I am rolling out the 2019 vintage of the Double Net Value Portfolio, comprised of seemingly cheap names relative to net current assets (current assets minus total liabilities). Despite the 2018 portfolio's disappointing performance, the strategy has shown solid return in the past.
The screening criteria remain rather simple:
- Companies trade at between 1x and 2x net current asset value (NCAV)
- Minimum market cap $150 million
- No development-stage pharmaceuticals/biotechs
This year, 22 names make the cut, up from 20 last year, and they are equally weighted. Not surprisingly, there are several repeat offenders from last year -- including Avnet (AVT) , AVX Corp (AVX) , Universal Corp (UVV) , Dril-Quip (DRQ) , Benchmark Electronics (BHE) , Hibbett Sports (HIBB) , Hurco Companies (HURC) , Adams Resources & Energy (AE) , and Gencor Industries (GENC) .
Familiar newcomers to the list include retailers CATO Corp (CATO) and Vera Bradley (VRA) . CATO had a wild ride in 2018, as did many small specialty retailers, starting the year at around $13 before rising to about $26 in July, and then falling to $14. It currently yields 9.2%, finding itself back in high-yield territory -- a bit of déjà vu.
VRA has also had a roller coaster year, staring at around $12, then rising to nearly $17 by September, but it's been all downhill since. VRA, which closed at $8.7 on Tuesday, was one of the small specialty retailers I held on in 2018. Disappointing third-quarter revenue and earnings put the company in the doghouse last week, sending shares to a two-year low. But the balance sheet remains solid. VRA ended the latest quarter with $132 million --more than 43% of its market cap -- or $3.75 per share in cash investments. VRA trades at 1.61x net current asset value (NCAV), and with a sub-$190 million market cap, could make a nice acquisition.
It's nice to see some new names in the portfolio -- including Astec Industries (ASTE) , Argan (AGX) , Titan Machinery (TITN) , Powell Industries (POWL) , Bridgepoint Education (BPI) , Olympic Steel (ZEUS) , Rocky Brands (RCKY) , Flexsteel Industries (FLXS) , PC Connection (CNXN) , Tutor Perini (TPC) , AXT Inc (AXTI) appeared in the 2017 Double Net Value portfolio.
In terms of portfolio statistics, the average market cap is $736 million, average price-to-book ratio is 1.03, and average multiple of price to NCAV is 1.64. And 18 of the names are currently profitable on a trailing twelve month basis; these have an average trailing price earnings ratio of 13.
I will provide periodic updates on portfolio performance: The good, the bad and the ugly.