Discovery › screen
Screen quality smallmid value
Date: 2026-07-29
Criteria: Convert the ring-2 finding (US small-cap value at 14.9x vs S&P 26.2x) into names. Profitable, low-debt, non-speculative.
Framework: analysis_notes.md §0 + full §1 health check on finalists
⚠️ This is a different asset class from the Microstocks sleeve.
Output/Microstocks/already holds 24 pre-revenue / turnaround names evaluated under §6, where the default prior is "most of these fail." Nothing here is that. Every name below is profitable, real-revenue, and screened for balance-sheet quality. Conflating the two would be the easiest way to misuse this screen.
Universe swept: 33 names across business services, niche software, specialty industrials, specialty insurance and healthcare services. Market caps $1.3B–$7.1B.
Executive Answer
One clear winner, one high-torque second, and one name I nearly recommended before the health check killed it.
The screen's most useful output may be the rejection: OTEX looked like the cheapest thing in the entire sweep (5.8x forward, 4.44% yield) and is a value trap. Revenue declining, FCF declining and below where it stood four years ago, 48% debt/assets, and returning more cash than it generates. §0 caught it; the price alone would not have.
🟢 Shortlist
| # | Company | Ticker | Sector | Mkt Cap | Price | %off High | fwd P/E | ttm | Yield | Target | Upside |
|---|---|---|---|---|---|---|---|---|---|---|---|
| 1 | Dolby Laboratories | DLB | Technology (IP licensing) | ~$5.1B | $52.54 | −31.5% | 11.5x | 20.8x | 2.75% | $78.33 | +49% |
| 2 | Calix | CALX | Infrastructure (broadband) | ~$2.5B | $35.55 | −50.1% | 15.4x | 46.8x | — | $62.33 | +75% |
| 3 | Gibraltar Industries | ROCK | Industrials | ~$1.3B | $43.10 | −42.6% | 9.0x | 20.6x | — | $72.50 | +68% |
| — | Progress Software | PRGS | Technology | ~$1.9B | $42.71 | −14.4% | 6.9x | 20.7x | — | $53.80 | +26% |
| — | ICF International | ICFI | Technology (govt) | ~$1.5B | $83.03 | −18.4% | 10.8x | 17.9x | 0.70% | $105.25 | +27% |
Health Check (§1) — 4 fiscal years, newest first
| Metric | DLB | CALX | ROCK | PRGS | ICFI | 🔴 OTEX |
|---|---|---|---|---|---|---|
| Revenue trend | 1.35 ← 1.27 ← 1.30 ← 1.25B ✅ steady | 1.00 ← 0.83 ← 1.04 ← 0.87B ✅ recovered | 1.14 ← 1.02 ← 1.05 ← 1.39B ⚠️ −6.5% CAGR | 978 ← 753 ← 694 ← 602M ✅ +17.5% CAGR | 1.87 ← 2.02 ← 1.96 ← 1.78B ⚠️ declining | 5.17 ← 5.77 ← 4.48 ← 3.49B 🔴 declining |
| FCF trend | 430 ← 297 ← 337 ← 259M ✅ 4yr HIGH, +66% | 116 ← 50 ← 38 ← 13M ✅ +106% CAGR (8.8×) | 121 ← 157 ← 206 ← 83M ⚠️ halved | 229 ← 206 ← 168 ← 186M ✅ rising | 120 ← 150 ← 130 ← 138M ⚠️ declining | 687 ← 808 ← 655 ← 889M 🔴 below 4yrs ago |
| Gross margin | ✅ 88.1% | 56.8% (rising) | 26.8% | ✅ 80.8% | 37.2% | 72.1% |
| Debt / Assets | ✅ 1.2% ($39M) | ✅ 1.5% ($16M) | ✅ 4.2% ($58M) | 🔴 58.1% | 27.9% | 🔴 48.2% |
| Equity / Assets | ✅ 81% | ✅ 81% | ✅ 68% | 🔴 19.4% | 50% | 28.5% |
| Net margin | ✅ 18.9% | 1.8% (trough) | net loss | ⚠️ 7.5% (interest drag) | 4.9% | 8.4% |
| Shares outstanding | ✅ −4.4% | ~flat ($94M buyback) | ✅ −6.9% | ~flat | ✅ −2.7% | ~flat |
| Div covered by FCF? | ✅ Yes — 29% payout | n/a | n/a | 🔴 Dividend eliminated ($31M → $0.8M) | ✅ Yes (8%) | ⚠️ Total returns $815M > $687M FCF |
Rationale
1. DLB (Dolby) — the pick 🥇
The best business in the entire 33-name sweep, and it's on sale.
