Every quarter I write about the unknown heroes of stocks, these investors who toil way out of the hearing on the talking heads and instant experts.
These investors do not have PR departments or Social Media Directors.
They just come in, go to work, and make money.
Almost every quarter I feature one form with a spectacular track record and everyone ignores them
I am quite sure that 98.3% will ignore it again but I am once again going to feature this same firm and their latest stock picks as revealed in the 13F filing at the SEC.
Sometimes the best investment stories begin in the most unlikely places. While Wall Street was busy chasing the latest fads and fashions, a farm boy from Bradford, Illinois, was quietly learning lessons that would eventually outperform the market for four decades. This is the story of Donald Smith & Co., and how a chance encounter with Benjamin Graham changed everything.
Humble Beginnings
Donald G. Smith didn’t start life with a silver spoon or trust fund. He grew up on a small family farm in Bradford, Illinois, the kind of place where you learn the value of hard work before you learn much of anything else. While other kids his age were probably playing baseball or chasing girls, young Donald was making regular trips to the local library to read the Wall Street Journal.
Here’s where the story gets interesting: his first stock purchase was funded not by an allowance or birthday money, but by cash he earned raising and selling hogs. Think about that for a moment. While most people’s investment careers begin with some theoretical understanding of markets, Smith’s began with the very real work of feeding animals, watching them grow, and selling them for a profit. It was value investing before he even knew what value investing was.
The Graham Connection
Fast forward to UCLA Law School, where Smith would have what he later described as a “formative experience” that would shape his entire investment philosophy. Benjamin Graham, the father of value investing himself, was teaching at the UCLA Business School. During one particular lecture, Graham discussed a Drexel Firestone study that analyzed the performance of buying the lowest P/E third of the Dow Jones—what would later become known as the “Dogs of the Dow” strategy.
Graham wanted to update the study but lacked access to a database. So he did what professors do: he asked for volunteers to manually calculate the data. While other students probably saw this as unpaid drudgery, Smith saw opportunity. He volunteered.
Here’s where Smith’s practical farm background served him well. While crunching numbers by hand—no computers, no Excel spreadsheets, just pencil and paper—he began to see flaws in the P/E approach that others might have missed. He noticed that you’d often buy companies like Chrysler when earnings were booming and the P/E was low, only to watch earnings collapse in the inevitable down cycle, forcing you to sell at exactly the wrong time.
“So in effect, you were often buying high and selling low,” Smith later observed. It was this insight that led him away from earnings-based metrics toward book value as a more stable foundation for investment decisions.
Building the Foundation
After completing his MBA at Harvard Business School, Smith joined Capital Research in Los Angeles. This was the late 1960s, and the firm had just purchased an IBM mainframe computer—cutting-edge technology for the time. Most portfolio managers probably saw it as an accounting tool. Smith saw it as a research weapon.
Working with a programmer, Smith systematically back tested various value strategies: price-to-book, price-to-earnings, price-to-sales, dividend yields, growth rates, return on equity. The results confirmed what Graham had been teaching and what Smith’s instincts had suggested: value approaches worked. But more importantly, he discovered that there wasn’t just one way to beat the market.
Smith spent over a decade at Capital Research, eventually becoming a portfolio manager known for his deep value approach. He then moved to Home Insurance Company as Chief Investment Officer, where he built a team of young investment professionals. One of those professionals was Richard Greenberg, who would become not just a colleague but a partner for nearly four decades.
The Firm Takes Shape
In 1980, Smith founded Donald Smith & Co. with a simple but powerful philosophy: invest in stocks trading in the bottom decile of price-to-tangible-book-value ratios. Greenberg joined him from Home Insurance, and together they began building what would become a legendary track record.
The approach was contrarian by nature. These weren’t the stocks making headlines or appearing on CNBC. These were the unloved, the forgotten, the temporarily fallen. Companies that the market had essentially written off but still possessed real assets and the potential for earnings recovery over a 2-4 year timeframe.
The Long Game
What followed was a masterclass in consistency. For nearly four decades, Smith and his team never deviated from their approach. They didn’t chase hot sectors during the dot-com boom. They didn’t abandon their discipline during the financial crisis. They simply kept buying good businesses at cheap prices and waiting for the market to recognize value.
