How My Outperforming Value Portfolio Is Bucking the Trend

 | Sep 11, 2017 | 10:00 AM EDT
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With nearly three quarters of 2017 already in the rearview mirror, at least one thing is clear: It's been a fairly rough year for smaller value stocks. Both the Russell 2000 Value and Russell Microcap Value indices (-2% and -0.9%) remain in negative territory while their growth cousins (Russell 2000 Growth and Russell Microcap Growth) are having decent years, up 10.6% and 8.4%, respectively.

Given this disparity between growth and value, it stands to reason that my 2017 Double Net Value Portfolio, launched at the tail end of 2016, would also be struggling, but oddly enough, that's not the case.

In fact, since inception, the portfolio is up 7.4%, better than both the Russell 2000 and Russell Microcap indices (+3.7% and +2.2%, respectively), although not as good as those indices' respective growth components. I still consider these results to be short term, however, and while pleased, will continue to track into the future.

By way of reminder, below are the criteria for inclusion in the portfolio:

  • Trades at between 1 and 2 times net current asset value (current assets less total liabilities)
  • Minimum market cap $150 million
  • No development stage pharmaceuticals/biotechs

As is typical in portfolio performance dynamics, there are a handful of companies that are doing much of the work, and are responsible for the overall gain. Electro Scientific Industries (ESIO) (+99%) seems to have turned the corner, putting up solid positive earnings surprises the past couple of quarters, as the shares have nearly doubled year to date.

AXT Inc. (AXTI) has soared 59%. Former cult stock Crocs (CROX) has been a surprising winner, up 37%, and also positively surprised on the earnings front. The growth crowd gave up on this faddish name years ago; it traded as high as $75 in 2007, and may be making somewhat of a comeback. Currently trading at 2.35x net current asset value, the company ended last quarter with $157 million, or $2.15 per share in cash, and no debt.

Clarus Corp. (CLAR) (formerly Black Diamond) is up 42%, while West Marine (WMAR) has increased 23% courtesy of the fact that it's being taken private, the latest in a long line of double-nets to be taken out. Double-nets remain a potentially prime hunting ground for acquirers.

Rounding out the winners are Kulicke & Soffa (KLIC) (+15.9%), FreightCar America (RAIL) +14%, AVX Corp. (AVX) (+8.5%) and Hurco Companies (HURC) (+6.3%).

Tesco Corp. (TESO) is the worst performer (-47.3%), followed by Geospace Technologies (GEOS) (-28.5%), Avnet (AVT) (-23.2%) and Fitbit (FIT) (-15%). I have high hopes for FIT, not as high as the growth crowd once did, but believe it is undervalued at these levels. The company does have much to prove, however, in order to entice other investors back into the fold.

Rounding out the portfolio:

  • Adams Resources (AE) (-13%)
  • Universal Corp. (UVV) (-11.1%)
  • Movado (MOV) (-5.7%)
  • Gencor Industries (GENC) (-2.8%)
  • CSS Industries (CSS) (+.7%)
  • Benchmark Electronic (BHE) (+3.4%)

One thing to keep in mind about this portfolio: it is static. Once names exceed 2x net current asset value, they are not removed.

That being said, I shudder to think what the 2018 version of this portfolio will look like, given the increasing population of retailers.

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