Methodology
My testing was pretty simple, I put all of the quotes and data into a giant spreadsheet and I typed in each ticker one by one into FT.com. I used the FT.com 1yr return as my return statistic, I have no idea how accurate this is, but in looking at the data I have a feeling it's generally more right than wrong.
For stocks that I could no longer get a quote I left them blank, and left them out of the average calculations. I recognize that this could skew the results some. Some of these companies have been acquired, but the potential also exists that others have gone out of business. I did some googling on a few of them and the ones I looked up fell roughly into the two buckets (bought out, failed) equally. I didn't want to spend more time on this but if anyone is interested in backfilling this data I'd be interested in the refined set.
I am not an Excel guru so I've uploaded my spreadsheet to Google Docs and attached a link at the bottom of this post. If anyone is so inclined I would love to know any fun facts from readers slicing and dicing the data. Also if anyone has the returns for the missing companies I'd love to see that as well.
Results
Observations
As I was entering the numbers I had a feeling that the net-net strategy had failed over the past year, as most of the returns I entered were negative. Consider out of the 214 that started 2011 only 30 had a positive return. Overall an equal weighted portfolio would have just about broken even although poor it trounced a global ex-US benchmark. The problem is that since so much outperformance came from such a small set of stocks it's likely an investor would have emotionally sold out after Comwest a $55,000 market cap company quadrupled, although at that point it still almost doubled again.
Here are a few general observations:
- Canada has the best returns due to a few tiny speculative companies. Building a position would have required purchasing most of the shares outstanding meaning these returns are mostly unachievable.
- Germany had a 11% gain which seemed attainable by an average investor.
- Only 21 companies had a return greater than 10%.
- Buying only FCF positive or dividend paying firms resulting in a loss but still beat the benchmark.
- Firms with a greater than 1m (in own currency) market cap returned -13.44%.
- Firms with a smaller than 1m (in own currency) market cap returned 58%.
- All of these returns assume a hedged portfolio.
- Forty companies lost 50% or greater with a number of total losses.
- The UK had the most "missing" companies. I hope this is because the UK is more shareholder friendly and management worked to merge or take companies private.
Conclusion
Often I'll come across a blog post, or an article on the internet where the author posits that buying any company below NCAV is a good investment decision. The data supports that conclusion if the investor buys ALL stocks selling below NCAV since the outperformance came from a very small set. If someone were to just buy a random set of stocks below NCAV it's likely they would have performed close to the benchmark at best.
Looking through the list and then looking at my own portfolio led me to the conclusion that NCAV is a great starting point but further work needs to be done. I say this because my own net-net portfolio performed quite well this past year, out of the 13 net-net's I own/owned only one is negative (Titon Holdings) all the rest are positive. The reason for my good fortune isn't that I happened to buy a lucky handful of net-net's but rather that I looked through a lot and discarded them rather then buying anything, I ensured I had a valid margin of safety and that the business wasn't impaired.
This was a fun exercise, I still plan on hunting through net-net land, but as I mention above it's only a starting point.
Talk to Nate about net-net performance
Link to the spreadsheet (click File->Download Original)
Disclosure: Long 7466, 9814, 9932, ARGO, HYI, TON, VIN
I would be interested in hearing about your criteria for accepting and rejecting the stocks in your portfolio.
ReplyDeleteMark,
ReplyDeleteAs strange as it sounds I was hoping that looking through this data might expose some criteria I was using unknowingly, unfortunately it didn't.
I do actually have a process that I use with regards to net-net's. The actual process is spread out in parts across posts on the blog but I will summarize it here.
1) I always check to see the makeup of the current assets, I prefer cash and receivables to inventory.
2) Check the liabilities, this is important leases are often lurking and sometimes there are contingent liabilities that have a hold on assets. I try to avoid debt ridden companies. If a company is doing poorly often management will want to lever it up but banks won't lever up junk, so bank debt can be a way of looking at the true value of the assets in some ways.
3) If a valid asset margin is established (liquid, little or no debt, assets can be liquidated unencumbered) then I ensure the company is profitable or at least cash flow positive. I do this because I have been stuck in some net-net's where operations destroyed my asset based margin of safety meaning I didn't really have a solid margin.
4) If the company is cash rich and sitting on it I like to get some sort of dividend as a small return.
5) If the company's ncav is composed of mostly inventory then I look at the operations, I look for potential margin expansion.
6) I always try to identify why the company is cheap, often most net-net's deserve to be cheap they are working hard to destroy shareholder value.
Hopefully this helps, I've used the same process with US and international companies.
One last point on exiting a position. To me these companies are total junk, I'm hoping to hold to ncav and then promptly sell my shares. Some investors will hold on as the business starts to recover. I can't invest like that, often there's a reason these companies are cheap in the first place unless that reason is totally eliminated (management booted, lawsuit cleared) there is no reason to invest in a bad business with management that helped it get there. Maybe this is a trading mentality, but if I invested in a net-net and two days later it popped to ncav on no news I'd dump it without hesitation. If I want to hold a stock for the long term it will in almost no cases be a net-net.
