Under the Radar: 21% Annual Returns? This Value-Momentum Strategy Delivered for Decades

After four decades of buying and selling stocks, I’ve learned that the best investment strategies are deceptively simple. They’re the kind of ideas that make perfect sense once you hear them but somehow escape the attention of most investors who are too busy chasing the latest hot trend or trying to outsmart the market with complex mathematical models.

One such strategy has been quietly minting money for those smart enough to pay attention: combining deep value with price momentum in the small-cap space. It’s an approach that flies in the face of conventional wisdom, which insists you must choose between being a value investor or a momentum player. But as I’ve discovered over the years, some of the market’s most powerful inefficiencies exist precisely where these two philosophies intersect.

James O’Shaughnessy codified this approach in what he called the “Tiny Titans” strategy. His method was brilliantly simple: buy the cheapest stocks (measured by price-to-sales ratios) that were also showing the strongest price momentum over the past twelve months. Focus on the smallest companies in the market, the true microcaps that most professional investors couldn’t touch even if they wanted to.

The results spoke for themselves. From 1964 to 2009, this strategy delivered annualized returns north of 21% and more than double the broad market’s performance. A thousand-dollar investment compounded into nearly $7 million over that period.

Not bad for a strategy you could execute with a basic stock screener and a willingness to own companies most people had never heard of.

But here’s the thing about markets: they evolve. What worked brilliantly in the 1980s and 1990s faces different challenges today. The microcap space has become cluttered with broken SPACs, penny stock scams, and biotech shells burning through cash with no viable products. Liquidity has become a real problem, and the regulatory environment has made many of these names practically uninvestable for anyone managing serious money.

So let me propose a variation on O’Shaughnessy’s theme, one that preserves the essential DNA of Tiny Titans while adapting it for today’s market realities. Instead of focusing on the absolute smallest companies, we’ll target what I call the ‘forgotten middle' stocks with market capitalizations between $300 million and $2 billion.

This isn’t quite microcap territory, but it’s nowhere near large enough to attract the attention of most institutional investors. These companies exist in a sweet spot: they’re too small for the big pension funds and mutual funds to bother with, too boring for CNBC to cover, and too illiquid for the high-frequency trading crowd to manipulate effectively.

What you’re left with is a hunting ground full of misunderstood companies that have survived their awkward adolescent phase and are on the verge of something bigger. When you can buy these businesses at cheap valuations and catch them just as their fortunes are turning, the results can be spectacular.

The strategy itself couldn’t be simpler. We’re looking for U.S. companies that meet three criteria:

First, size matters. Market cap between $300 million and $2 billion. Big enough to have real businesses with actual revenue streams, small enough to be ignored by the crowd.

Second, we want them cheap. Price-to-sales ratios in the bottom quartile of the market, ideally under 1.0. This isn’t about finding the absolute cheapest stocks, it's about finding businesses that are genuinely undervalued relative to their revenue-generating capability.

Third, we want momentum. Not the kind of momentum that comes from short squeezes or Reddit armies, but sustained price appreciation over the past twelve months, which puts these stocks in the top 5% of all performers. We exclude the most recent month to avoid getting caught up in short-term volatility.

The beauty of this combination is that it exploits two of the market’s most persistent behavioral biases. Investors consistently underreact to improving fundamentals, especially in unloved stocks. And once a stock starts moving higher, performance chasers eventually pile in, creating a self-reinforcing cycle of demand.

The $300 million to $2 billion market cap range represents what I consider the market’s most fertile ground for contrarian investors. These companies have moved beyond the survival stage that plagues true microcaps, but they haven’t yet attracted the institutional attention that tends to eliminate pricing inefficiencies.

Many of these businesses are at genuine inflection points  are launching new products, expanding into new markets, or achieving profitability for the first time. When Wall Street finally notices what’s happening, the revaluation can be swift and dramatic.

Consider some examples from recent years.

 Boot Barn was trading at half of sales in 2016 during a retail sector pullback. As the western wear retailer’s margins improved and sentiment shifted, the stock ran from under $10 to over $90.

Enphase Energy was a $300 million solar company trading below 0.5 times sales in 2017. As demand for microinverters exploded, early investors enjoyed a 100-bagger return.

These weren’t lucky picks or hot tips from Wall Street analysts. They were systematic discoveries using a disciplined screening process that identified cheap stocks with improving momentum.