- 88.1% gross margin — IP licensing, not manufacturing. Dolby Atmos and Vision are embedded standards across the content-production and device chain, which is a switching-cost moat by construction (§2: intangibles + switching costs).
- Essentially debt-free: $39M against $3.23B assets (1.2%). Equity is 81% of assets. Invested capital equals equity — there is no leverage in the structure at all.
- FCF at a four-year high of $430M, up 66% over three years while revenue grew only 2.5% — that's margin and working-capital discipline, not a revenue cycle.
- Dividend covered at a 29% payout ratio, and buybacks have shrunk the share count 4.4% over three years. Total shareholder returns are 67% of FCF — returning cash without straining.
- −31.5% off its high at 11.5x forward with a 2.75% yield and a +49% consensus target.
Honest knocks: revenue growth is slow (2.5% 3yr CAGR) — this is a royalty annuity, not a grower, so the return comes from the multiple, the dividend and the buyback rather than from expansion. The reported ROIC of ~10.7% understates the underlying economics because a large cash pile sits in invested capital. And licensing models carry concentration risk to a handful of device and studio partners.
Portfolio fit: genuinely new territory — capital-light IP licensing, in no existing correlation cluster (not AI capex, not cyber, not AI-services). Income-producing. Earnings July 30.
2. CALX (Calix) — the high-torque second
The sharpest inflection in the sweep. FCF went $13M → $38M → $50M → $116M — an 8.8× increase over three years, with a +106% CAGR — while revenue recovered to a fresh high of $1.00B off an $831M trough. Debt-free ($16M on $1.06B assets), 81% equity, gross margin 56.8% and rising, and it bought back $94M of stock last year.
Why it's cheap: operating income is only $21M on $1.0B of revenue — margins are at a trough, which is exactly why the trailing P/E reads 46.8x. If operating margin normalises toward the gross-margin structure, the earnings leverage is enormous. That's the bet, and it's why consensus carries a +75% target at −50.1% off the high.
Honest knocks: it's a hardware vendor to rural telcos and ISPs — lumpy order patterns, and the federal broadband-funding backdrop (BEAD) is politically variable. Thin trailing profitability means a stalled recovery leaves you holding a 46x stock. Higher risk than DLB; size accordingly.
3. ROCK (Gibraltar) — fortress balance sheet, cyclical trough
Debt/assets of 4.2% with 68% equity and a −6.9% share count over three years — an unusually clean balance sheet for a building-products cyclical. At 9.0x forward, −42.6% off its high, with a strong_buy consensus and +68% target.
But the fundamentals are genuinely soft: revenue is −6.5% CAGR and below where it stood four years ago, FCF has halved ($206M → $121M), gross margin is a thin 26.8%, and the most recent year shows a net loss (operating income stayed positive at $123M, so this is a below-the-line impairment). This is a §6-style turnaround wearing a strong balance sheet — the safety is real, the earnings recovery is a forecast.
Not recommended
PRGS — real growth (+17.5% revenue CAGR) and 80.8% gross margin, but 58.1% debt/assets with equity at only 19.4%, net margin compressed to 7.5% by interest expense despite $174M of operating income, and the dividend was eliminated ($31M → $786K) to service the debt. The 6.9x forward multiple is on adjusted numbers that step around the leverage. A leveraged acquisition roll-up, not a quality compounder.
ICFI — cheap at 10.8x with a decent balance sheet, but revenue is already declining and it's government consulting, carrying the same federal-budget/DOGE risk already flagged on BAH and correlated with owned ACN. The portfolio does not need a fourth expression of that bet.
