Next week I plan to roll out my 2022 Tax Loss Selling Recovery Portfolio, and it may come with a twist.
I've done this portfolio experiment annually for the past several years and have used the same criteria in order to identify names that were hammered during the year, may suffer more damage as investors sell them off at year-end to offset gains, and potentially will be set up for a rebound in the new year:
- Down at least 30% year to date
- Forward price-to-earnings (P/E) ratios below 15 in the next two fiscal years
- Minimum market cap of $100 million
The twist is that the list of candidates is a bit thin this year, so I am contemplating opening the search criteria up a bit, namely by reducing the threshold to stocks that are down 20% year to date. The alternative is to not run it at all this year, but what would the fun be in that? Once again, I will take positions in all the selected names, and I know what I'll be doing this weekend. Stay tuned for Monday's column.
On another note, despite a ridiculously thin cupboard of net/nets (stocks trading below net current asset value, or NCAV) these days, I continue to regularly run that search. It's one that I've been doing for probably 25 years and it historically has produced some interesting opportunities. Unfortunately, due to the rising tide of the markets, and perhaps the fact that the net/net concept has become more widely followed over the years, the list of candidates has all but dried up to a couple with market caps in excess of $100 million.
The most recent addition is one that has appeared on several of my deep value searches over the years. When I see the same name over and over, it's an indicator that the company may be a perennial; in other words, it just happens to trade relatively cheaply for one reason or another.
The name in question is Dril-Quip Inc. (DRQ) , which, with its $676 million market cap, is the largest net/net I've seen in quite a while. Currently trading at 0.92x NCAV, Dril-Quip is a maker of drilling and production equipment that ended its latest quarter with $375 million, or $10.60 per share, in cash and no debt. (The company is a member of my 2021 Double Net Value Portfolio.)
Like many net/nets, Dril-Quip has some fleas. That's sometimes why companies end up trading so cheaply relative to NCAV. In Dril-Quip's case, it has been profitable just one of the last six quarters and is it expected to lose 26 cents a share in 2022 (with eight analysts covering it). Dril-Quip is also not in a great industry right now, as it makes and services deep-water drilling equipment. However, it is difficult to ignore a company that has 55% of its market cap in net cash, and I've added it to my watch list.
DRQ shares are down 35% year to date, 67% over the past five years and 73% over the past 10 years. I am not a technician, but I'm sure my fellow Real Money contributors who are would find DRQ's chart interesting, and not in a good way.
