Key Metrics:
55% discount to NCAV
4.5x forward P/E
Large government contract as catalyst
Let’s face it: valuations in the U.S. market have gotten a little out of hand.
By almost any measure, large-cap stocks are now priced at levels we’ve only seen right before major pullbacks.
An article in Fortune recently highlighted the disconnect between rising multiples and the weak economic data we’ve been getting. Whether it‘s slowing job growth, disappointing GDP numbers, or stubborn inflation, the risks for the S&P 500 just keep piling up.
The author pointed out the issue as follows:
„Prices are so extremely stretched that they risk a sharp fall, or at a minimum, weak gains looking forward. The problem: The S&P 500’s charge is far outpacing the plodding advance in earnings. At the market close on Aug. 14, the big-cap index posted yet another record at 6,469. As of Q1 2025, the last full quarter of reported profits, S&P 500 earnings per share, based on the trailing 12-month results, stood at $216.69. Hence, the S&P price-to-earnings multiple just hit 29.85 - I’ll round it to 30. By historical standards, it’s a gigantic, even scary figure.“
That’s why there are very few large-cap names I find interesting right now.
The good news is that not all corners of the market are equally expensive. The two other major equity indices, S&P Mid Cap 400 and S&P Small Cap 600 are both trading at valuations around or even below their historical averages.
To me, that suggests these sectors are much better positioned to outperform over the next decade.
Especially small microcaps seem to be best suited to take advantage of current market conditions. These names are often ignored, which means you can still find stocks trading at deep discounts to their real value.
When I search for new ideas, I focus on exactly those kind of names. Tiny companies with growing earnings, little or no debt, and very often… low trading volume.
It may sound odd, but that’s how you can find companies that are off the radar.
Today’s stock clearly fits that description.
It trades below liquidation value and qualifies as a Graham-style net-net.
In addition to the cheap valuation, it has a clear catalyst.
The company recently announced it won a large government contract. Once the first financial statements with those higher numbers come out, I expect that alone to push the stock higher.
And if it doesn’t, management has a strong track record of acting in a shareholder-friendly way - good communication, selling unused assets, and buying back stock.
In 2021, after selling their headquarters, they used the proceeds to retire about 30% of outstanding shares.
Something similar could easily happen again.
In other words: this is the kind of setup that still makes sense in an expensive market.