Tuesday, November 11, 2008

Net/Net Indexing: CS21 Net/Net Update; and the Launch of a New Net/Net Index

When we conceived of and constructed the first index of companies trading below net current asset value (NCAV), we did so knowing that the choices at the time were very limited. The quality of companies that met the criteria were not that strong overall. Few of the names were profitable, and the quality of the typical balance sheet was a far cry from what we are seeing in today's terribly negative landscape.

Still, the index has performed relatively well. As of yesterday, the CS21 Index was down 20% since inception 2/12/08, while the Russell Microcap Index, the closest proxy for our little index of misfits, is down about 32% during the same period.

The whole purpose of indexing net/nets is to spread the risk. Many net/nets are at risk of bankruptcy- that's why they appear to be so cheap- but it is often difficult to accurately assess the posibility of success or failure in the individual names. The winners typically win big, which helps to offset those that ride into the sunset.

In this case, there are just four companies that are in positive territory since index launch. The big winner is The Finish Line Inc (FINL,+190%), which is no longer a net/net (that's what you hope for as an investor), followed by Anadys Pharmaceuticals (ANDS, +42.5%), Parlux Fragrances (PARL, +28.06%), and Adaptec (ADPT, +8.93%). All other members of the index are in negative territory, some very deeply. However, the positive performers helped buoy the index as a whole. Still no bankruptcies, though.

The Next Generation
We are currently designing a second net/net index. This one will focus on profitable names, and should be rolled out in the coming months. Stay tuned.

For a list of all CS21 Net/Net Constituents, please search our site.

*The author does not have positions in any of the companies mentioned. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.


BIgBeluga said...

Thank you for putting this strategy out there - I have followed this blog since you created the index and it is certainly thought provoking. All alpha is capacity constrained on some level, and I hypothesize institutional investors cannot capture a significant share of it because the dollar amounts are simply too small to matter of them. This seems like a great strategy that may capture alpha only available to individual investors.

Anonymous said...

Jonathon, the Tweedy Browne "What has worked in investing" document seems to suggest that better returns come from unprofitable net-nets (31.3% p.a. versus 28.9% for the profitable ones). Is that not your experience? Why focus on profits?