Thursday, February 25, 2010

Winding Down The Cheap Stocks 21 Net Net Index; Outperforms Russell Microcap by 1371 bps, S&P 500 by 2537 bps

Two years ago, we launched the CS 21 Net/Net Index, the first index designed to track net/net performance. The index was cap weighted, and comprised of the 21 largest net/nets by market cap at the time of launch. We had a few restrictions on inclusion in the index, including average daily volume and price, but otherwise, this was a very simply constructed index.

We originally intended to replace companies that were acquired, but thought better of it, instead deciding to keep proceeds from acquistions in cash. We also did not replace any names if they no longer met the net/net criteria. This was simply an experiment in order to see how net/nets at a given time would perform over the subsequent two years.

The results are in, and while it was not what we'd originally hoped for, it does lend credence to the long-held notion that net/nets can outperform the broader markets.

The Cheap Stocks 21 Net Net Index finished the two year period relatively flat, gaining 5.1%. During the same period, The Russell Microcap Index was down 8.61%, while the Russell Microcap Value Index was down 9.9%. During the same period, the S&P 500 was down 20.27%.

Here are the index constituents, their original weights, and performance.

Adaptec Inc(ADPT)
Weight: 18.72%
Computer Systems

Audiovox Corp(VOXX)
Weight: 12.20%

Trans World Entertainment(TWMC)
Retail-Music and Video

Finish Line Inc(FINL)

Nu Horizons Electronics(NUHC)
Electronics Wholesale

Richardson Electronics(RELL)
Electronics Wholesale

Pomeroy IT Solutions(PMRY)

Ditech Networks(DITC)
Communication Equip

Parlux Fragrances(PARL)
Personal Products

InFocus Corp(INFS)
Computer Peripherals

Renovis Inc(RNVS)

Leadis Technology Inc(LDIS)
Semiconductor-Integrated Circuits

Replidyne Inc(RDYN)Became Cardiovascular Systems (CSII)

Tandy Brands Accessories Inc(TBAC)
Apparel, Footwear, Accessories

FSI International Inc(FSII)
Semiconductor Equip

Anadys Pharmaceuticals Inc(ANDS)

MediciNova Inc(MNOV)

Emerson Radio Corp(MSN)

Handleman Co(HDL)
Music- Wholesale

Chromcraft Revington Inc(CRC)

Charles & Colvard Ltd(CTHR)
Jewel Wholesale

Cash Weight: 8.58%

We are in the process of putting together a new net/net index, and still trying to decide whether or not we want to disclose the constituents, or keep them under wraps. Stay Tuned.

*The author has a position in Chromcraft Revington (CRC). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.


Anonymous said...

surprised to see you own chromcraft. Why if you don't mind me asking?

Rev's have been declining since 03'
02-07 the consumer was doing well and furniture was doing well, but this company did not grow.

At present Furniture ind as big problems, there are a lot of issues with importing and cost of importering going up near 50% lately. Some manufatcuers are coming back to US which is expensive to re tool.

The last years this company should not have been making a loss 06 & 07 they should have made a profit still the could'nt. Furniture wholesale is very competative with high costs

08 FCF was the the biggest loss in the last 10years

Assets to lias. look good, but the assets are mostly made up of inventory and recies. With such pressure on their customers recieves need marking down some what, inventory will also be sold at discount in some cases. 3 mil in cash agaisnt 7.5 mil in current lias, not good. The costs of doing business in furniture will not change for them and their customers will require ever decreasing prices in the current enviro. One could say the consumer is back (I would not) but this company's last profit was in 05, it should have been making money in 06,07 and it could not. This industry is very competative and their product mix is not exciting or far reaching enough to capture new customers,plus he consumer will not be back quick enough for this stock to turn around.

Jonathan Heller, CFA, Editor said...

Buying net/nets is sometimes buying ugly. In CRC's case, you are absolutely right about the business. There are some assets here though, as company still owns 1 million square feet of warehouse space, plus land in MS. I took a position under $1, sold half when the stock rose nicely, and am still holding half. The question about CRC, is what are the assets worth? I believed they were worth well more than $1 per share. Never had any illusions that business would turn around significantly, but if it does, that's a plus. This is a classic case of a cigar butt that I believe has a few more puffs. We'll see.