High Cash Stock Review Portfolio: Our First Quarter 2011 Performance Update

by: Randy Durig

Low Enterprise Value Stocks

The first quarter of 2011 has been very good considering the many global and domestic events. Utilizing our selection criteria, the simple math aggregate of the holdings in our High Cash Stock Review portfolio was up a strong 14.88 %, compared to the S&P 500 5.42% gain since the new year.

In each of the last three quarters, our High Cash Stock Review significantly surpassed the S&P 500 index. In the fourth quarter, 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 our update here.

Our third quarter 2010 performance delivered a rewarding 16.68% return compared to the S&P 500’s 10.62% return.

By using distressed Enterprise Value in valuing the ongoing operation, combined with eliminating the cash and/or debt from the companys' market value, this seems to give a unique way to judge the lower valuation of the company. With that said, if we could buy an enterprise that has such a distressed valuation that the underling company has very little to even a negative value, buying the operating core of the company for so little over time has so far become very rewarding for our clients.

We try to profit from these unique and sometimes quite fearful situations, knowing the only real outcome might 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. Even with this very high level of criteria, we still have of challenges. The select few that make the cut are included in our High Cash Stock Review.

Below are the equity positions included in this portfolio that had these characteristics when they were published on Seeking Alpha and have been held for the entire period.

The first quarter added to the second half of 2010, based on simple math, is:

Time High Cash Stock Review S&P 500
First Quarter 2011 14.88 % 5.42%
Fourth Quarter 2010 20.38% 9.92%
Third Quarter 16.68% 10.90%
Total 51.94% 26.25%

First quarter 2011 performance stocks:

Company 2011 Year to Date Fourth Quarter 2010
China Yuchai International Limited (NYSE:CYD) - 7.45 % 63.14 %
Homeowners Choice, Inc. (HCII) 1.24 % * 29.69 %
KHD Humboldt Wedag International AG (OTCPK:KHDHF) 12.22 % 22.76 %
LoJack (NASDAQ:LOJN) - 27.4 % New to the portfolio
O2Micro International Ltd. (NASDAQ:OIIM) 22.98 % (- 1.44) %
Openwave (OPWV) 0.94 % New to the portfolio
The Bancorp Inc. (NASDAQ:TBBK) -9.24 % 44.02 %
Tessera Technologies Inc. (TSRA) -17.56 % 19.55 %
Silicon Graphics International Corp (NASDAQ:SGI) 136.99 % 11.21 %
Sonus Networks, Inc. (SONS) 40.82 % (-27.76) %
Terra Nova Royalty Corporation (NYSEARCA:TTT) 10.24 % *14.61 %

*Dividends not included

It appears again that the top performers one quarter are often the worst the next, as Silicon Graphics was by far our worst performer last year. Since the new year, SGI has been just outstanding - providing an over 135% return. With Sonus being the single worst stock in the fourth quarter of 2010, it again rebounded like many other laggers we own, with an over 40% increase in the first quarter of 2011. Even though it appears our selection process is working, it appears our timing could improve.

That said, we are still holding both Duoyuan (DGW) and LoJack (LOJN), as we believe our original investment thesis is correct in both selections, but only time will tell. We have seen news in both, but neither has shown a fundamental change since we published our analysis. Knowing both SGI and Sonus are driving the portfolio returns this quarter, we are very pleased we stayed true to our disciplined approach when they both showed similar stock signs in 2010 that DGW and LOJN are showing today.

We started the High Cash Stock Portfolio with the understanding that very low enterprise values may provide protection from a market sell off. Positive earnings, cash flows that provide profit increases, and possible stock price expansions are all examples that assist in raising these very low values. So far, the evidence and performance we have measured in a rough but upward trending market seems quite impressive.

Updated portfolio review:


Again we added Duoyuan Global Water Inc to the portfolio in February. Even though we announced it in the last month, since then, it has taken a significant loss in stock value. Like companies that have provided tremendous gains, we have not included it in the performance metrics since it was not included in the portfolio at the start of the period.

We added TravelCenter of America (NYSEMKT:TA) to the portfolio in March. It is a company with 6 billion dollars in sales and under 100 million dollars in enterprise value. Possibly up to 40% of the company value has an underlying ownership in real estate.

Disclosure: I am long CYD, HCII, OTCPK:KHDHF, LOJN, OIIM, OPWV, TBBK, TSRA, SGI, SONS, TTT. Both Durig Capital and its clients have positions in all the above positions.