As the Brexit worries bubble to a fever pitch, I spent yesterday looking over some of the portfolios I tested and formed back in January. We are at the six-month mark and it is time to see how we did and rebalance for the final half of the year.
I will start with the best-performing portfolio so far this year, the dual momentum value portfolio. For the first six months of the year, the portfolio is up 4.12%, handily beating the anemic 0.73% for the S&P 500 and 0.09% for the Russell 2000. The maximum drawdown was 8.6% compared to the S&P's 10.51%.
This was a very simply constructed portfolio. I took the universe of stocks trading below book value and added two momentum factors. To qualify, the stock had to have a positive return over the past 52 weeks and be outperforming the S&P 500 for the year. The model then buys the stocks in the group with the lowest price to book value ratio.
The best performer in the group was Alpha & Omega Semiconductor (AOSL), followed by McDermott (MDR), Summit Financial (SMMF), First Clover Leaf (FCLF) and SkyWest (SKYW). The portfolio was more than half in small banks and we had two takeovers in the first six months of the year. The worst performer was GSV Capital (GSVC), followed by AIG (AIG), First United (FUNC), Madison County Financial (MCBK) and Northeast Community Bancshares (NECB). (McDermott is part of TheStreet's Stocks Under $10 portfolio.)
The rebalance is pretty interesting. We sell a few small banks but add several more, including some of my favorites like Mackinac Financial (MFNC), United Bancshares (UBOH), Bank of Commerce Holdings (BOCH), Citizens Community (CZWI) and First Northwest (FNWB). The portfolio remains overweight community bank stock and, needless to say, I am fine with that. Owning mostly small banks has worked very well for me the past few years and I am very comfortable doing so in a post-Brexit world.
We are adding some higher-yielding names to the portfolio this time as well. The model is buying one of my favorite long-term business development companies (BDCs), Prospect Capital (PSEC). This has always kicked up a bit of controversy when I have mentioned it in the past. It is leveraged, has exposure to energy and the shares trade all over the place based on current market sentiment on BDCs. Through it all, they have paid a great dividend and I have collected more than double my cost basis over the last eight years. It was messy, but management did navigate and survive the credit crisis. The stock has been strong the past few months and it is a nice high-yield addition to the value momentum portfolio.
Annaly Capital (NLY) is going to add some income to the mix as well. Mortgage REITs go in and out of favor based on every paragraph in the various Fed releases, but the REIT has been around since 1997 and has navigated two crashes and several economic catastrophes. Lower-for-longer should benefit the REIT and it's trading at 95% of book value with an 11% yield.
One of my favorite small-cap REITs is added to the value momentum portfolio for the second half of the year. BRT Realty (BRT) has transformed itself from a finance REIT to a multifamily REIT and, with the exception of Michael Price and me, no one has really noticed. It exited the joint venture in Newark, N.J., that had the potential to be troublesome and now owns 31 multifamily properties in 12 states with an aggregate of 8,781 units. Multifamily has been one of the hottest segments of the property markets and it is not reflected in the stock price of BRT. At 71% of book value, I think the shares have enormous upside potential from here.
The value momentum portfolio has consistently beaten the market over the five-, 10- and 15-year time periods by a significant amount. For the first six months of the year, it has outperformed again. The new portfolio has an average price to book value of 79% with an average market cap of $2.2 billion. Small banks make up half of the portfolio right now and I would say that bodes well for future performance.