This Deep-Value Portfolio Experiment Is Yielding Favorable Results in the Lab (original) (raw)

The Triple Net Active Versus Passive Portfolio Experiment is favoring the Active team so far, though the Passive squad is doing just fine, too.

Three months since inception, this year's Triple Net Active Versus Passive Portfolio Experiment is heating up as the Active Portfolio (up 20%) has a solid lead over the Passive Portfolio (up 14.8%).

The theory is that companies trading at relatively low levels of net current asset value can outperform the benchmarks, and that a hand-selected group of stocks (the Active Portfolio) can outperform the entire universe of triple nets (the Passive Portfolio).

Selection criteria include the following:

• Market capitalization of more than $100 million
• No financials or development-stage companies
• Trading at between 2 and 3 times net current asset value (NCAV is calculated by subtracting a company's total liabilities from current assets)

Those criteria produced a list of more than 70 qualifiers (the Passive Portfolio); I selected eight stocks that were most compelling, took positions in each and released them in two tranches, on Oct. 21, 2022, and Oct. 24 of last year.

Tranche 1 is up 25.4% since inception versus a 16.3% gain for the Russell 2000 and 16% increase for the Russell Microcap Index. Fossil Group (FOSL) (up 49%) is leading the way. FOSL has rebounded nicely since it was dropped from the S&P SmallCap 600 Index last September. Boise Cascade (BCC) (up 29%) continues to shine while Smith & Wesson Brands SWBI (up 6%) has found its way into positive territory. Rounding out the tranche is Movado Group (MOV) (up 17%), which boasts a 3.9% dividend yield .

Tranche 2 is up 14.6% since inception versus a 13.7% gain for the Russell 2000, and 13.6% increase for the Russell Microcap Index. IPG Photonics (IPGP) (up 33%) has surged early in the New Year and is tied with Park Aerospace (PKE) (33%) as the best performers in this tranche. PKE is currently trading near a 52-week high. Seneca Foods (SENEA) (up 2%) is lagging, while Benchmark Electronics (BHE) (down 10%) is the only active name in negative territory. BHE, the only Active member that recently has reported earnings, fell nearly 14% last Thursday after reporting below-consensus fourth-quarter revenue. While earnings per share of 60 cents were in line, revenue of 751millionmissedthemarkby751 million missed the mark by 751millionmissedthemarkby29 million.

In the Passive Portfolio, Outset Medical OM (up 98%) is the leader, while SiTime Corp. (SITM) (up 67%), SeaSpine Holdings (SPNE) (up 53%), LiveRamp Holdings (RAMP) Holdings (up 52%) and Kimball Electronics (KE) (up 47%) round out the top five.

The rising tide of the markets is lifting many boats, including triple-nets.

At the time of publication, Heller was long BCC, FOSL, SWBI, MOV, PKE, IPGP, SENEA and BHE.