The media is hyper focused on the clickbait stories of the day involving the President, trade policy, anything AI along with quantum dreams and nuclear wishes.
All are good stories. All of them have kernels of truth, sometimes large ones. Very few of the stories will make you a meaningful amount of money.
The more people that read the same story, the lower your odds of success become.
The louder the Instant Experts of the Internet scream about the mind blowing potential of the latest and greatest next big thing, the more likely it is to be big.
I ran across a quote this weekend from David Dreman, one of the most underrated investors of all time. In his book on Contrarian Investing, Dreman pointed out that successful investing goes against human nature."
You have to be willing to do what everyone else does not do.
Dreman also suggests that the whole concept of doing “Deep Dives” to gain an edge is a fool’s task. In today’s world of instantly available information, it is tough to gain an edge when it comes to most publicly traded companies.
You can gain an edge owning highly illiquid, unfollowed, hard to trade OTC stocks, but that is a full time job in and of itself.
The key to success according to Dreman is to follow a strategy that consistently exploits investors’ overreaction to events and addiction to being a part of herd behavior.
Today I am going to show you a strategy that does exactly that. Furthermore, it exploits human behavior in several ways. It defies traditional wisdom. It takes advantage of the power of incentives.
You will not be doing what everybody else is doing.
One of the greatest truths of the markets is that private equity funds have offered the best returns over the past fifty years. One of the biggest lies is how they delivered those returns.
One man exposed the reality and has screamed the truth from rooftops. No one has listened. It does not involve anything click worthy.
Private equity has always sold itself as a world of genius dealmakers and operational wizards, but Daniel Rasmussen of Verdad has done the hard work of pulling back the curtain. When he dug through decades of buyout data, the story was not one of brilliance in the boardroom.
Instead, it was one of financial engineering.
The great secret, Rasmussen argues, is not hidden insight or magical management but simply buying small, cheap companies and piling on debt. The industry’s celebrated outperformance, he shows, can be explained by that combination of value and leverage, not by any unique skill set.
The key to making it all work is not just the initial leverage, but the steady paydown of that debt over time. As portfolio companies generate cash flow and chip away at their borrowings, the equity slice of the capital structure quietly expands. That is what drives the handsome returns private equity reports back to investors.
Even if the business is only doing modestly better, the optics of deleveraging make the equity story look powerful.
For investors, Rasmussen’s work is a reminder that there is nothing mystical about private equity’s track record. The same results can be recreated in the public markets by holding a portfolio of small cap value stocks with leverage without high fees. The heart of the strategy lies in leverage and repayment, and once you understand that the mystery disappears.
Now let’s talk about Pete Stavros for a second. Pete Stavros of KKR has built a reputation for proving that giving employees equity is not only good for workers but can also deliver superior returns for investors. His approach started years ago with CHI Overhead Doors, where he handed out ownership stakes to line workers and paired it with financial literacy training.
The result was a culture shift that boosted efficiency, reduced waste, and led to a sale that generated a tenfold return, with $360 million shared among 800 employees.
Similar successes followed at GeoStabilization International, where equity ownership cut turnover from 50 percent to 17 percent and produced $75 million in payouts for 900 employees at exit, some receiving life changing sums.
KKR has always given equity to management to incentivize them to get the business to generate cash flows and repay the debt. Incentives for the entire workforce to do so has helped power higher returns. Incentives matter.
Building a portfolio that replicates this approach is not that hard. We start by narrowing our universe to small companies (market caps of less than $2 billion) that have high debt to equity ratios. Then we remove any that are not actively reducing the debt over the past year. Finally, we only include those that have a decent amount of insider ownership.
Owning the small handful of companies we uncover has crushed the markets over the past decade. Index owners have been exposed to all of the big name tech stocks and the very best stories, but these under the radar companies that have insiders incentivized to reduce the debt and increase the stock price have blown the market away. For every dollar gained by the S&P 500, investors using this strategy would have earned more than $1.70.
Here are five stocks that currently fit the profile of potential winners using the strategy that Wall Street is ignoring:
Global Partners LP (Ticker: GLP) is a master limited partnership that distributes petroleum products and operates convenience stores across the Northeast. While historically leveraged, GLP has prioritized debt reduction in recent years, extending maturities and reducing reliance on its credit facilities. Family ownership, particularly by the Slifka's, anchors decision making and ensures continuity. The combination of stable cash flows, insider alignment, and ongoing deleveraging supports a case for steady value compounding, not unlike the midstream energy strategies private equity favors.
CommerceHub (Ticker: CMRC) provides cloud based e-commerce and drop ship solutions that allow retailers to expand product offerings without inventory risk. Its platform supports order management and fulfillment optimization, making it deeply embedded in retail supply chains. Debt levels rose following its private equity backed transactions, but cash flow growth has enabled repayment efforts and a more manageable balance sheet. With high institutional and management ownership, CommerceHub aligns closely with investors while executing a strategy built around scalable, recurring revenues: hallmarks of the private equity replication model.
Sinclair Broadcast Group (Ticker: SBGI) controls one of the largest portfolios of television stations in the United States, complemented by digital and regional sports assets. Aggressive acquisitions left Sinclair with a heavy debt load, particularly tied to its sports subsidiary, but management has turned its focus toward repayment and restructuring. Advertising cycles can be volatile, but retransmission fees and political spending provide reliable cash generation. The Smith family retains significant ownership and influence, reinforcing long term consistency. Sinclair today looks like a classic private equity style investment: a levered balance sheet gradually de-risked by strong recurring cash flows and aligned insider leadership.
Gannett Co. (Ticker: GCI), the largest newspaper publisher in the United States, is attempting to pivot from its structurally challenged print business into digital subscriptions and advertising. The 2019 merger that created the company left it with significant leverage, but management has steadily chipped away at its obligations, emphasizing free cash flow generation and refinancing. Digital progress is slow but measurable, and Apollo linked entities remain influential investors, tying ownership to a turnaround thesis. Gannett exemplifies the distressed value profile where debt repayment and modest execution can unlock significant equity value if stabilization takes hold.
Quad/Graphics (Ticker: QUAD) remains a leader in commercial printing while transitioning toward integrated marketing services. The print industry’s decline forced a strategic shift, but Quad has maintained a disciplined focus on debt reduction, selling non-core assets and lowering leverage to more sustainable levels. Strong free cash flow supports this effort. The Quadracci family’s substantial stake ensures that strategic decisions are tied to long term equity outcomes. While secular pressures remain, Quad’s balance sheet progress and insider alignment place it firmly in the category of private equity replication opportunities.