The results speak for themselves: a 15.3% compound annual return over 30 years, achieved by focusing on a strategy that most of Wall Street ignored or dismissed as too simple.
When Donald Smith passed away in 2019, he left behind more than just an investment firm—he left a philosophy and a methodology that continues to generate superior returns. Under the leadership of Richard Greenberg and Jon Hartsel, Donald Smith & Co. continues to manage billions of dollars using the same approach that a farm boy from Illinois developed by hand-calculating data for Benjamin Graham.
There’s a beautiful symmetry to Smith’s story. He began his investment career buying stocks with money earned from raising hogs—real work producing real value. He ended it by building an investment firm that specialized in finding companies whose real assets were being overlooked by a market obsessed with quarterly earnings and growth stories.
In an industry that constantly searches for the next new thing, Donald Smith proved that sometimes the oldest thing, good businesses at cheap prices, remains the best thing. It’s a lesson that began on a farm in Illinois and ended up outperforming Wall Street for four decades.
Not bad for a kid who started with hogs and a library card.
Here are the latest additions to the Donald Smith and Company portfolio:
Mohawk Industries Inc. (Ticker: MHK) – Flooring Giant Turnaround
Mohawk Industries, the world’s largest flooring manufacturer, trades at approximately $120.61 per share with analysts setting a consensus price target of $141.64, implying nearly 39% upside potential. While current P/B ratio data is limited, historical analysis suggests the stock has traded below book value during market downturns, and the company’s substantial tangible asset base in manufacturing facilities and inventory provides inherent value support for patient investors.
Recent Q2 2025 results demonstrated operational resilience with EPS of $2.77 beating consensus estimates of $2.61, generating $2.8 billion in revenue despite challenging housing market conditions. The company maintained flat year-over-year net sales while showing strong financial health with a current ratio of 2.01 and Altman Z-Score of 3.17. Management’s optimism about Q4 performance, combined with expectations for Federal Reserve rate cuts to stimulate housing demand, positions MHK for cyclical recovery. The company’s recent $42.89 million share buyback program in Q2 demonstrates management’s confidence in intrinsic value, while the diversified global footprint across ceramic, North American flooring, and international operations provides defensive characteristics during the current housing market trough.
Executive Summary – Our analysis identifies compelling deep value opportunities among five undervalued equities trading at attractive price-to-book ratios. STNG presents the most compelling opportunity with a current P/B ratio of 0.74, while HG offers specialty insurance exposure at 0.91x book value with strong earnings momentum.
Gerdau S.A. (Ticker: GGB) – Brazilian Steel Giant
Gerdau trades at approximately $2.85 per share with a price-to-book ratio of just 0.60x, representing one of the most attractive asset-based valuations in the global steel industry. This 40% discount to book value reflects the market’s pessimistic view of steel fundamentals yet provides compelling downside protection given the company’s substantial tangible asset base across Brazilian and North American operations.
The 0.60x P/B ratio appears overly punitive considering Gerdau’s strategic positioning with nearly 50% of North America’s steel EBITDA and strong operational performance despite headwinds. Recent Q2 2025 results demonstrated resilient execution with adjusted EBITDA of R$2.6 billion, up 7% compared to Q1 2025, while the company maintains geographic diversification across markets. With analysts setting a consensus price target of $3.80 versus the current $2.85, the 33% upside potential combined with trading below book value creates an asymmetric risk-reward profile. The deep asset discount provides a margin of safety while positioning investors for significant appreciation as steel cycle conditions normalize and infrastructure spending accelerates.
Hamilton Insurance Group Ltd. (Ticker: HG) – Specialty Insurance Value
Hamilton Insurance Group trades at an attractive P/B ratio of 0.91x compared to the US Insurance-Reinsurance industry average of 1.1x, offering compelling book value-based upside with substantial tangible equity backing. The Bermuda-based specialty insurer operates through three underwriting platforms: Hamilton Global Specialty, Hamilton Select, and Hamilton Re, providing diversified specialty insurance and reinsurance solutions globally across casualty, property, and specialty lines.
