CS21 Net/Net Index Update

In the face of all the turmoil in the markets the past few days, we wanted to give an update on the CS21 Net/Net Index; specifically around performance. The Index closed at 115.05 yesterday, up 15.05% since inception (2/12/2008), and is down 5.4% since Friday. No big surprise here. This index is very volatile, and will continue to be volatile. For its part, the Russel Microcap Index is down 1.7% since Friday, and 5.21% since CS21's inception.

Profitable Companies Trading Below Net Current Asset Value

As promised, here's the latest list of profitable net/nets. In order to qualify, market cap had to be greater than $20 million, with positive trailing 12 month net income, and the company had to have a "real" operating business. (Therefore, companies such as Zapata (ZAP) and Comdisco (CDCO) did not qualify.) Some of these names, such as Audiovoxx and Lazare Kaplan seem to be perennial net/nets; others are first timers.

Company: AudioVox
Ticker: VOXX
Price: $9.69
Market Cap: $221.46 (million)
NCAV: $242.99

Company: RCM Tech
Ticker: RCMT
Price: $2.71
Market Cap: $34.62
NCAV: $39.29

Company: Nu Horizons Elec
Ticker: NUHC
Price: $4.78
Market Cap: $88.27
NCAV: $131.17

Company: Lazare Kaplan
Ticker: LKI
Price: $7.85
Market Cap: $64.78
NCAV: $71.27

Company: GSI Group
Ticker: GSIG
Price: $4.88
Market Cap: $204.98
NCAV: $264.65

Company:Vicon Industries
Ticker: VII
Price: $5.65
Market Cap: $26.79
NCAV: $26.36*
*reflects increase in price today, company now trades just over NCAV

Company: Flexsteel Inds
Ticker: FLXS
Price: $11.18
Market Cap: $73.52
NCAV: $75.69

Company: Trident Microsystems
Ticker: TRID
Price: $3.05
Market Cap: $186.05
NCAV: $194

Company: Peerless Systems
Ticker: PRLS
Price: $1.87
Market Cap: $33.68
NCAV: $43.67

Company: Gencor Industries
Ticker: GENC
Price: $9.35
Market Cap: $89.88
NCAV: $90.37

Company: Silverleaf Resorts
Ticker: SVLF
Price: $1.87
Market Cap: $71.21
NCAV:$97.46

Company: Tegal Corp
Ticker: TGAL
Price: $3.76
Market Cap:$27.31
NCAV: $30.31

Company: Novacea
Ticker: NOVC
Price: $1.83
Market Cap: $47.33
NCAV: $91.53

There you have it. Once again, all these companies are deep into micro-cap land, so use caution, and do your own evaluation. As a postscript, there were some intriguing names with market caps below $20 million; but these were too small for print.

*The author does not have positions in any of the companies mentioned. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

Volatile Markets Reveal Profitable Net/Nets

If you are a deep value investor, market volatility can be your friend; especially if you fish in the net/net pond. Large swings in the markets tend to punish these underfollowed, less liquid and smaller names.

And most investors have become painfully aware about the historically high levels of market volatility we've been experiencing--as measured by daily market movements greater than 1 percent--through endless financial media outlet barrages. In fact the S&P 500 Index has closed plus or minus 1% in 70 out the 170 trading days so far in 2008, or an amazing 41 percent of the time.

Smaller companies have been even more volatile. The Russell Microcap Index, for instance has finished 78 trading days plus or minus 1% so far in 2008; 35 of those days hace been plus or minus 2 percent. Our own Cheap Stocks 21 Net Net Index has finished more than half--86--of its 142 days since inception plus or minus 1 percent.(Yet CS21 Is up more than 25% since inception, but thats another story)

All of this volatility has revealed an increasing number of profitable net/nets; an area of the market that can be very lucrative for those with time, patience and an iron stomach. In fact, our recent search found more than a dozen profitable net/nets, the most we've seen in years. This initial list, however, needs further scrutiny. Once we've completed our research, and confirmed the data, we'll reveal this list in an upcoming post.

US Air Update

We put our neck out on the line on June 24th with our US Airlines: a Put on Oil? piece. Call it luck (I certainly do), but US Airways, which we referenced in that piece, is up 220 percent since then.

And it truly was all about oil. The inevitable oil pullback has brought many an airlines stock price back too life. Can the run continue? I for one still believe oil prices are headed lower, but the airline bet is now too risky for my blood. I will venture to say that's the last 2 bagger in 2 months time you'll ever read about here.

*The author does not have a position in US Airways. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

Cheap Stocks 21 Net/Net Index: 6 Months Later

Six months after launching the first index comprised of companies trading below their net current asset value, the results have been fairly compelling. However, six months is still far too short a timeframe to draw a meaningful conclusion. In any event, the CS21 Net/Net Index is up 20.62% since inception, while the Russell Microcap Index is down 2.21% during the same period.

When you dig into the underlying index constituents and return experience of each, the results are along the lines of what we expected: a handful of companies with very strong returns, with the majority in negative territory. So it goes with net/nets; some will go under, some will be acquired, some will tread water, while others will be rediscovered by the market, having been mis-priced.

