Under the Radar: The Importance of Book Value Growth in Assessing Company Stability

Investors love high-growth stories, and they should.

Companies that are growing rapidly have the potential to deliver massive gains.

The problem is that Wall Street and most observers are not always using the right metrics to determine growth.

The most used metric is earnings per share growth. Nothing excites people more than a massive year-over-year earnings gain.

Once you have been at this for a while, you realize that a competent accountant can make the earnings per share numbers be almost anything their boss wants them to be.

Earnings management and even outright fraud can go on for longer than one would think.

Just as with people who bought into Enron, WorldCom, or any other companies that were Wall Street darlings until the ugly truth was revealed.

Many companies have been accused of other forms of accounting misconduct that led investors down a primrose path over the years, including stalwarts like Kraft Heinz KHC, Chemours Chemical CC (Teflon manufacturer), and Archer Daniels Midland ADM, which have been accused of irregularities that made things look better than they were.

I tend to ignore reported earnings most of the time.

One of the greatest lessons I have learned over the years is that everything eventually shows up on the balance sheet.

I like to look at top-line revenue growth and then skip everything in between to look at book value growth.

This allows me to see what happens once management gets their hands on the money.

Did they use the cash wisely and invest the excess cash flow to increase the company’s value?

Or did they waste it and not create much value along the way?

If you want to see this theory in action, the three companies with the fastest book value growth in the S&P 500SPY are NVIDIA NVDA, Amazon AMZN, and Tesla TSLA.

Management received the cash, paid the bills, and grew the value of the business.

In this case, it does not matter what the price-to-book ratio value is.

We are not measuring valuations.

We are simply determining if management is converting revenues to real value at a high rate.

It is no accident that Warren Buffett has measured his success at Berkshire Hathaway (BRK.A) by the growth in book value.

It is the best way to measure growth.

Very few people look at stocks this way, so we can use the combination of revenue and book value growth to find some potential gems that are well under Wall Street’s radar.

Velocity Financial VEL is a business that is perfectly positioned to take advantage of the housing affordability crisis.

Thanks to higher mortgage rates and a lack of inventory, people are renting for longer.

Velocity Financial (VEL) operates in an often-overlooked but highly lucrative niche of the real estate finance world, specializing in loans for real estate investors. This is not your typical Fannie Mae or Freddie Mac lending operation; Velocity thrives in the non-QM (non-qualified mortgage) space, targeting small- to mid-sized investors who need financing for rental properties and small commercial ventures. This is the bread and butter of the real estate world—the individuals who are rehabbing houses, growing rental portfolios, and breathing life into small business properties.

Velocity is not competing with big banks or institutions chasing the cookie-cutter borrower. Instead, it is laser-focused on a niche that is too small for the big institutions to care about but too complex for the smaller entities to handle. It offers tailored financing for single-family rentals, small multifamily properties, and even small commercial buildings like retail or mixed-use spaces. Borrowers are often small investors with solid property cash flow but not the financial profile big banks want to consider.

The loans are short- to medium-term, high-yield, and relatively low balance, which means Velocity captures some attractive interest income compared to traditional lenders. Velocity has built a scalable origination platform, using brokers and direct relationships to keep the deals flowing while maintaining tight underwriting standards. Their proprietary process focuses on the property’s cash flow, an approach that fits this market perfectly.

The business is growing impressively.

Revenue is growing at over 20% annually, and tangible book value has grown by about 25% over the past five years.

Given the niche market Velocity serves, I would expect the company to continue to grow at an above-average rate for several years. As Wall Street discovers this company, we could see buying pressure push the stock to much higher prices in the years ahead.

Red Violet, Inc. RDVT is one of those under-the-radar plays that quietly builds an impressive moat in a high-growth niche. At its core, this is a data and technology company with a focus on identity intelligence and data fusion. In simpler terms, Red Violet takes massive amounts of data, turns it into actionable insights, and sells it to industries that need help solving some of their biggest problems—fraud, compliance, risk, and verification.

This is the kind of company that thrives in today’s data-driven world. It is not flashy, but it is indispensable to its customers. Red Violet operates through two key platforms: IDI Core and Forewarn, both of which are designed to make the complex world of data analytics simple and accessible for its users.

IDI Core is the workhorse of the operation. This platform is used by a variety of industries—financial services, insurance, government, legal—to verify identities, detect fraud, and conduct investigations. Think of it as the Swiss Army knife for anyone needing to sift through mountains of data quickly and accurately. It is the platform that makes businesses smarter, faster, and more compliant in an increasingly regulated world.

Then there is Forewarn, which takes a different tack by focusing on the real estate industry. Real estate agents use this tool to screen potential clients and assess risks instantly. With safety concerns on the rise in the field, Forewarn has carved out a strong niche in a growing vertical.

What sets Red Violet apart is its proprietary technology. They have built a scalable infrastructure capable of analyzing billions of records and turning them into something useful.

That is not just tech buzz. It is the foundation for why customers keep coming back and why the company’s business model works.

Sales and earnings are both growing at around 30% a year and have the potential to continue to grow at a very high rate.

As the dollars come in the door, Red Violet Management is using them to increase the value of the company at a rapid pace.