My Small-Cap Value Portfolio Is Proving Its Value

 | Jul 15, 2016 | 1:00 PM EDT
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It's been nearly six months since the inception of my Profitable Small-Caps with Cash Portfolio, and so far, so good. This portfolio, which is primarily comprised of under-the-radar names that will not be familiar to many investors, is up about 25% versus a 21.5% gain over the same period for the Russell 2000 Index and 18.1% for the Russell Microcap Index.

The magnitude of my portfolio's out-performance no doubt has diminished since the last update, but frankly, it's still early. While I am pleased with performance, I don't expect instant gratification from my investment ideas. And while six months may seem like a lifetime to many investors, it's but a day to a value investor. Our ideas typically take time to play out. In this fast-paced investment landscape, that can be about as exciting as watching grass grow or paint dry.

By way of reminder, here are the specific screening criteria utilized for the portfolio:

  • Market capitalization between $100 million and $3 billion
  • Price-to-earnings ratio of less than 15
  • Long-term debt-to-equity ratio of less than 50%
  • Profitable during the trailing 12 months and in the latest fiscal year
  • Cash in excess of 20% of market cap
  • Price-to-book ratio of less than 1
  • Quick ratio greater than 1
  • Any sector except for the financial space

Eight of the 10 stocks in the portfolio are currently in positive territory, and the ""losers" -- DeVry Education Group (DV) and ArcBest (ARCB) -- are each down about 3%. Indeed, Devry has had a nice run recently and is up about 40% since turmoil in late May/early June that saw the CEO and CFO exit stage left in rapid succession. The stock was down 13% alone on May 25 following the announcement that CEO Daniel Hamburger was leaving.

The big winner has been Sanmina (SANM) , which is up a blistering 69% yet still trades at about 11x next year's consensus earnings estimate. This name had been unfairly punished by the market between late November and early January, when it fell about 33%.

The second-best performer, Multi-Fineline Electronix (MFLX) , is up 57; it's the beneficiary of agreeing to be acquired by China's Suzhou Dongshan Precision Manufacturing for $23.95 a share. This is yet another example of the recent mini-boom in deeper-value names being taken out.

TravelCenters of America (TA) , which rejected a $14-a-share bid by Golden Gate Capital in December, is up 22%. It is of special interest to me given that it closed on the acquisition of the bankrupt, 54-store Quaker Steak and Lube chain in late April. It will be interesting to see how this plays out. I frequented the original Quaker Steak and Lube, best known for its wings, in Sharon, Pennsylvania, during my college years in the 1980s and on occasion since the company began franchising. I much prefer it to Buffalo Wild Wings (BWLD) and am curious to see if TA can turn it into a national brand. 

Here's how the rest of the portfolio has fared:

AVX (AVX) , up 29%

Benchmark Electronics (BHE) , up 15%

United States Cellular (USM) , up 20%

Tropicana Entertainment (TPCA) , up 20.5%

Hurco (HURC) , up 21%

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