I'm still extremely pleased with the performance of my value-based "Profitable Small Caps with Cash Portfolio." Launched less than three months ago, the portfolio has exceeded my expectations to the point that it's making me a bit nervous.
You see, we value investors don't expect instant gratification from our stock picks. I know plenty of fellow Real Money contributors rely on technical analysis and day-to-day movements of stocks or options, but I'm not wired that way.
I'll sometimes wait years for a value story to play out, and even then, things don't always work out. It's easy to wrongly convince yourself that you see something in a stock that few others see -- a company that investors have unfairly beaten down, or perhaps an asset that you think the market has improperly valued.
Still, I'll admit that there's a thrill that comes with immediate success, and it's not just due to the monetary gains involved.
So while seeing my Profitable Small Caps with Cash Portfolio shoot up more than 19% in 10 weeks is a bit of a shock, it's nonetheless exciting. For perspective, the Russell 2000 and Russell Microcap indices are up just 12.5% and 9.5% respectively for the same period.
There's no doubt that the broad market's recent rising tide has lifted all boats, and this portfolio has certainly benefited from that. But truth be told, I wouldn't have been all that surprised to have seen the portfolio drop 10% this early in its lifespan. That's how small-cap value portfolios often roll.
As a reminder, here's the screening criteria that I used to create this group of stocks:
- Market capitalization must be between $100 million and $3 billion.
- Price-to-earnings ratio must be less than 15.0.
- Long-term-debt-to-equity ratio has to be below 50%.
- A company must have been profitable during both its latest fiscal year and the trailing 12 months.
- Cash must exceed 20% of a firm's market cap.
- The price-to-book ratio have to total less than 1.0.
- The quick ratio must be greater than 1.0.
- Stocks can be in any sector except the financial space.
This screen came up with a portfolio of 10 stocks, and the big winner so far is Multi-Fineline Electronix (MFLX). Multi-Fineline is up more than 58% because the company agreed in February to a $610 million buyout by China's Suzhou Dongshan Precision Manufacturing. Suzhou is paying $23.95 a share in cash for MFLX, or a 46% premium over what the stock traded for prior to the news.
While I consider the timing of MFLX's takeover deal to be pure luck, I wouldn't be surprised to see more take-outs among the portfolio's components given the screen's fundamental attributes. This one just happened to occur very quickly.
All told, eight of the group's 10 stocks are in positive territory since I first created the portfolio. The only exceptions are:
- DeVry Education (DV), which is down more than 20% following the Federal Trade Commission's decision to sue the firm in January.
- TravelCenters of America (TA), which has fallen some 3.5%.
Here's how the rest of the group has fared between the portfolio's inception and yesterday's close:
- Sanmina Corp. (SANM), +37.5%.
- United States Cellular (USM), +33%.
- Hurco (HURC), +29%.
- Benchmark Electronics (BHE), +18.5%.
- AVX Corp. (AVX), +16%.
- ArcBest Corp. (ARCB), +14%.
- Tropicana Entertainment (TPCA), +12.5%.