Excellent summary Nate. Thanks.
DeleteJust thinking I also require directors to own a large shareholding. Since the companies are cash rich and doing badly I want some reassurance management won't take one last throw of the dice and blow all the cash on a gamble, like a 'transformative' acquisition. Obviously they might, any way, but I'd hope they'd be conservative with their own cash.
DeleteRichard,
DeleteVery good point about director holdings, this is something I look at but probably don't actively focus on, interestingly enough of the net-net's I currently own outside of the Japanese ones all of them have a significant majority holder. I guess this is a subconscious criteria.
You bring up a transformative acquisition, I think this is the largest risk to a net-net. Most investors are worried the company will go out of business when they should be worried that management will blow cash and financing on a merger with the hope of saving the ship. I don't know how to guard against this.
I have experienced the transformative acquisition once with Audiovox (VOXX). I think I actually wrote them up right before it happened. Management went out and spent cash and got loans on a related company. At the time it shook out a lot of shareholders, I held on for a bit then eventually sold. Looking back I should have held on, the shares went from the 6s to over 12 now. I would say this is an exceptional case, most often acquisitions will do nothing except destroy cash.
Nate
Hello
ReplyDeleteJust out of curiosity I checked your xls for French net-nets.
Found 4 under FRA exchange : SOFR is a holding company (financial), TAYN is also a holding company (commercial real-estate), ARDO and MLARDO are the same stock for a super-obscure trading company that traded just once this year, on an un-regulated exchange (ML = Marche Libre).
So none of them would fit Graham criteria for a net net anyway.
I personally invested last year only in one net-net : SAM (ticker SAMP) (listed on Euronext Paris, makes professional tools) and the outcome was better (see http://valueinvestingfrance.blogspot.com/2012/01/bilan-2011-review.html). No statistical signification though.
This blog (not mine, they're based in Belgium) http://blog.daubasses.com/ specializes in situations with a large discount to book value and on occasion on net-nets (daubasse ~ French slang for junk).
My conclusion ?
I'd be super cautious on international net-nets. I'm not sure there's a reliable database to work with (at least in France, the situation is probably much better in the US or the UK ?).
Anyway thanks for the blog and your work, and my best 2012 wishes.
Caque,
ReplyDeleteThanks for the comment you're right on the money. Since I didn't research each company I just took every one of them at face value, but I did notice a number of closed end funds mixed in. Screener.co was ok in finding these, but the data wasn't that great, I wish there was a reliable site for foreign net-net's but without paying for Bloomberg I just don't think it's possible.
I also wanted to say I love your blog. I looked at SAMP and Tessi that you'd posted about, I like your approach. My French is bad, but I enjoy fumbling through trying to expand my vocab and then matching what I thought I read vs your English translation.
Thanks for the link to the daubasses blog, I've read it before but didn't have it bookmarked. It seems like you need to have a premium account to see current purchases though.
Thanks for reading, I'm hoping we'll see some French net-net's in 2012.
Nate
Bonjour,
ReplyDeleteQue pensez vous de 3U Holdings AG, une entreprise Allemande de Télécom qui viens de ce lance dans le photovoltaïque .
J’ai calculé la marge de sécurité sur la VANN, en appliquant 30% de décote sur les créances (allongement des durée de paiement) et 20% sur le stock par précaution. Il semble que le stock est considérablement augmenter depuis que l’activité photovoltaïque soit lancée, ce qui est normal.
Actif courant réévalué = Cash + 0.7*Receivables + 0.8*Inventory
Actif courant réévalué = 33 + 0.7* 15 + 0.8*6.54
Actif courant réévalué = 33 + 10.5 + 5.232
Actif courant réévalué = 48.732
Total Dettes réévalués = 11
VANN = ( Actif courant réévalué – Total dettes) / Total action
VANN = ( 48.732 -11) / 39.43 = 0.957
Marge de sécurité sur la VANN = (0.957 – 0.731 ) / 0.957 = 23.6%
Au prix de 0.731, les marges de sécurité sont importantes sur la VANN.
Les risques me semble minimes sachant que je n’ai pas tenu compte des points suivants pour évaluer la société:
Property, plant & equipment, net: 0.20 par action
Long term investments: 0.24 par action
Un plan de rachat d’action l’année dernière
Achats des initiés récents
EPS : 0.78 par action
Bonjour Anon,
ReplyDeleteMon francais ne pas bon désolé.
3U Holdings AG semble intéressant, je vais les recherches. Merci pour le conseil.
Nate
biolitec AG
ReplyDeleteReally facinating summary. Interesting about Germany. Is that because Germany has thrived economically as the rest of the EZ has gone down the tubes?
ReplyDelete