Jon Heller of the superb Cheap Stocks, one of the inspirations for this site, has published the results of his two year net net index experiment in Winding Down The Cheap Stocks 21 Net Net Index; Outperforms Russell Microcap by 1371 bps, S&P 500 by 2537 bps.
The “CS 21 Net/Net Index” was “the first index designed to track net/net performance.” It was a simply constructed, capitalization-weighted index comprising the 21 largest net nets by market capitalization at inception on February 15, 2008. Jon had a few other restrictions on inclusion in the index, described in his introductory post:
- Market Cap is below net current asset value, defined as: Current Assets – Current Liabilities – all other long term liabilities (including preferred stock, and minority interest where applicable)
- Stock Price above $1.00 per share
- Companies have an operating business; acquisition companies were excluded
- Minimum average 100 day volume of at least 5000 shares (light we know, but welcome to the wonderful world of net/nets)
- Index constituents were selected by market cap. The index is comprised of the “largest” companies meeting the above criteria.
The Index is naïve in construction in that:
- It will be rebalanced annually, and companies no longer meeting the net/net criteria will remain in the index until annual rebalancing.
- Only bankruptcies, de-listings, or acquisitions will result in replacement
- Does not discriminate by industry weighting—some industries may have heavy weights.
If a company was acquired, it was not replaced and the proceeds were simply held in cash. Further, stocks were not replaced if they ceased being net nets.
Says Jon of the CS 21 Net/Net Index performance:
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 Index was down 9.9%. During the same period, the S&P 500 was down 20.27%.
Here are the components, including the weightings and returns of each:
Adaptec Inc (ADPT) Weight: 18.72% Computer Systems +7.86% Audiovox Corp (VOXX) Weight: 12.20% Electronics -29.28% Trans World Entertainment (TWMC) Weight:7.58% Retail-Music and Video -69.55% Finish Line Inc (FINL) Weight:6.30% Retail-Apparel +350.83% Nu Horizons Electronics (NUHC) Weight:5.76% Electronics Wholesale -25.09% Richardson Electronics (RELL) Weight:5.09% Electronics Wholesale +43.27% Pomeroy IT Solutions (PMRY) Weight:4.61% Acquired -3.8% Ditech Networks (DITC) Weight:4.31% Communication Equip -56.67% Parlux Fragrances (PARL) Weight:3.92% Personal Products -51.39% InFocus Corp (INFS) Weight:3.81% Computer Peripherals Acquired Renovis Inc (RNVS) Weight:3.80% Biotech Acquired Leadis Technology Inc (LDIS) Weight:3.47% Semiconductor-Integrated Circuits -92.05% Replidyne Inc (RDYN) became Cardiovascular Systems (CSII) Weight:3.31% Biotech [Edit: +126.36%] Tandy Brands Accessories Inc (TBAC) Weight:2.94% Apparel, Footwear, Accessories -57.79% FSI International Inc (FSII) Weight:2.87% Semiconductor Equip +66.47% Anadys Pharmaceuticals Inc (ANDS) Weight:2.49% Biotech +43.75% MediciNova Inc (MNOV) Weight:2.33% Biotech +100% Emerson Radio Corp (MSN) Weight:1.71% Electronics +118.19% Handleman Co (HDL) Weight:1.66% Music- Wholesale -88.67% Chromcraft Revington Inc (CRC) Weight:1.62% Furniture -54.58% Charles & Colvard Ltd (CTHR) Weight:1.50% Jewel Wholesale -7.41%
Cash Weight: 8.58%
Jon is putting together a new net net index, which I’ll follow if he releases it into the wild.