Navigating Small-Cap Value Investing in Q3 2025: Uncovering Undervalued Equities with Earnings Momentum

Small-cap value investing in Q3 2025 has been a tale of resilience and recalibration. While the sector faced headwinds from speculative market dynamics, disciplined strategies like those of the FPA Queens Road Small Cap Value Fund demonstrated the potential for long-term outperformance. This article examines the fund's Q3 2025 performance, highlights undervalued equities with strong earnings momentum, and contextualizes these findings within broader market trends.

FPA Fund's Q3 2025 Performance: A Test of Discipline

The FPA Queens Road Small Cap Value Fund returned 7.46% in Q3 2025, trailing the Russell 2000 Value Index's 12.60% gain. However, over the first three quarters of the year, the fund outperformed with a cumulative return of 13.77% versus the index's 9.04%. This divergence underscores the fund's strategy: a focus on disciplined, long-term value investing that prioritizes margin of safety over short-term speculation. As stated by the fund's commentary, its approach is designed to "outperform in down markets and trail in speculative markets," a dynamic that played out in Q3 2025 as broader markets favored momentum-driven stocks.

Case Study: Vishay Intertechnology – A Contrarian Bet

One of the fund's notable holdings, Vishay Intertechnology (NYSE:VSH), exemplifies the fund's focus on undervalued equities with earnings momentum. Despite a 27.85% one-month price decline and a 26.97% 52-week drop, Vishay's Q3 2025 results revealed resilience. The company reported sequential revenue growth of 4% to $791 million, exceeding expectations by 2%. While GAAP net income turned negative at $(0.06) per share, adjusted earnings reached $0.04 per share, reflecting a 19.5% gross margin and 2.4% operating margin. This contrast between GAAP and adjusted metrics highlights the importance of scrutinizing intrinsic operating performance-a key tenet of value investing.

Vishay's strategic positioning in high-growth sectors like smart grid infrastructure, AI-related power systems, and aerospace/defense further strengthens its case as a value opportunity. The company's capacity expansion efforts have enabled it to meet quick-turn delivery demands, a critical advantage in capital-intensive industries. However, challenges such as a 150-basis-point margin drag from Newport underscore the need for continued operational discipline.

Broader Market Dynamics: Regulatory Shifts and Strategic Realignments

Q3 2025 saw small-cap value investors navigating a complex landscape shaped by regulatory changes and corporate strategy shifts. For instance, Tucows Inc. (TCX) reported a $1.42 loss per share but saw its stock rise 2.84% in after-hours trading following its decision to divest the Ting Mobile business and reinvest in core segments like Domains and Wavelo. This reaction illustrates how strategic clarity can unlock value even amid short-term losses.

Similarly, Samsung's first design win with Nvidia for high-bandwidth memory (HBM) chips positioned it as a key player in the AI-driven semiconductor market. Regulatory improvements in South Korea, coupled with AI's transformative potential, have created tailwinds for companies like Samsung, offering small-cap value investors a glimpse into the future of technology-driven growth.

The Role of Earnings Momentum in Value Investing

Earnings momentum is a critical differentiator for small-cap value equities. Vishay's sequential revenue growth and Samsung's HBM breakthrough demonstrate how companies can bridge the gap between undervaluation and earnings acceleration. However, as seen with Bolloré and U-Haul in Q3 2025, not all value plays succeed in the short term. Bolloré's detracted performance, despite its strong net asset value through Vivendi and Universal Music Group, highlights the importance of patience in value investing.

Conclusion: Balancing Patience and Precision

Small-cap value investing in Q3 2025 required a balance of patience and precision. While speculative markets favored momentum stocks, funds like FPA Queens Road demonstrated that disciplined strategies can yield superior returns over the long term. By focusing on companies like Vishay-those with strong earnings momentum, operational flexibility, and alignment with high-growth sectors-investors can navigate volatility and capitalize on mispriced opportunities. As regulatory and technological trends continue to evolve, the ability to discern between transient challenges and enduring value will remain paramount.