Just over mine months since inception, my 2019 Double Net Value Portfolio has continued to bow to the pressure exerted on smaller value/distressed value names and is down 3% since inception. The S&P 500 (up 12.7%) is still holding up fairly well during the same time frame, but the Russell 2000 Index (up 6.7%) and Russell Microcap Index (up 0.6%) are showing the pressure that has been put on smaller names.
Growth is absolutely trouncing value; the performance difference between the Russell 2000 Growth Index (up 11.6%) and Russell 2000 Value Index (up 1.5%) is an astounding 1,010 basis points. Within microcaps, the situation is even more interesting; the Russell MicroCap Growth Index (up 1.8%) is ahead of Russell MicroCap Value Index (down 0.7%) by 250 basis points, but overall there has been little return from this area of the market.
Twelve of the portfolio's 22 stocks are now in negative territory. Zovio Inc. (ZVO) (down 74%), formerly Bridgepoint Education, remains the biggest drag on the portfolio and has continued to weaken. The stock fell 17% on Tuesday alone on no news.
Dril-Quip Inc. (DRQ) (up 43%) remains the best performer despite giving back 6% since the July update. Second-quarter results released late last month featured better-than-expected revenue. Shares rose 10% in response, hitting the $52.50 level, but have since fallen 15%. DRQ ended the quarter with $423 million, or $11.76 per share, in cash and just $500,000 in debt.
Powell Industries Inc. (POWL) (up 39%), the second-best performer, reported solid third-quarter results earlier this month, beating estimates on both the top line ($135.6 million actual vs. $132.3 million consensus) and bottom line (39 cents a share vs. 20 cents).
Specialty retailer Cato Corp. (CATO) (up 17%) jumped into the third-best spot, rising 37% since the July update primarily on good second-quarter results, reported last week. With nearly $10 per share in cash, CATO currently yields 7.8%.
Titan Machinery Inc. (TITN) (up 14%) has had a rough run recently, falling 20% since early July, likely due to escalating trade wars. In light of the company's agricultural equipment operations, the stock will likely continue to rise and fall depending on how the tariff wars with China are going on any given day.
Construction name Tutor Perini Corp. (TPC) (down 43%) has fallen 30% since the July update, with significant damage coming from worse-than-expected second-quarter results and a full-year guidance cut announced earlier this month. As a result of the declining stock price, TPC now has fallen into net/net land, trading at just 0.83x net current asset value. Markets think very little of the name at this point, considering that it trades at just 4x next year's consensus earnings estimates.
If value is Mudville, there is no joy in Mudville this year, so far anyway.
Here's how the rest of the portfolio has performed thus far, since December 18th inception.
Avnet Inc. (AVT) (+8%)
AXT Inc. (AXTI) (-21%)
PC Connection Inc. (CNXN) (+14%)
Benchmark Electronics (BHE) (+19%)
Hurco Cos. (HURC) (+11%)
Gencor Industries Inc. (GENC) (-4%)
Rocky Brands Inc. (RCKY) (+20%)
AVX Corp. (AVX) (-16%)
Hibbett Sports Inc. (HIBB) (+18%)
Vera Bradley Inc. (VRA) (+11%)
Universal Corp. (UVV) (-15%)
Argan Inc. (AGX) (-1%)
Adams Resources & Energy Inc. (AE) (-22%)
Flexsteel Industries Inc. (FLXS) (-40%)
Olympic Steel Inc. (ZEUS) (-40%)
Astec Industries Inc. (ASTE) (-15%)
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.
