Three months since inception, my Triple Net active versus passive portfolio experiment has had some interesting early results. The idea was to determine whether taking a scattergun approach to buying companies at relatively low multiples of net current assets (current assets minus total liabilities), can outperform a more active approach. Of course, inherent in the argument is the belief that either group should also outperform the markets over the long-term.
The original screening criteria included the following:
- Market capitalization in excess of $100 million
- No financials or development-stage companies
- Trading at between 2 and 3 times NCAV (NCAV is calculated by subtracting a company's total liabilities from current assets)
The 48 qualifying names represent the "passive" portfolio. I then honed this list down to the eight that I found most interesting, which comprise the "active" portfolio.
So far, since October inception my active portfolio, comprised of Astec Industies (ASTE) (+40%), Crimson Wine Group (CWGL) (+10%), Dril-Quip (DRQ) (-8%), Fitbit (FIT) (+94%), Johnson Outdoors (JOUT) (+31%), LiveRamp Holdings (RAMP) (+14%), MarineMax (HZO) (+13%), and National Presto Industries (NPK) (+9%), up an average of 25%, is beating the passive portfolio (+16%). During that same time frame, the Russell 2000 Value Index is up 7%, while the Russell Microcap Value Index is up about 8%. (The Russell 2000 Index, which includes both growth and value components is up about 10%, while the Russell Microcap Index is up 13%).
FIT, which has nearly doubled since inception due to Alphabet's (GOOGL) $7.35/share acquisition, continues to drive the results of the active portfolio. Excluding FIT's performance, the active portfolio would be up about 16%, still in-line with the passive portfolio, and ahead of the benchmarks.
The top performers in the "passive" portfolio, besides FIT, include Cyberoptics (CYBE) (+63%), nLight (LASR) (+56%), and Intevac (IVAC) (+51%), DASAN Zhone Solutions DZSI (+50%), and SeaSpine Holdings (SPNE) (+49%).
The early outperformance by both active and passive portfolios is interesting to say the least, and has me wondering whether there might be a tax-loss selling recovery effect at work at least for some of the triple-nets. However, the rising tide of the markets is certainly a big factor nonetheless. In any event, I don't expect the current level of outperformance to continue.
The more important question is whether an active approach can outperform a passive approach in small, deeper value names. So far, active is winning.
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