Momentum gets a bad rap in value investing circles, but I’ve found it to be an essential filter for separating genuinely improving businesses from permanent value traps. The key is using the right time frame.

Twelve-month momentum, excluding the most recent month, has proven to be the gold standard. It’s long enough to filter out random noise and short-term manipulation, but responsive enough to catch businesses in the early stages of a turnaround or growth acceleration.

Some practitioners also incorporate six-month momentum as a confirmation signal. If a stock is performing well over both time frames, you’re probably looking at a genuine trend rather than a temporary blip.

This isn’t a set-it-and-forget-it strategy. You’ll need to rebalance monthly, selling any names that no longer meet the criteria and adding new ones that do. You’ll own some obscure companies that your friends have never heard of.

But you’ll also own some of the market’s biggest winners before they become obvious to everyone else.

After decades of watching markets cycle through various fads and fashions, I’ve come to appreciate strategies that are both simple to understand and grounded in solid behavioral finance principles. The combination of value and momentum in small-cap stocks represents one of the market’s most enduring inefficiencies.

By focusing on the $300 million to $2 billion market cap range, we can capture most of the upside potential of the original Tiny Titans strategy while avoiding many of the practical problems that plague true microcap investing.

The market will always offer opportunities to those willing to look where others won’t. In a world obsessed with mega-cap growth stocks and the latest meme stock craze, some of the best values are hiding in plain sight among the forgotten companies that are quietly building real businesses and generating genuine momentum.

Cheap stocks that are going up tend to keep going up. It’s a simple truth that has created fortunes for those disciplined enough to act on it. The next generation of Tiny Titans is out there waiting to be discovered.

Here are three companies that currently pass out momentum and value filters and could be huge winners:

OppFi operates in that uncomfortable corner of finance that makes most investors squirm: subprime lending. Trading at just 0.5 times sales with a $250 million market cap, this Chicago-based company partners with community banks to extend credit to the 60 million Americans who get turned away by mainstream lenders.

Here’s what caught my attention: the company just posted 112% net income growth in 2024 while everyone else in fintech is struggling. They’re generating $526 million in trailing revenue by doing something banks won’t—lending to people with imperfect credit at higher rates, but with technology-driven underwriting that actually works.

The bears will tell you subprime lending is risky, and they’re right. But OppFi uses advanced data analytics and machine learning to assess creditworthiness efficiently, and their loss ratios have been improving. Sometimes the businesses everyone avoids are exactly where the money is hiding.

Stitch Fix Inc. SFIX – The Comeback Story Wall Street Forgot

Stitch Fix was once the darling of Silicon Valley, going public in 2017 with a $1.6 billion valuation. Today, it’s a wounded bird that’s starting to show signs of life. The company just beat Q2 expectations with revenue of $312.1 million and managed to achieve a 710 basis point sequential improvement in year-over-year revenue comps.

The business model remains compelling: they send you clothing they think you’ll like, you keep what you want and send back the rest. It’s retail meets data science, and when it works, it’s magical. Both their Men’s business and Freestyle channel returned to year-over-year revenue growth, suggesting the turnaround strategy is gaining traction.

Founder Katrina Lake returned as interim CEO in January 2023 after the previous management team couldn’t execute. Sometimes it takes a founder to fix what’s broken. The stock has been beaten up enough that modest improvements could generate substantial returns.

Universal Insurance Holdings UVE – Florida’s Hurricane Specialist

Universal Insurance operates in the one place most insurers fear to tread: Florida’s hurricane-prone coastline. With a current stock price of $23.16 and market cap of $636.4 million, this isn’t a company for the risk-averse.

But here’s what’s interesting: they just reported Q4 2024 results with direct premiums written up 8.8% year-over-year to $470.9 million, despite facing three hurricanes (Debbie, Helene, and Milton). The company maintains relationships with 3,214 independent insurance agencies across 32 states and uses sophisticated risk assessment algorithms.

They’ve secured 92% placement of their 2025 first event catastrophe tower and additional multi-year capacity for the 2026 hurricane season. In an industry where most players are fleeing Florida, UVE has figured out how to price risk appropriately and stay profitable. Sometimes the best opportunities exist where others fear to go.

Each of these companies operates in markets that make institutional investors nervous—subprime lending, troubled retail, and hurricane insurance.

Each also have momentum building that could provide the buying pressure to send the shares dramatically higher.