Friday, September 13, 2013

Winding Down The Cheap Stocks 26 Net/Net Index

Today marks the 2nd anniversary of our launch of the Cheap Stocks 26 Net/Net Index, our second experiment in net/net indexing.  The idea was to develop an equal-weighted index of net/nets, and see how it performed over a two year period. We used a "set it and forget it" mentality, and did not drop companies from the index once they no longer traded below net current asset value. Companies that were acquired for cash were not replaced in the index, and the associated cash was included as such once a transaction occurred. For mergers/stock deals, we kept the new entity in the index.

This time around, CS26 returned 41.8% over the past two years, beating the Russel Microcap Index, which was up 29.4%.  However, unlike our last net/net index, it underperformed the S&P 500, which was up 44.8%. Our previous Index beat the S&P by more than 2500bps.

Below are the original members 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)

Still, it was another interesting experiment, and not surprisingly, the index ended with fewer companies than it started with due to buyouts. It also ended up with some new names due to takeovers:

*In April, 2012, Parlux merged with Perfumania (Perfumania remained in the Index)
*In October 2011, BigBand Networks  was acquired Arris for $2.24/share
*In March, 2012, Adams Golf was acquired by TaylorMade for $10.80/share
*In July, 2012 Opnext and Oclaro merged (Oclaro remained in the index)
*In November, 2011, Trimeris was acquired by Synageva in an all stock deal (Synageva stayed in the index)
*In October, 2011, ADPT changed name to Steel Excel

The biggest winner by far was Synageva (Trimeris) which was up 462%. Absent that one name, performance would have been much worse.  That being said, this go-around of net/net indexing was inconclusive in terms of the success of the concept.

Other winners include Tuesday Morning (TUES, +244%), Trans World Entertainment (TWMC, +149%), Emerson Radio (GTSI, +72%), Benchmark Electronics (BHE, +72%), Kimball Intl (KBALB, +108%), and Axcelis Technolgies (ACLS, +60%).

The biggest losers included Advanced Battery Tech (ABAT, -83%), Myrexis (MYRX, -97%) and Imation (IMN, -42%)..

We'll construct a new index in the near future, but truth be told, the cupboards are bare in net/net land at this writing.


Anonymous said...

how much of the 42% was from trimeris? i believe that trimeris was a net net that, at the time when the 26 net net index started, had already been acquired by a non net net, i.e. i don't think that many value investors would have included/maintained trimeris in their basket......


Jonathan Heller, CFA, Editor said...

Syynageva (Trimeris) was best performer, and without it, Index would have been up about 25%, a major difference. We made decision to keep Trimeris, despite it's pending deal. But this is why we don't believe the results of CS26 were conclusive as to the efficacy of indexing net/nets,at least this time around.