet, or maybe a lot of customer concentration? Maybe the company has no growth plan. 

Revisions to valuation multiples occur when growth outlooks improve and/or a company becomes perceived as less risky.

The allure of investing in smaller cap stocks is that sometimes one can find a deep value opportunity simply because there’s less people investing in microcaps.

This leads me to the world of ‘Bigcap Micros” – Companies with substantial revenue trading as microcaps.

Some of these entities are trading at very low valuations due to prolonged periods of stagnant growth or less-than-shareholder-friendly management.

However, at a time where shareholder activists are more prevalent than ever trying to affect change in companies where management has not been maximizing shareholder value, we’re starting to see these boring companies be more proactive about finding ways to grow before activists get involved. 

Throughout my investing career, I’ve been constantly on the lookout for these boring companies, these diamonds in the rough that are about to be more attractive and possibly experience a ridiculous upward revision in their depressed valuation multiple. 

My team and I are looking into one of these companies right now. The stock is a typical Bigcap Micro with over $200 million in revenue, but is trading as a microcap and a crazy low price to earnings multiple of 3x!

It’s a company I’ve followed for over 20 years, but never really got excited about because management seemed disinterested in affecting positive change, even though the company was highly profitable.

Revenues have historically fallen within a relatively stable range as earnings per share (EPS) being volatile on a quarterly basis.

However, because I’ve followed the company for so many years, I was able to detect some very subtle changes management is making, not only in the direction they have taken the company, but also in the manner in which the company is communicating with investors. 

The changes are evident by: 

• A reduction of debt by eliminating pension liability
• Focusing on faster-growing markets
• The unnoticed announcement of an expanding manufacturing facility.

This has all culminated in the company, over the last five record setting quarters, finally getting through the upper end of the revenue range it has been stuck in. Earnings per share growth has also accelerated. So, what we have here is a company that is less risky due to a reduction in its debt. Consequently, it  may be entering a new growth phase.

So far, investors have ignored the company’s progress. My next job is to reach out to management to see if the last 5 quarters are setting the stage for the new norm or if the stock is a value trap that will revert to being an unpredictable company that deserves to trade at a low valuation multiple. 

However, my thirty years of investing experience has me thinking there is a good chance that we may be able to avoid a value trap. Furthermore, the high cash per share provides some downside protection.

One other thing I love about this stock is that investors are so pessimistic about it. This is what one investor I pitched the stock to had to say as he passed on the idea:. 

“A large issue is capital allocation. They should be returning cash to shareholders but it almost all gets plowed back into this low-return business.”

My whole point is asking: “What would happen if this historical pattern is no longer the case!!”

The last time investors were incredibly pessimistic (and I mean in droves, every single one of them) about a company that had a horrible history, but on which I had become increasingly bullish on, was with $SPOK.

GeoInvesting premium subscribers who bought SPOK when we added it to our Top Five Model Portfolio have seen the stock go from $8.19 to $17 over the past year, and collected a 15% dividend along the way.

Along with this idea, you will gain access to all of GeoInvesting’s wide array services, content and tools that will help you make informed investing decisions.

Geoinvesting is a research platform founded in 2007 to publish premium research on microcap stocks that meet a certain set of criteria that we have proven leads to superior returns. Empirical evidence proves that investing in microcap stocks beats the returns of larger cap stocks by 8.24% per year. Even Warren Buffett and Peter Lynch have said that if they were to invest in one type of stock, it would be microcaps. We provide our subscribers with an even bigger edge by combining the microcap investing edge with our own tested strategies to find the best stocks that are undervalued relative to their growth prospects or other positive catalysts. Our approach is based on qualitative and quantitative factors that finds stocks a point where they are going through significant changes that the market has yet to identify. This opportunity is only available in the Microcap world, an area ignored by institutions, Wall Street and the financial media.

Over the last 15 years, we have also built a expert Microcap investor network who contribute ideas to our subscriber base.

Our History

1500+ Equities Covered
200+ Multibaggers
30+ Years Of Investing Experience
200+ Management Interview Clips

Subscribe Now For A Risk Free Trial