AI remains one of the hottest themes in the market, and recent studies highlight an important trend: the rising value of precise small language models (SLMs). Unsurprisingly, when an AI is not trained on high-quality data, its performance suffers…dramatically.
Most large language models (LLMs), such as ChatGPT, rely heavily on the open internet for training, which is a source filled with noise, conflicting signals and inaccuracies. As a result, these LLMs handle a broad range of simple tasks reasonably well, but their performance declines sharply when faced with expert-level tasks.
In contrast, SLMs trained on focused, high-quality, domain-specific data consistently outperform larger models on specialized tasks. As this trend becomes more widely recognized, AI developers, from startups to multinational enterprises, are racing to develop and train the best SLMs.
This trend is exactly why we partnered with Google Cloud to pioneer the first AI agent that produces truly reliable results. This AI Agent for investing leverages years of expertise and proprietary high-quality data to deliver real alpha.
To give you a glimpse into the research derived from our AI Agent, we are sharing a free stock pick from our Most Attractive Stocks Model Portfolio. This Model Portfolio leverages our superior fundamental data to identify the best stocks in the market, i.e. the stocks that are not only undervalued but also possess strong fundamentals.
This pick comes with a concise summary, not a full Long Idea report. The summary provides insight into the rigor of our research and approach to picking stocks. Whether you’re a subscriber or not, we think it is important, especially in today’s volatile market environment, that you’re able to see our research on stocks. We’re proud to share our work, and we want to help investors when they need it most.
Keep an eye out for the free pick from our Most Dangerous Stocks Model Portfolio, which will be published this week as well!
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We update this Model Portfolio monthly. The latest Most Attractive and Most Dangerous stocks Model Portfolios were updated and published for clients on September 4, 2025.
Free Most Attractive Stocks Pick: Federated Hermes Inc. (FHI)
Federated Hermes (FHI: $53/share) has grown revenue and net operating profit after tax (NOPAT) by 7% and 9% compounded annually since 2014, respectively. Federated Hermes’ NOPAT margin increased from 19% in 2014 to 22% in the trailing-twelve months (TTM), while its invested capital turns rose from 0.7 to 0.9 over the same time. Rising NOPAT margins and invested capital turns drive Federated Hermes’ return on invested capital (ROIC) from 14% in 2014 to 19% in the TTM.
Figure 1: Federated Hermes’ Revenue and NOPAT Since 2014
Sources: New Constructs, LLC and company filings
FHI Is Undervalued
At its current price of $53/share, FHI has a price-to-economic book value (PEBV) ratio of 0.9. This ratio means the market expects Federated Hermes’ NOPAT to permanently decline by 10% from TTM levels. This expectation seems overly pessimistic for a company that has grown NOPAT by 6% compounded annually over the last five years and 9% compounded annually over the last ten years.
Even if Federated Hermes’ NOPAT margin falls to 20% (compared to 22% in the TTM) and the company grows revenue by 3% (below ten-year CAGR of 7%) compounded annually through 2034, the stock would be worth $66/share today – a 25% upside. In this scenario, Federated Hermes’ NOPAT would grow just 3% compounded annually through 2034. Contact us for the math behind this reverse DCF scenario.
Should Federated Hermes grow profits more in line with historical levels, the stock has even more upside.
Critical Details Found in Financial Filings by Our Robo-Analyst Technology
Below are specifics on the adjustments we made based on Robo-Analyst findings in Federated Hermes’ 10-K and 10-Q:
Income Statement: we made over $100 million in adjustments, with a net effect of removing under $70 million in non-operating expense. Professional members can see all adjustments made to the company’s income statement on the GAAP Reconciliation tab on the Ratings page on our website.
Balance Sheet: we made just under $200 million in adjustments to calculate invested capital with a net increase of just under $150 million. One of the most notable adjustments was for asset write downs. Professional members can see all adjustments made to the company’s balance sheet on the GAAP Reconciliation tab on the Ratings page on our website.
Valuation: we made just under $800 million in adjustments, all of which decreased shareholder value. Apart from total debt, the most notable adjustment was for deferred tax liabilities. Professional members can see all adjustments to the company’s valuation on the GAAP Reconciliation tab on the Ratings page on our website.
This article was originally published on September 12, 2025.
Disclosure: David Trainer, Kyle Guske II, and Hakan Salt receive no compensation to write about any specific stock, style, or theme.
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