I'm unveiling the 2020 vintage of my Double Net Value Portfolio, comprised of seemingly cheap names relative to net current assets (defined as current assets minus total liabilities). I've done this for several years, and more often than not the results are decent. Last year's portfolio did fairly well relative to the benchmarks. This year, I am not as hopeful, given the scarcity of double-nets as well as the fact that there are several repeat offenders from past portfolios. Therefore, to mix things up a bit, I am slightly altering the criteria for inclusion by lowering the market cap threshold.
- Companies trade at between one and two times net current asset value (NCAV)
- Minimum market cap $75 million (down from $150 million last year)
- No development stage pharmaceuticals/biotechs
This year, just 13 names make the cut, and that's with the lower market cap threshold. That's down from 22 last year. The names again are equally weighted for tracking purposes.
Not surprisingly, there are six repeat offenders from last year; they are AXT Inc. (AXTI) , Hurco Companies (HURC) , Gencor Industries Inc. (GENC) , Tutor Perini Corp. (TPC) , Flexsteel Industries Inc. (FLXS) and Universal Corp. (UVV) . The last company of the bunch is the largest name that made the cut, with a $1.36 billion market cap. UVV currently yields 5.4% and trades at 1.86x net current asset value
Interestingly, there are no retailers in the portfolio this year; last year the sector was prominent with Vera Bradley Inc. (VRA) , Hibbett Sports Inc. (HIBB) and Cato Corp. (CATO) . However, there may be a good reason for their absence.
Due to a change in accounting rules, companies with operating leases -- and those are typical for retailers -- are required to include both the associated asset and liability of the leases on their balance sheets. This change can add a significant amount of long-term assets and liabilities to a company's balance sheet. Meanwhile, the double-net formula considers all liabilities in the formula, but it excludes long-term assets. For Instance, Vera Bradley now trades at -13x NCAV based on data that include operating lease liabilities; stripping out those liabilities, which are significant at $116 million, VRA trades at just under 4x NCAV. It looks like I've got a weekend project on the horizon to see how leases affect other retailers' NCAV.
Other names in this year's double-net portfolio are Now Inc. (DNOW) , NetGear Inc. (NTGR) , FutureFuel Corp. (FF) , TESSCO Technologies Inc. (TESS) , Amtech Systems Inc. (ASYS) , Lakeland Industries Inc. (LAKE) and Aware Inc. (AWRE) .
I'm not excited about this year's Double Net Portfolio, but the show must go on.
