Tuesday, September 13, 2011

Introducing The New Cheap Stocks 26 Net/Net Index

Back in February of 2008, we launched the Cheap Stocks 21 Net/Net Index, an experiment in net/net indexing. This was not a particularly good time for net/nets; the quality of those available was quite low. What better time, we thought, to truly stress test the concept. The results after two years, while not as compelling as we'd hoped, were still quite good. The CS 21 Net/Net Index, a rag-tag bunch of troubled companies outperformed the S&P 500 by 2537 basis points, and the more appropriate benchmark The Russell Microcap Index by 1537 basis points, returning 5.1% during the two year period.

In the past year or so, the ranks of net/nets have been extremely thin. Our readers have wondered where we've been, with so few postings in recent months, but the truth is, there simply has not been much to write about in net/net land. The recent market pullback, however, has helped to push a few more companies below net current asset value. While the number of net/nets is still a bit thin, we've decided to introduce a new net/net index.

Unlike our previous CS 21 Net/Net Index which was cap weighted, the New Cheap Stocks 26 Net/Net Index will be equal weighted. It is comprised of 26 companies with market caps in excess of $40 million that were trading below their net current asset value as of today's market close. There will be no rebalancing, no companies will be added or deleted, and we'll track the results over the next two years. We are keeping this very simple.

Here are the constituents of the CS 26 Net/Net Index:

Ingram Micro (IM)
Benchmark Electronics(BHE)
Imation Corp.(IMN)
RealNetworks, Inc.(RNWKD)
ModusLink Global Solutions(MLNK)
Tuesday Morning Corporation (TUES)
Maxygen, Inc.(MAXY)
Volt Information Sciences, Inc (VISI)
Axcelis Technologies, Inc. (ACLS)
Kimball International (KBALB)
Opnext, Inc. (OPXT)
Advanced Battery Technologies,(ABAT)
BigBand Networks, Inc. (BBND)
Myrexis, Inc.(MYRX)
Gencor Industries, Inc. (GENC)
Parlux Fragrances, Inc. (PARL)
Trans World Entertainment Corp (TWMC)
Heelys, Inc. (HLYS)
RCM Technologies, Inc. (RCMT)
Trimeris, Inc. (TRMS)
Emerson Radio Corp (MSN)
Adams Golf, Inc. (ADGF)
Planar Systems, Inc. (PLNR)
Books-A-Million, Inc.(BAMM)

In true net/net fashion this is not a well diversified group of companies, and is very heavy on technology.

The beginning value for the Index will be 260.00, and we'll update the progress weekly.

Stay tuned for more on the index members, portfolio fundamental data, and more.

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


Joshua Wallis said...

Hi Jonathan. I am looking forward to this strategy. Yet, I would be very anxious about including ABAT on your list of net/nets. Kerrisdale and Prescience have written up about this, and it looks like another Chinese fraud. (http://kerrisdalecap.com/blog.php)

I have actually been short this one previously. I have closed my position since then to go into other opportunities, but I would still rather be short than long ABAT.

Any thoughts?

Really enjoy your blog, and I look forward to more posts.

Anonymous said...

Using big numbers to picture small numbers is manipulative. Basis points are meant to be used for numbers below a percentage point, although I don't see a problem with 0.01%. But using thousands of basis points is plain silly.

Just say it as it is: The portfolio overperformed by a measly 1-2%, which is well within the range of the sample error, so the results may not even be statistically significant.

Jonathan Heller, CFA, Editor said...

Thanks for the comment, but you might want to check your math. 100 bps=1%, so 2537 = 25.37%, 1537 = 15.37%. That's hardly a rounding error.

Jonathan Heller, CFA, Editor said...

Joshua, thanks for your comments. Most net/nets have some warts, some are controversial. We debated about including ABAT in the index, and decided to despite the controversy.