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    A Small Cap Growth Model Inspired by The Motley Fool’s David & Tom Gardner – Validea’s Guru Investor Blog

    hello@luximperiumholdings.comBy 2 Comments4 Mins Read

    David and Tom Gardner may not take themselves too seriously in their public personas, but their investing strategy is anything but foolish. The brothers behind The Motley Fool have helped millions of investors understand how to uncover fast-growing companies with durable fundamentals and compelling value.

    Their investing framework — which Validea has modeled in our Fool-inspired strategy — emphasizes small-cap growth stocks with strong profit margins, healthy cash flows, manageable debt, strong earnings and sales growth, and insider ownership. A central focus is the PEG ratio, which compares a stock’s P/E to its earnings growth. The Gardners dubbed this the “Fool Ratio” and use it to identify growth stocks trading at reasonable valuations.

    Validea’s Motley Fool-inspired strategy captures the essence of their methodology and translates it into a systematic, rules-based model.

    The focus is on:

    Strong profit margins

    Above-average earnings and sales growth

    Reasonable valuations based on the PEG (or “Fool”) ratio

    Price strength and momentum

    Low debt and healthy cash flow

    Significant insider ownership

    The strategy loos for undiscovered gems — companies too small for large institutions but with the financial traits and momentum that often precede long-term outperformance.

    Performance Overview (July 15, 2003 – 2025 YTD)

    Since inception, the Small Cap Growth Investor (Fool inspired) Portfolio has returned 13.2% annually, more than 4.5 percentage points ahead of the S&P 500. A $100,000 investment would have grown to $1.5 million, compared to just $500K in the benchmark.

    Returns are model returns and do not reflect actual trading. Full performance disclaimer

    The annual performance drives home an important lesson. After years of outperformance, market leadership narrowed significantly starting in 2017. From 2017 through 2020, the Fool-based strategy hit a rough patch, underperforming the S&P 500 in four consecutive years. The most notable shortfall came in 2017, when the portfolio declined 3.0% while the S&P gained 19.4%, resulting in a 22.4 percentage point gap.

    While difficult to endure, this period underscores the importance of discipline and staying committed to a strategy through inevitable down cycles. Despite the lag, the model rebounded in 2021 with a 51.6% gain – nearly double the market’s return – demonstrating how patience and consistency can ultimately reward long-term investors.

    Here’s the year-by-year performance with a visual indication of whether the model outperformed (✅ green) or underperformed (❌ red) the S&P 500.

    YearFool PortfolioS&P 500+/- S&P2003 (7/15/2003)19.8%11.1%✅ +8.7%200422.5%9.0%✅ +13.5%20059.6%3.0%✅ +6.6%200622.2%13.6%✅ +8.6%200723.3%3.5%✅ +19.8%2008-25.0%-38.5%✅ +13.5%200938.5%23.5%✅ +15.0%201019.2%12.8%✅ +6.4%20111.0%-0.0%✅ +1.0%20124.7%13.4%❌ -8.7%201361.1%29.6%✅ +31.5%20141.6%11.4%❌ -9.8%20159.0%-0.7%✅ +9.7%201616.6%9.5%✅ +7.1%2017-3.0%19.4%❌ -22.4%2018-14.3%-6.2%❌ -8.1%201922.2%28.9%❌ -6.7%202010.6%16.3%❌ -5.7%202151.6%26.9%✅ +24.7%2022-18.9%-19.4%✅ +0.5%202325.1%24.2%✅ +0.9%202428.9%23.3%✅ +5.6%2025 YTD (6/20/2025)3.5%1.5%✅ +2.0%

    ✅ Green = Outperformed S&P 500
    ❌ Red = Underperformed S&P 500

    Current Motley Fool-Based Portfolio (as of June 2025)

    Below are the 10 stocks currently held in the strategy, including links to their Validea Guru analysis pages:

    Ticker
    Company
    Validea Analysis
    Buy Date
    Score
    Return

    KINS
    KINGSTONE COMPANIES INC
    View
    4/25/2025
    91%
    -18.67%

    RDVT
    RED VIOLET INC
    View
    5/23/2025
    91%
    -3.71%

    ESQ
    ESQUIRE FINANCIAL HOLDINGS INC
    View
    3/28/2025
    87%
    18.97%

    SEZL
    SEZZLE INC
    View
    3/28/2025
    85%
    318.13%

    IDT
    IDT CORP
    View
    6/20/2025
    85%
    0.00%

    HRTG
    HERITAGE INSURANCE HOLDINGS INC
    View
    4/25/2025
    85%
    19.36%

    ATLC
    ATLANTICUS HOLDINGS CORP
    View
    6/20/2025
    83%
    0.00%

    HCI
    HCI GROUP INC
    View
    5/23/2025
    83%
    -11.04%

    FTK
    FLOTEK INDUSTRIES INC
    View
    6/20/2025
    83%
    0.00%

    HIPO
    HIPPO HOLDINGS INC
    View
    6/20/2025
    83%
    0.00%

    What Makes the Strategy Work

    The Fool approach is all about finding scalable businesses that are just starting to gain traction — but still under Wall Street’s radar. Combining quality fundamentals, growth, insider conviction, and manageable valuations makes this a model with serious long-term appeal.

    While the strategy doesn’t win every year, it has outperformed in 16 of the last 22 full years — a testament to its durability and alpha-generating potential.

    Further Research

    🔎 View Full Motley Fool Strategy & Model Portfolio: Explore Validea’s Fool-Based Model
    🎧 Listen & Learn: Tune into the Excess Returns Podcast to learn about The Motley Fool Small Cap Growth Model or watch our Strategy Overview.
    🧪 Experiment with the Strategy Matching Tool: Find which ETF strategies most closely align with the Fool model on Validea’s ETF Matching Tool.

    Access all of Validea’s Tools – Sign Up for a Risk-Free Trial Today.

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