Today I am rolling out my 2018 Double Net Value Portfolio, comprised of seemingly cheap names relative to net current assets (current assets minus total liabilities). It is a screen that has shown promise in the past and has been fertile ground at times for acquisitions.
The screening criteria remain rather simple:
- Companies trade at between 1 and 2 times net current asset value (NCAV)
- Minimum market cap $150 million
- No development stage pharmaceuticals/biotechs
Further scrutiny of the qualifying names in order to identify the best of the bunch may seem warranted. However, over the years I've found that some of the uglier situations -- those names that the markets want no part of -- sometimes can be the big winners. That was true with 2017's vintage of the portfolio, where Electro Scientific Industries Inc. (ESIO) and to a lesser extent Crocs Inc. (CROX) stole the show.
This year, 20 names make the cut, and as in the past, there are several holdovers from last year. The eight repeat offenders include Avnet Inc. AVT, the largest name, with a $4.8 billion market cap; AVX Corp. (AVX) ; Benchmark Electronics Inc. (BHE) ; Universal Corp. (UVV) ; Hurco Cos. (HURC) ; CSS Industries Inc. (CSS) ; Gencor Industries Inc. (GENC) ; and FreightCar America Inc. (RAIL) .
Not surprisingly, there are a couple retailers in the portfolio for 2018 after the drubbing the sector has taken in 2017. These include Hibbett Sports Inc. (HIBB) and Big 5 Sporting Goods Corp. (BGFV) , both of which are down more than 50% over the past year. HIBB shares have doubled since their August bottom and trade at just under 14 times next year's consensus earnings estimates and 1.93 times NCAV.
Big 5 shares are at about the same level where they traded during the August retail bloodbath and can be had for about 9.5 times next year's "consensus" earnings estimates (just two analysts cover the name) and 1.66 times NCAV. Interestingly, the stock currently yields a whopping 7.82%; whether that is sustainable remains to be seen. At this price level, the market is signaling its doubts, but this could be interesting to follow.
Fossil Group Inc. (FOSL) , perhaps best known for watches, also made the cut. It has been a brutal year for the stock, which is down more than 70% and is trading at 16-year lows. It is not currently profitable and is not expected to be next year, either. Currently trading at 1.94 times NCAV, the company has $167 million, or about $3.50 per share, in cash on the books, but also $485 million in debt. At this point, you could not even call this one a value trap and management has much to prove.
Rounding out the portfolio for 2018 are the following:
- Dril-Quip Inc. (DRQ)
- Super Micro Computer Inc. (SMCI)
- Actua Corp. (ACTA)
- Essendant Inc. (ESND)
- Digi International Inc. (DGI)
- Adams Resources & Energy Inc. (AE)
- Gulf Island Fabrication Inc. (GIFI)
- Northwest Pipe Co. (NWPX)
- Emcore Corp. (EMKR)
In terms of portfolio statistics, the average market cap is $862 million, average price to book ratio is 1.11, and average multiple of price to NCAV is 1.71. Just 11 of the names are currently profitable on a trailing 12-month basis.
As usual, I am just as interested to see how this group would perform in a down market as in an up market.