There’s Still Money to be made in Net/Nets by Jonathan M. Heller, CFA
There’s Still Money to be made in Net/Nets
When we formulated and “launched” the first index comprised of companies trading below their net current asset value, The Cheap Stocks 21 Net/Net Index, back in February, it was the culmination of years of research, writing on the subject, as well as a belief in what Ben Graham had espoused many years ago.
Nearly seven months later, this little experiment has had interesting results, and lends credence to the notion that there’s money can be made in the depths of the downtrodden. I fully admit that for years I’ve taken liberties with Ben Graham’s net/net formula; he wouldn’t consider companies of this nature unless they were trading at 2/3 or less net current asset value, while I’ve lowered the bar, considering companies trading below one times NCAV.
Although 8 months is a very short timeframe in which to declare success or failure, the Cheap Stocks 21 Net Net Index has greatly exceeded my expectations so far. Since inception (February 12, 2008), the index is up 24.78%. While it’s difficult to find a truly representative benchmark for this index, I’ve settled on the Russell Microcap Index since all constituents of CS21 Net/Net are micro caps, which is down 2.8% during the same period.
Our work with net/nets is not done yet. While early results taking an indexing approach (see our earlier VIC post on this, which describes the index construction and lists the constituents and their weights) have been positive, the next step will be to take a more active approach in company selection. We’ll continue to report our progress moving forward, and you can read our past research on the Cheap Stocks website.
Finally, I look forward to attending the Value Investing Congress in New York on October 6th and & 7th in New York. This will be my 3rd VIC, and it has quickly established itself as the premier forum for value investors. If you plan on attending (highly recommended) and want to discuss net/nets, (or value investing in general), I’d be more than happy to.
Jonathan M. Heller, CFA