Reassessing Deep Value in a Post-Recovery Market

In the wake of prolonged market volatility and economic recalibration, the post-recovery phase has ushered in a unique opportunity for value investors to capitalize on deeply discounted equities. The Miller Deep Value Strategy, a long-standing proponent of contrarian investing, has increasingly spotlighted small-cap stocks and turnaround plays as prime candidates for outsized returns. As of Q2 2025, the strategy's focus on undervalued equities with durable cash flows and robust balance sheets underscores a disciplined approach to navigating the evolving market landscape, according to the Miller Deep Value letter.

The Case for Small-Cap Value

Small-cap stocks, historically overlooked during periods of market exuberance, have seen their valuations compressed to multi-year lows. According to the Miller Value Partners report, these securities now trade at significant discounts to their intrinsic value, offering compelling entry points for patient capital. The firm's Q2 investor letter emphasizes that small-cap equities are poised for a rebound as liquidity normalizes and investors rotate into undervalued sectors. This thesis is supported by data from the S&P 600 Value Index, which has underperformed its growth counterparts by over 30% since 2022 but now trades at a 40% discount to historical averages.

Nabors Industries: A Turnaround Story

One of the most striking examples of this strategy in action is Nabors Industries Ltd. (NYSE:NBR), a leading provider of offshore oil and gas drilling services. Despite a 59.24% decline in its share price over the past 52 weeks, according to a Finviz report, Nabors has demonstrated resilience through operational improvements and strategic acquisitions. The company's acquisition of Parker Wellbore in late 2024 has expanded its drilling solutions portfolio, contributing to a 90% free cash flow conversion rate in 2025, per Nabors financials.

Financial metrics reveal a mixed but improving picture. While Nabors' Return on Equity (ROE) remains negative at -0.81% and its Debt/Equity ratio stands at 1.86, according to StockAnalysis, its operating cash flow of $581 million in Q2 2025 highlights its ability to generate liquidity despite sector headwinds, as reported in coverage of the fund's Nabors holdings. Miller Deep Value Strategy has increased its stake in Nabors by 60.54% in Q2 2025, betting on its potential to leverage merger synergies and reduce leverage over the next 12–18 months, according to a CBonds note.

Diversifying the Deep Value Portfolio

Beyond energy, the Miller strategy has identified undervalued opportunities in financials, media, and industrials. Lincoln National Corp (LNC), a top holding at 8.36% of the Q2 2025 portfolio, is noted in the Bill Miller holdings report. With $18.4 billion in 2024 revenue and $3.18 billion in net income, per Lincoln financials, LNC's scale and diversified insurance offerings position it as a durable cash flow generator. However, its negative operating cash flow of $2.0 billion in 2024 underscores the need for continued balance sheet fortification.

Alliance Data Systems (ADS), another key holding, trades at a P/E ratio of 9.5—well below the IT sector average, as discussed in a Reddit thread—and offers a compelling valuation gap. Analysts estimate its fair value at $188.48 on the ValueInvesting fair value page, over 230% above its current price of $56.80, suggesting significant upside if the market re-evaluates its data analytics and loyalty program assets.

Gray Television (GTN) and Quad Graphics (QUAD) further illustrate the strategy's focus on cash flow durability. GTN's $751 million in operating cash flow and consistent $0.32 dividend per share, per Gray Television financials, highlight its defensive characteristics, while QUAD's improving free cash flow guidance ($40–50 million for 2025) is outlined in the Quad earnings transcript and signals a path to debt reduction and operational efficiency.

Navigating Risks and Rewards

The Miller strategy's cautious approach to high-growth sectors like AI reflects its emphasis on margin of safety. While acknowledging AI's transformative potential, the firm avoids overvalued "AI tickers" and instead targets infrastructure suppliers or energy plays that benefit from the sector's expansion without carrying speculative valuations, as noted in its investor communications. This balanced perspective is critical in a post-recovery market where sentiment swings can exacerbate volatility.

Conclusion

As the market transitions from recovery to normalization, deep value investing offers a roadmap for capturing mispriced opportunities. By prioritizing durable cash flows, strong balance sheets, and intrinsic value, strategies like Miller Deep Value are well-positioned to deliver asymmetric returns. While risks such as high leverage and sector-specific challenges persist, the current discount to long-term fundamentals creates a compelling case for selective, conviction-driven investments. For investors willing to look beyond short-term noise, the post-recovery landscape is ripe for those who dare to dig deep.