🔴 Traps, Named
| Ticker | The lure | The reality |
|---|---|---|
| OTEX | 5.8x forward, 4.44% yield — cheapest in the sweep | 🔴 Revenue declining (5.77 → 5.17B), FCF declining and below its level 4 years ago, 48.2% debt/assets from the Micro Focus deal, and returning $815M against $687M of FCF. "Hold" consensus, +12% target. This is the CAG/GIS/KHC pattern in software form: a fat yield as compensation for a shrinking business carrying acquisition debt. |
| FORR (Forrester) | 11.3x forward, −11.4% off high | 🔴 Target $6.00 is 42% BELOW the $10.26 price. No trailing earnings. Research/advisory — the same AI-disruption bucket that collapsed Gartner's contract value. Avoid. |
| NSP (Insperity) | 4.56% yield | 🔴 Target $43.75 vs $53.18 spot — 18% below. No trailing earnings. |
| KFY (Korn Ferry) | 13.4x, 2.71% yield | 🟡 Target $81 below the $84.69 spot; only −1.2% off high. Fine business, no discount. |
| PINC (Premier) | — | 🔴 37.7x forward, 294.6x trailing, −0.4% off high. |
Rejected on price / no discount (all within ~10% of highs or >20x forward): EXPO 23.9x · AIT 28.3x · WTS 25.5x · SXI 27.6x · KAI 22.2x · FELE 20.5x · MEDP 30.3x · AGYS 35.5x · DSGX 24.0x · HSTM 34.1x · USPH 23.4x · CRAI 19.7x · MWA 16.0x · MLI 14.9x · TNC 13.2x · IDCC 23.2x
Specialty insurers priced out: SKWD (11.4x but −2.2% off high, +4% target) and PLMR (12.8x, −3.2% off high) are good businesses that never sold off. Worth a revisit on a real drawdown — the sector has no exposure in either account.
No data returned: CSGS, CSWI, CRVL (incomplete forward estimates).
Portfolio Fit
| Check | Result |
|---|---|
| AI-capex cluster? | ✅ None of the three |
| Cyber sleeve (already 4-deep)? | ✅ None |
| AI-services cluster (ACN/CTSH/EPAM/IBM)? | ✅ None — and this is why ICFI was cut |
| Overlaps Microstocks sleeve? | ✅ No — all profitable, real revenue |
| New sub-sectors added | IP licensing (DLB) · rural broadband infra (CALX) · building products (ROCK) |
| Income added | DLB 2.75%, covered at a 29% payout |
DLB in particular sits in no existing correlation cluster, which is rare at this point — most additions to this portfolio deepen a bet that's already on.
Recommendations
Add to Watchlist:
| Ticker | Sleeve | Suggested entry | Trim | Conviction |
|---|---|---|---|---|
| DLB | 🏛 Evergreen Compounders | Attractive at $52.54; add $46-50; strong buy <$44 | $75+ | [—] pending /analyze |
| CALX | 🔧 Re-Rating Plays | Stage $32-36; strong <$29 | $60+ | [—] pending /analyze |
| ROCK | 🔧 Re-Rating Plays | Watch only — wait for revenue to turn | — | [—] |
Do not add: OTEX, FORR, NSP, PRGS, ICFI, PINC.
Next steps
/analyze DLB— my recommendation. Best business found, in a zone, in a new sleeve, with earnings July 30 making it timely. The §2 moat work (how durable is an embedded audio/video standard against open codecs like AV1?) is the question that decides it./analyze CALX— resolve whether the margin recovery is structural or a funding-cycle artifact before committing./compare DLB CALX— if you'd rather pick one; they're not really substitutes though (annuity vs inflection), so two separate analyses probably serve better here.
Bottom Line
- DLB is the find — 88% gross margin, 1.2% debt/assets, FCF at a four-year high, share count −4.4%, a covered 2.75% yield, −31.5% off its high at 11.5x forward, and it lands in no correlation cluster the portfolio already owns.
- CALX is the higher-torque option — FCF up 8.8× in three years, debt-free, −50% off its high, +75% target — but trough margins mean a stalled recovery leaves you in a 46x trailing stock.
- The most valuable output was a rejection. OTEX screened as the cheapest name in the sweep (5.8x, 4.44% yield) and the §1 check exposed a shrinking business with 48% debt/assets returning more cash than it earns. Price alone would have bought it.
- The small-cap discount is real but thin on quality. Of 33 names swept, only three cleared both §0 tests — most quality small/mids never sold off (SKWD, PLMR, MLI, TNC, KFY all sit within 10% of highs), and most of the deeply discounted names are discounted for cause.
- Consistent with the two prior spirals: the cheap-looking tail is mostly traps, and the finds are one step off the obvious. DLB is not what "small-cap value" conjures — it's a high-margin royalty business that happens to be small.
Screen run 2026-07-29. 33 names swept, 6 taken to full §1 health check. Prices live; health data via .mcp/fin.py (4 fiscal years, newest-first). Follows the ring-2 finding in screen-global-vs-us-value-2026-07-29.md.