Recent Q2 2025 results demonstrated exceptional operational performance with operating EPS of $1.55 significantly exceeding consensus estimates of $1.05, driven by strong net investment income of $149 million from the Two Sigma Hamilton Fund. Book value per share reached $25.55 as of June 30, representing an 8% sequential increase and 23.5% growth from prior year levels. The company maintains robust financial metrics with a PE ratio of 6.78x versus the industry average of 13.72x and an intrinsic value estimate of $30.08 according to Graham’s formula. JMP Securities recently raised their price target to $29 from $27, representing approximately 0.9x forward book value, while the company’s active share repurchase program and 18.3% return on average equity underscore management’s confidence in value creation.
Scorpio Tankers Inc. (Ticker: STNG) – Maritime Value Leader
STNG presents the most compelling P/B opportunity in our coverage universe, trading at just 0.74x book value. With book value per share of $56.72 and recent strong growth averaging 18% annually over the past 12 months, the discount to book value appears unjustified given the company’s asset-heavy business model.
The company operates a modern fleet of 99 owned and leased tankers including 38 LR2, 47 MR, and 14 Handymax vessels, providing seaborne transportation of crude oil and refined petroleum products globally. Recent Q2 2025 results exceeded expectations with EPS of $1.41 versus consensus of $1.05, demonstrating strong operational performance amid market uncertainties. The tanker industry’s cyclical nature creates significant upside potential as global trade normalizes and fleet utilization improves. The company maintains an active capital allocation strategy with securities repurchase programs, enhancing shareholder returns.
Ryerson Holding Corp. (Ticker: RYI) – Metal Distribution Recovery
Ryerson trades at a P/B ratio of 1.86x based on recent data, though some sources indicate the ratio could be as low as 0.83x, making it an intriguing value proposition in the metals distribution space. The company serves as a value-added processor and distributor of industrial metals across the US, Canada, and Mexico, offering carbon steel, stainless steel, alloy steels, and aluminum products to diverse end markets.
Recent Q2 2025 results showed net sales of $1.17 billion, up 3% quarter-over-quarter, though EPS of $0.08 missed consensus expectations of $0.16 amid challenging market conditions. Despite near-term headwinds, the company has invested over $650 million since 2021 in network modernization, gaining market share in North America particularly in carbon long, carbon plate, and stainless long products. The metals distribution business model provides operational leverage as industrial activity improves, while the 3.44% dividend yield offers income during the recovery phase. Management’s active share buyback program and focus on cash generation to reduce the current 4.4x leverage ratio demonstrate commitment to shareholder value creation as market conditions normalize.
Two Sigma Hamilton Fund. Book value per share reached $25.55 as of June 30, representing an 8% sequential increase and 23.5% growth from prior year levels. The company maintains robust financial metrics with a PE ratio of 6.78x versus the industry average of 13.72x and an intrinsic value estimate of $30.08 according to Graham’s formula. JMP Securities recently raised their price target to $29 from $27, representing approximately 0.9x forward book value, while the company’s active share repurchase program and 18.3% return on average equity underscore management’s confidence in value creation.
Metallus Inc. (Ticker: MTUS) – Specialty Steel Recovery
MTUS trades at a P/B ratio of 0.96x compared to the US Steel industry average of 0.82x, with an attractive PEG ratio of 0.19x indicating strong value relative to growth prospects. The company, formerly TimkenSteel Corporation, manufactures alloy steel, carbon and micro-alloy steel products serving automotive, energy, industrial equipment, and aerospace sectors.
Recent Q2 2025 results demonstrated strong performance with order backlog growth, shipment increases, and improved profitability despite challenges in aerospace and defense segments. The company maintains strong liquidity with $240.7M in cash and short-term investments, sufficient to cover operations while debt-to-equity has improved from 0.93 five years ago to 0.62 currently. Analysts have set price targets ranging from $20-24, suggesting potential upside from current levels around $15.57. The specialty steel focus provides higher margins than commodity steel, positioning MTUS for recovery as industrial demand strengthens.
