How We Build the DEEPi Index

by Tobias Carlisle

March 23, 2021

The contents of this article are not intended as a recommendation to buy or sell any securities.

The DEEP Index (“DEEPi”) seeks to identify deeply undervalued small- and micro-cap companies listed in the United States. Tobias Carlisle’s firm Acquirers Funds® manages the DEEPi index.

DEEPi seeks to hold stocks with strong balance sheets and durable businesses run by shareholder friendly managers. We believe these businesses can deliver sufficient returns over time for the risks taken.

Small and Micro

DEEPi begins by examining stocks with a market cap—the share price multiplied by the total shares outstanding—less than the 75th percentile of all stocks. In the first quarter of 2021, the largest stock in the universe had a market cap smaller than $2.5 billion, and the smallest stock in the universe had a market cap greater than $75 million. We also exclude depository receipts, over-the-counter stocks, and master limited partnerships.

Deep Value

DEEPi ranks the stocks remaining in the small- and micro-cap universe by the Acquirers Multiple®, the metric that certain financial acquirers, including private equity firms and activists, use to identify potentially deeply undervalued takeover targets.

DEEPi seeks to create a portfolio of the most deeply undervalued 100 stocks in the small- and micro-cap universe.

Acquirers Multiple®

The Acquirers Multiple® compares a stock’s operating earnings to its enterprise value.

Operating earnings is the operating income available after depreciation and amortization. It is comparable to earnings before interest and taxes (EBIT), but is constructed from the top of the income statement down and excludes special items and non-recurring earnings.

Enterprise value is the total cost to acquire a company in its entirety. It includes any net debt, preferred stock, and non-controlling interests.

Earnings Quality

DEEPi examines the cheapest stocks ranked on the Acquirers Multiple® to ascertain whether or not accounting earnings convert into cash flow over time. DEEPi excludes stocks with accounting earnings that do not match cash flows over time.

Balance-Sheet Strength

DEEPi looks at the balance sheet of each stock to determine whether it is conservatively financed—favoring net cash over net debt—and appropriate to the business. DEEPi excludes stocks with too much debt relative to the operating income.

Business Durability

DEEPi examines each stock’s gross margins to understand the durability of the business. We believe high or stable gross margins indicate a durable business.


DEEPi looks to see how each management team uses cashflow. Deeply undervalued companies with positive cashflow and balance-sheet strength should repurchase stock.

We believe large buybacks in deeply undervalued companies are a powerful indicator. In our view, they demonstrate three things:

  1. The company is undervalued
  2. Management recognizes the undervaluation and wishes to take advantage of it on behalf of shareholders
  3. The company has the cash flow and balance sheet to exploit the opportunity.

The aim of the DEEPi index is to identify deeply undervalued small- and micro-cap stocks, with strong balance sheets and durable businesses run by shareholder friendly managers. We believe these businesses can deliver satisfactory risk-adjusted returns over time.


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