Draft Picks and Value Stocks

During the National Football League’s recent draft, teams selected from hundreds of prospects to build rosters for the future. It’s my favorite sporting event of the year, mainly because it provides an opportunity to see professional evaluators miss wildly with their projections.¹ And while many sources of uncertainty contribute to these misses, NFL teams are often derailed by a self-inflicted error: focusing too much on a prospect’s weaknesses at the expense of all their strengths.

I was thinking about this lesson in the context of small cap value performance. Many investors have expressed concern over small cap value stocks underperforming large caps in the US over the 20 years ending in January. But this was largely an outlier from a global perspective. In major non-US markets, small cap value stocks handily outperformed their large cap counterparts over this period. While a two-decade stretch of underperformance is not what investors hope to see from US small value, it’s important to take notice of what went right for small value over this period.

Comparing Recent Financial Performance Across the Board

When we scan through recent financial results for several notable companies, some interesting contrasts emerge—reminding us, once again, that performance drivers can look quite different depending on where you cast your net.

Take quarterly profit growth, for starters. A handful of companies saw profit surge at break-neck speed—think leaps of over 150% for certain players—while others wrestled with steep drops, sometimes more than 20% off their previous quarter’s mark. This kind of volatility shows just how much fortunes can diverge, even among established firms.

Sales growth paints a similarly mixed picture. A few organizations delivered exceptional top-line results, growing quarterly sales by well over 100%, while others posted modest gains in the single or low double digits—or even recorded small declines. In short: not all sectors (or management strategies) are created equal.

If we pivot to margins and balance sheet health, return on capital employed (ROCE) and debt-to-equity ratios provide more food for thought. Several firms have maintained robust double-digit ROCE figures, signaling efficient use of capital, while most have kept debt at bay, ensuring financial stability even in rougher market weather.

What do we make of all this? It’s a lively demonstration that headline indices or size alone don’t dictate results. Investors need to look beyond averages and spot what went right—and why—with each name in the stack. Sometimes, a single standout quarter is driven by a unique business model, a turnaround, or a timely pivot into new markets. Other times, it’s simply the ebb and flow of cyclical forces at play.

Taking Stock: Current and 5-Year Average ROCE Performance

So, what do we know about the returns these stocks have delivered on capital employed—both in the short and longer term? Here’s what caught my eye as I surveyed the field:

Current ROCE (Return on Capital Employed) ranges widely, with many companies posting strong numbers. For the most recent year, several stocks landed in the 30–105% range, showcasing notable operational efficiency.
5-Year Average ROCE paints a similar picture of consistency, with figures for many firms hovering between 37% and 93%. For example, some standouts recorded five-year averages in the 50s and even above 90%, underscoring the durability of their value-creation over time.

To put that in perspective, these kinds of ROCE numbers are rare in global indices and put them on par with some of the most celebrated compounders globally—think of the likes of Colgate-Palmolive and Procter & Gamble, both known for generating enviable returns on the dollar they put to work.

Consistency Across Time: Not only have these value stocks shown resilience in their most recent reporting periods, but their five-year histories suggest these aren’t just flashes in the pan. Whether you look at newer standouts or established names, the ability to convert invested capital into profits—year in, year out—stands out as a remarkable common thread.
Range of Outcomes: Of course, not every stock boasts record-shattering returns. A few sit closer to the mid-teens or 20s for current ROCE and five-year averages, but even those levels stack up well against broader market norms.

The upshot? Whether you’re eyeing current results or taking a longer view, these metrics make a compelling argument for keeping an open mind about where value may be hiding—and how the narrative around small and mid-cap value can look very different when you dig beneath the headlines.

Exhibit 1 20-year annualized return differences between small cap value stocks and large cap stocks

Past performance is not a guarantee of future results.

Source: Dimensional. Returns in USD. Sample period is February 1, 2004–January 31, 2024.

 See Appendix for the list of indices representing small cap value and large cap stocks in each country/region.

Debt-to-Equity Ratios Among Selected Value Stocks

Given the turbulent history of small cap value returns—and the importance of assessing overall financial health—it makes sense to look beyond just performance numbers and consider balance sheets as well. Debt-to-equity ratio is a handy metric for this, since it measures how much companies rely on borrowing to fund their operations.

For these selected value stocks, the debt-to-equity ratios are exceptionally low almost across the board:

• Nearly all of the companies on this list sport a debt-to-equity ratio well under 0.10, with several practically debt-free (ratios at 0.00 or 0.01).
• Heavyweights like Coal India, Infosys, and Tata Elxsi all operate with minimal leverage (ratios between 0.07 and 0.09), a sign of financial resilience.
• Others—including companies in healthcare, technology, and finance—are equally conservative, with debt-to-equity ratios rarely crossing 0.05.
• Even the smaller and more growth-oriented names on this roster appear cautious, with almost no one taking on aggressive debt relative to their equity position.

For investors, this means that beyond examining value metrics, it’s worth recognizing the disciplined capital structures underpinning these stocks. Low reliance on debt may limit risk, especially when volatility creeps into the market.

 Thinking globally also reinforces the importance of diversification when emphasizing small cap value stocks. The returns for these stocks may not move in lockstep across regions, and outperformance for non-US stocks can mitigate the impact of disappointing relative returns in the US.

Value Stocks with Robust Fundamentals

When it comes to value investing, I’m reminded of analysts fussing over prospects’ forty-yard dash times while missing the forest for the trees—namely, the companies delivering consistently solid results where it counts. Instead of zeroing in on short-term blips or recent underperformance, it pays to notice businesses that pair enduring profitability with robust balance sheets.

A quick scan across diverse sectors reveals a handful of companies that stand out for their high operating profit margins (OPM), strong returns on capital employed (ROCE), and prudent use of leverage. These three metrics together often capture the elusive mix of efficiency, moat, and financial discipline that value investors hold dear.

Here’s what to look for:

High Operating Profit Margin: Indicates the business is running efficiently, turning a sizeable chunk of revenue into profit before interest and taxes.
Strong ROCE: Demonstrates management is skilled at deploying capital for outsized returns, a hallmark of quality.
Low Debt-to-Equity Ratio: Suggests the company isn’t overextending itself, giving it staying power through economic cycles.

Across both established and emerging sectors, a few notable examples emerge. Think of consumer staples like Colgate-Palmolive and Abbott India, both of which have demonstrated sustained profitability, high returns on invested capital, and minimal reliance on debt. Diversified industrials such as Ingersoll-Rand show similar financial discipline.

On the technology and pharma side, Infosys and Sanofi India continue to post impressive margins and return on capital while keeping balance sheets remarkably clean.

While nothing is guaranteed in investing, focusing on companies with this blend of high OPM, high ROCE, and low leverage can potentially swing the odds in your favor over the long run. And for those who enjoy sifting through the numbers, it’s a bit like watching a smart draft pick quietly transform into a perennial Pro Bowler—consistently productive, often overlooked, but invaluable to the overall team (or portfolio) performance.