Deep Value 101: What Makes A Stock Cheap?

Have a No-Bullshit Approach To Investing.

Your friend Jimmy owns a lemonade stand.

It’s a nice stand, you think.

It’s fully equipped with a built-in lemon storage, a large water container that keeps the water cold all day (thanks to a set of tiny solar panels on the wooden roof above your head), plus the newest Squeezz™ lemon squeezer, the one with the chrome handle, and that satisfying clunk when you press it down.

You remember seeing this exact lemonade stand in a Lemonz-Ware Co. store two months ago while window-shopping at your local mall.

Brand new, it goes for $800, with a 10-year guarantee included.

Jimmy desperately needs cash to cover a margin call from shorting Bitcoin on 3x leverage, and he wants to sell it to you.

The price is $300.

You ask how much money the stand makes, and he honestly replies:

“It brings in about $200 a year after costs.”

So you start doing the math.

The stand costs $800 brand new, but Jimmy’s had it for about 2 years now.

You figure it probably loses about 10% in value each year, going by the 10-year guarantee.

Plus, you assume there’s some wear and tear, like a cracked piece here and there, since Jimmy has a habit of hitting things when his crypto bets don’t go as expected.

Conservatively, you estimate the stand’s current value to be around $450.

You also run a quick check on LemonSqueezersClub.com, and sure enough, the $200 in annual net income checks out.

Moreover, you figure that just by moving the stand to a higher traffic neighborhood a few blocks closer to where the mall is located, you could easily boost profits.

On top of that, Jimmy’s not really the best salesman, as Bitcoin’s volatility tends to make his mood… unpredictable.

Not something you struggle with, of course, since you subscribe to The Stonkstack and know better:

Folks in your town would be happy to see someone new running the stand.

Obviously, you’re not the only person who could do this, but Jimmy came to you first.

Let’s just say Jimmy doesn’t win any popularity contests at school. And actually, if there even were one, he’d probably come in last.

Some parents have even flat-out banned their kids from hanging out with him!

But the two of you have always gotten along pretty well.

And by your estimates, if you were the one running the stand, the profits could easily reach $350 a year, maybe even more.

Suddenly, it all becomes simple:

Is paying $300 for a business with assets worth $450, and $350 in annual profits a good deal?

You go home and start thinking about that.

For some reason, you’re still not convinced.

After all, you need more data to decide, more research.

You ask around, and your cousin Fred, who recently got into macro, says that according to his projections, if the Fed hikes rates another 150 basis points (what he says definitely will happen), lemon prices in your local market will jump 18.7%, based on historical data from 2004 to 2007.

That, in turn, could increase the stand’s operating costs by 14%, which might compress margins unless you pass it on to customers. But if you do pass it on, foot traffic could decline due to reduced demand elasticity in citrus products during non-peak hours.

What he says sounds very smart and convincing.

He talks about monetary policy and supply shocks, using terms like EBITDA and “cyclical margin pressure”, whatever the hell that is.

It all sounds so impressive that you start to second-guess yourself.

Maybe it really is more complicated than it looked?

Perhaps I shouldn’t be so sure.

So now you don’t buy the lemonade stand.

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What Makes A Stock Cheap?

Whenever I check out Value Investors Club or read stuff here on Substack, I can’t help but notice how much space and effort goes into analyzing the story, macro, and all the background things, and how little into what actually makes the stock cheap.

Oftentimes, the bulk of the thesis goes like this:

“Company X has been growing 30% annually for the past five years, and the industry it operates in is projected to reach $125 billion by 2030, according to experts. If Company X captures just 5% of that market (which I think is conservative, given management’s track record and recent LinkedIn posts), revenues could 6x from here.

Also, with the Fed cutting rates back to pre-COVID levels (which they absolutely will), I estimate earnings will grow 12.3% annually, maybe more. There’s also room for multiple expansion once the macro headwinds ease. Don’t forget the structural tailwinds from the semiconductor supercycle, AI adoption, and increased automation - all of which should, in theory, boost margins indefinitely. Management has hinted at international expansion too, so this might be a 10-bagger.”

Or like this:

“Company Y is in the early stages of transforming from a traditional hardware company into a high-margin SaaS platform. With a renewed focus on recurring revenue, the upcoming product suite launch and recent executive hires signal a major inflection point.

The company is trading at just 4.3x next year’s adjusted EBITDA (excluding restructuring costs and stock-based comp), which is a steep discount to peers. Once the market starts recognizing the shift toward a software multiple, there’s room for significant multiple expansion.”

Sounds very professional, doesn’t it?

And yet, not a single word here tells you what the business is actually worth.

In reality, it probably even makes it harder for you to really understand its real value.

After all, there’s just so many important things to consider here!

If we strip out the fancy stuff, we’re basically left with just a bunch of assumptions, most of which are not really grounded in any fundamental truths of what actually makes a stock worth anyone’s money or time.

I personally follow the Graham-and-Buffett school of investing, now universally known as deep value, so I naturally focus more on the quantitative side of things.

These are the companies that Buffett calls “mediocre, but extremely cheap”, as opposed to your typical “wonderful companies at a fair price”.

Like this one, for example:

A stock with a terribly simple thesis, but one which has given me incredible results.

Exploiting Cyclical Companies For Outsized Returns — Part [1/2]

I find focusing on the balance sheet much more rewarding than anything else.

That’s what makes sense to me.

It might not be your style, and that’s totally fine.

You do what makes sense to you.

It’s what makes this game so interesting, after all.

But whatever your approach is, I think we can both agree on this:

At its core, intelligent investing is simply just common-sense investing.

Doing Things The Rational Way

Apart from being subscribed to my Substack, of course, the easiest way to learn common-sense investing is to simply:

1. Figure out what works more often than not

2. Figure out what doesn’t work very often

3. Build your investing strategy based on your findings

4. Focus on stocks where your strategy is most effective, and avoid those where it isn’t likely to work well.

After all, good investing is nothing more than buying things for far less than they’re actually worth, and avoiding dumb risks.

I’m not interested in complex setups where five different things need to go right.

I mean, if the whole thesis depends on rate cuts, multiple expansion, and international growth all happening at once, why even bother?

Don’t get me wrong. Interest rates are very important, obviously.

Buffett says that "Everything in valuation gets back to interest rates" and that "Interest rates are like gravity".

And he’s right.

Interest rates impact every part of the financial system we live in.

But you don’t become the next Tony Hawk by focusing on how friction affects the wheels of your skateboard.

You focus on keeping your balance, when to move your body in certain ways and when not to, and how to fall so that you don’t accidentally die.

Young Tony Hawk. As you can see, no textbook on physics in his hand.

Same with investing.

You don’t become an outlier with above-average returns by focusing on macro forecasts and other things you cannot possibly predict…

…you become a wannabe economist.

Because when it comes to investing, these give you almost 0 edge in doing what you’re actually trying to do.

In my view, Peter Lynch put it best:

“If you spend 14 minutes a year on economics, you've wasted 12 minutes.”

I'm pretty sure that, if you were only going to spend one single hour improving your investing skills in all of July 2025, this video would be one of the best ways to do it:

That leaves us with a very important question:

What then should you focus on to make the most money?

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What Has Actually Worked In Investing