Low Enterprise Value Stocks: Second Quarter 2011 returns
The 2Q quarter of 2011 had been our first down quarter in a year, reducing our annual gains to a still very respectable 37 percent but down from over 50% in just the prior three quarters alone. Utilizing our selection criteria, the simple math aggregate of the holdings in the High Cash Stock Review portfolio was down -14.75 % compared to the S&P 500 being down -1.07% since the last quarter.
In each of the prior three quarters, the High Cash stock review significantly surpassed the S&P 500 index. In the first quarter it was up 14.88% compared the S&P 500 index being up 5.42%. Its gain was very close to its second quarter lose, putting the year to date gain at 0.07% compared to the S&P’s 4.35%. In the fourth quarter of last year, the High Cash Stock review was up a strong 20.38% percent compared to the S&P 500’s gains of 9.92% (please review it here), while its third quarter 2010 performance delivered a rewarding with 16.68% returns compared to the S&P 500’s 10.62% return.
Using distressed Enterprise Values in an evaluation of the ongoing operation, combined with eliminating the cash and or debt from a companies market value, seems to provide a unique way to judge the lower valuation of the company. With that said, if we can buy an enterprise that has such a distressed valuation that the underlying company has very little to perhaps even a negative valuation, then buying the operating core of the company for so little has so far, over time, become very rewarding for our clients.
We attempt to profit from these unique and sometimes quite fearful situations, knowing that the only real outcome will probably take time. This takes a very disciplined and well rounded review process, focusing on companies that provide high cash flows, superb business models and increased earnings forecasts. But even with this very high level of criteria, we still have of challenges. Even using such strict discipline, we acquired DGW, which to date has been very disappointing with the current trading of it being halted.
The select few that make the cut are included into our High Cash Stock Review. Below are the equity positions included in this portfolio that evidenced the previously noted characteristics when first published on Seeking Alpha, and were held for the entire period.
The First Quarter is added to the second half of 2010 based on simple math is:
|Time||High Cash Stock Review.||S& P 500|
|Second Quarter 2011||-14.75 %||-1.07%|
|First Quarter 2011||14.88 %||5.42%|
|Fourth Quarter 2010||20.38%||9.92%|
|Total||37.19 %||25.18 %|
Second Quarter 2011 performance on our Seeking Alpha listed stocks compared to our first:
|Company||Second Quarter 2011||First Quarter 2011|
|China Yuchai International Limited (CYD)||- 29.26 %||-7.45 %|
|Homeowners Choice, Inc. (HCII)||- 18.78 %||1.24 %|
|KHD Humboldt Wedag International AG (KHDHF.PK)||- 16.11 %||12.22 %|
|LoJack (LOJN)||- 7.62 %||27.4 %|
|O2Micro International Ltd. (OIIM)||-15.03 %||22.98 %|
|Openwave (OPWV)||- 2.29 %||0.94 %|
|The Bancorp Inc. (TBBK)||11.88 %||-9.24 %|
|Tessera Technologies Inc. (TSRA)||-6.23 %||-17.56 %|
|Silicon Graphics International Corp (SGI)||-19.66 %||136.99 %|
|Sonus Networks, Inc. (SONS)||14.05 %||40.82 %|
|Terra Nova Royalty Corporation (TTT)||-7.58 %||10.24 %|
|TravelCenters of America (TA)||-28.85%||New last quarter|
|Duoyaun Global Water (DGW)||-35.76||new last quarter|
*Dividends not included
It again appears that the top performers of one quarter are often the worst in the next, as Silicon Graphics was by far the best performer in the first quarter, and was down the most among our established positions in the second. Even though it appears our selection process works, it appears that our timing could improve.
In light of that, we are still holding Duoyuan and our analysis of it is available here. We believe if the cash balance was accurate at over $6 per share, the underlying equity should receive a premium over the cash value, as most other companies do. This is our worst selection we believe ever to date, but with that said, last year’s worst selection was up over 150% in the first quarter of 2011 alone, making it our best performer this year.
We started the High Cash stock portfolio with the understanding that very low enterprise values may some protection from a broad market sell off. Positive earning, cash flow that provides profit increase, and potential stock price expansion are all examples of things that assist in raising these very low values, and so far the evidence and performance we have measured in a rough but upward trending market seems quite impressive.
We had no changes in the portfolio in the second quarter due to the high volatility.
Disclosure: I am long CYD, HCII, KHDHF.PK, LOJN, OIIM, OPWV, TBBK, TSRA, SGI, SONS, TTT, TA, DGW.