So far, there has been one acquisition, Renovis Corp. Rather than replace this company in the index, we decided to keep the proceeds in cash.

Below are the results to date of the companies comprising the CS21 Net/Net Index:

Company, Ticker, Original Weight, Return

Adaptec, Inc(ADPT),18.7,42.86%

Audiovox Corporation(VOXX),12.22,-0.52%

Trans World Entertainment Corporation(TWMC),7.57,-32.27%

The Finish Line, Inc(FINL),6.26, 337%

Nu Horizons Electronics Corp(NUHC),5.81,-17.19%

Richardson Electronics, Ltd(RELL),5.15, 22.31%

Pomeroy IT Solutions, Inc(PMRY),4.62,-46.62%

Ditech Networks Inc(DITC),4.29,-38.33%

Parlux Fragrances, Inc(PARL),3.92, 65%

InFocus Corporation(INFS),3.84, -15.29%

Renovis, Inc. (acquired 5/5, proceeds held in cash)

Leadis Technology, Inc(LDIS),3.5,-53.64%

Replidyne, Inc(RDYN)3.3,-42.27%

Tandy Brands Accessories, Inc(TBAC),2.93,-32.99%

FSI International, Inc(FSII),2.87,-29.41%

Anadys Pharmaceuticals, Inc(ANDS),2.53, 73.75%

MediciNova, Inc(MNOV),2.31, 9.43%

Emerson Radio Corp(MSN),1.65,-10%

Handleman Company(HDLM),1.7,16%

Chromcraft Revington, Inc(CRC),1.63,-32.29%

Charles & Colvard, Ltd. CTHR,1.5,-46.67%

While we are pleased with the results of this experiment so far, we also realize the potential opportunities in constructing a portfolio of net/nets that is not naively constructed, as this one is.

*The author does not have positions in any of the companies that comprise The Cheap Stocks 21 Net/Net Index. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

Blogger Roundtable

Many thanks to Geoff Gannon of the excellent Gannon on Investing Site for including us in his recent roundtable, with the editors of three outstanding value oriented blogs. Its also great to see Geoff posting regularly again.

“Dear Bill….”: A Letter to Bill Miller, Manager, Legg Mason Value Trust

Dear Bill,
I hope you are well these days, I understand it’s been a difficult time for you lately, and I’d imagine you’ve had many sleepless nights. I trust that there are better days ahead for you. I hope for your sake, as well as for others who have trusted you with their money, that this is indeed the case.

When I hired you several years ago to manage a nice chunk of my retirement portfolio’s large cap allocation, I did so knowing that our investment philosophies are quite different. We view “value” in very different terms, but that was ok. I understood the differences, and I took the risk. I was actually quite pleased that my company’s 401K plan brought you aboard.

We had a great run, Bill. In fact, your streak began years before I hired you, and I certainly did not expect it to continue forever. After all, how many managers beat the S&P 500 Index 15 consecutive years? You did, Bill. But just like all streaks, yours came to an end. Unfortunately a very abrupt and painful end; more painful than either of us could have ever imagined.

When I hired you, I never dreamed I’d be writing you this letter. But after a great deal of thought, it pains me that I am hereby replacing you as my primary large cap manager. I can no longer take the risk that your investment process is indeed broken, or is no longer effective.

I know, Bill, every active manager hits bumps in the road, and the market environment has been extremely difficult. But your underperformance the past two years has gone way beyond normal market gyrations.

How is it possible that you are down 32% year to date, or 39% over the past year? Looking back, do you think that your positions were too concentrated in financials? Yes, Bill, I know hindsight is 20/20, and I sound a bit like Captain Obvious here, but Bear Stearns, Washington Mutual, Citigroup, Merrill Lynch, Freddie Mac, AIG, Countrywide? Where was your risk control? Was it deep conviction or wishful thinking on your part that financials would turn around? I know that what has transpired over the past couple of years in financials was essentially the perfect storm, but I hired you because I trusted that you’d be able to navigate even the worst market events. I certainly never expected things to turn out like this.

Unfortunately, your recent performance has been so devastating that it essentially renders your 15 year streak irrelevant. Over the past five years, you’ve underperformed the S&P 500 by more than 800 basis points…per year. Over the past ten years, you are under 90 bps per year. You have to go back to 1996 in order to find a multi-year period (through now) that you’ve outperformed. Guess I should have indexed large cap all along. My bad.

Unfortunately Bill, what many investors fail to understand is that average returns are meaningless. What truly matters is the time path of returns, i.e., the order in which returns occur. Your huge losses the past couple years all but wipe out the previous gains your shareholders enjoyed.

Finally, Bill, just a word of advice about where you are spending your time these days. I know you want the Yahoo situation to work out to the advantage of your shareholders, and you do hold a fairly large position in the company (4% of your portfolio). But are you devoting too much time and energy to this?

In closing, I can’t place all of the blame on you. I should have pulled the trigger several % ago. I admit I got too caught up in “Bill Miller: The Legend”.

Bill, best wishes for the future.

Regards,

Jon