Nearly six months since inception, my 2019 Double Net Value Portfolio has shown some cracks since last month's update and is now up just 9.5% since inception. It was a brutal month for this little band of misfits, which ceded their prior advantage over benchmarks the Russell 2000 Index (+13.7%) and Russell Microcap Index (+12.5%). The gap is narrower with the value components of each index, with R2000 Value up 11%, and RMicro Value up 10.2%.
When markets show any signs of distress, smaller, lower quality names typically bear the brunt, and that's what we've seen over the past month for this tracking portfolio of deeper value names.
Seven of the 22 stocks are in negative territory, and still, just one currently shows single digit percentage losses. Zovio (ZVO) (-32%), which changed its name from Bridgepoint Education last month remains the biggest loser. Shares fell 15% on May 10th after the company reported worse than expected first quarter results.
Powell Industries (POWL) (+45%) took the reigns as the top performer from Hibbett Sports (HIBB) (+38%). POWL benefited from solid first quarter results last week, beating earnings estimates by 33 cents, reporting an 8 cent gain when a loss of 25 cents was expected. POWL now trades at 2.9x net current asset value (NCAV) and yields 2.8%.
Dril-Quip (DRQ) (+39%), remained the second best performer, despite falling 5% over the past month. DRQ trades for 2.07x NCAV .
Vera Bradley (VRA) (+32%) gave back 4% over the month, yet has still been a solid performer over the past several months. VRA currently trades at 2.11x net current asset value, and has nearly $157 million, or $4.50 per share, in cash and investments on the books. I still would not be surprised to see this company among the next double nets to be acquired. While specialty retail is not a great industry, VRA has an attractive balance sheet, and is a well-known brand name. There is a great deal of insider ownership here, however, which could create some hurdles for a deal.
Argan (AGX) (+31%) has very quietly put up a solid run since bottoming in late December. Shares are up 43% since December 21st, and the stock appears to be making a run at its 52 week high. AGX currently trades at 2.29x NCAV, yields 1.97%, and trades for about 11.5x next year's consensus earnings estimates.
Astec Industries (ASTE) (+4%), which had been a strong performer, gave back more than 20% over the past month, with all of the damage occurring on April 23rd after the company reported worse than expected first quarter earnings. ASTE now trades at 2.34x NCAV, and just under 12x next year's consensus earnings estimates.
This is the first inception-to-date period that the portfolio has not outperformed its benchmarks; it certainly may not be the last. That's how it goes in deep value (or value trap) land.
Here's how the rest of the portfolio has performed thus far, since December 18th inception.
Avnet (AVT) (+21%)
AXT Inc (AXTI) (+20%)
PC Connection (CNXN) (+18%)
Benchmark Electronics (BHE) (+17%)
Titan Machinery (TITN) (+11%)
Hurco (HURC) (+8%)
Gencor Industries (GENC) (+3%)
Rocky Brands (RCKY) (+3%)
AVX Corp (AVX) (+1%)
Tutor Perini (TPC) (-2%)
CATO Corp (CATO) (-2%)
Universal Corp (UVV) (-7%)
Adams Resources & Energy (AE) (-10%)
Flexsteel Industries Inc (FLXS) (-10%)
Olympic Steel (ZEUS) (-13%)
As a reminder company screening criteria for inclusion in this tracking portfolio are as follows:
- Companies trade at between 1 and 2 times net current asset value (NCAV, computed by subtracting total liabilities from current assets)
- Minimum market cap $150 million
- No development stage pharmaceuticals/biotechs
The NCAV calculation disregards the potential value of a company's long-term assets, which may create a margin of safety, depending on the particular situation.