The underperformance of value stocks and smaller capitalization stocks relative to large-cap growth stocks continues.
That is reflected in the performance of the Model Shadow Stock Portfolio, which is up only 2.0% for most of 2007 (through November 30), compared to 6.1% for the market as a whole, as represented by the Vanguard 500 Index fund (see Figure 1).
However, the Model Shadow Stock Portfolio does continue to outperform both small- and micro-cap indexes (complete data are shown in Table 1). While it seems likely that the portfolio will extend its six-year run of positive returns, it may not match the return of the total stock market for 2007.
Historically when small stocks underperform, the period of underperformance lasts only one or two years. It would be nice to know if it is going to be one or two years this time (or perhaps zero years if we catch up in the remaining weeks of December as of this writing). [For a complete description of the Shadow Stock Portfolio, see the Shadow Stock Portfolio area on AAII.com.]
|Annual Rate of Return (%)|
|Shadow Stock Portfolio||18.5||2.0||29.4||17.9||43.7||73.1||10.8||21.4||-7.7||0.0||-8.9||44.3||22.3||20.7||2.0||32.3|
|S&P 500 (VFINX)||10.5||6.1||15.6||4.8||10.8||28.5||-22.1||-12.0||-9.1||21.1||28.6||33.2||22.9||37.4||1.2||9.9|
|Vanguard Small Cap (NAESX)||11.0||1.9||15.6||7.4||19.9||45.6||-20.0||3.1||-2.7||23.1||-2.6||24.6||18.1||28.7||-0.5||18.7|
|DFA US Micro Cap (DFSCX)||13.5||-5.2||16.2||4.9||18.4||60.7||-13.3||22.8||-3.6||29.8||-7.3||22.8||17.6||34.5||3.1||21.0|
|*Data as of 11/30/2007.|
As you will see in viewing the portfolio’s activity this period, there is suddenly an abundance of new qualifying stocks—so much so that we reduced the price-to-book ratio criterion back to 0.80, and we had to sell most of our two-year rule stocks (in which the stock has not met the buy criteria for over two years) to obtain funds to buy the new opportunities.
I don’t want to make too much of it, but when the supply of qualifying stocks dried up early in 2007 and we had to hold onto stocks that had not qualified for a long time and relax our criteria, it indicated the beginning of poorer performance relative to the overall market.
Could the sudden reappearance of a number of qualifiers signal a turn in the relative performance of the portfolio?
I can’t make a case for it based on such limited experience, but I will certainly take note of what happens next.
|Allion Healthcare (ALLI)||5.55||7.58||3.85||89.9||37.0||0.9||0.0|
|Avalon Holdings (AWX)||6.53||10.87||6.05||24.8||17.6||0.6||0.0||currently qualifies|
|BlueLinx Holdings (BXC)*||3.62||12.39||3.16||113.1||362.0||0.6||0.0|
|Building Mat’ls Hdg (BLG)*||6.38||27.00||4.86||187.4||9.8||0.3||6.3||currently qualifies|
|Cobra Electronics (COBR)*||5.02||10.95||4.65||32.5||33.5||0.5||3.2||currently qualifies|
|D&E Commun’s (DECC)||14.15||19.99||12.01||204.3||16.5||1.1||3.5|
|Edge Petroleum (EPEX)*||5.65||20.26||5.21||161.3||18.8||0.4||0.0||currently qualifies|
|Flexsteel Indus (FLXS)||12.07||15.94||11.60||79.3||8.0||0.7||4.3||currently qualifies|
|Gehl Company (GEHL)*||17.05||33.17||15.50||209.1||8.4||0.8||0.0|
|Golfsmith Int’l Hdg (GOLF)||4.00||11.57||3.81||63.1||14.8||0.5||0.0|
|Gottschalks Inc. (GOT)||4.16||15.37||3.38||57.0||nmf||0.5||0.0||earnings probation (2007q2)|
|Hardinge Inc. (HDNG)||18.19||40.13||12.67||208.8||8.3||0.9||1.1|
|Hastings Entertain (HAST)||9.45||10.00||5.43||100.3||11.1||1.0||0.0|
|Haverty Furniture (HVT)*||8.39||16.22||7.76||183.2||59.9||0.7||3.2||currently qualifies|
|ILX Resorts (ILX)||4.00||13.37||4.00||14.1||nmf||0.4||12.5||earnings probation (2007q3)|
|Johnson Outdoors (JOUT)||22.19||23.91||17.00||203.4||22.4||1.1||1.0|
|L.S. Starrett Co. (SCX)||18.70||20.52||14.53||123.8||14.2||0.7||2.1||currently qualifies|
|McRae Indus (MRINA)||15.80||17.75||11.25||40.4||10.6||1.0||2.3||not qualified as buy for 2 yrs|
|P&F Industries (PFIN)||6.36||14.30||6.20||25.2||27.7||0.4||0.0||currently qualifies|
|PGT, Inc. (PGTI)*||5.70||13.67||4.95||157.8||63.3||0.7||0.0||currently qualifies|
|RCM Technologies (RCMT)||5.69||10.30||4.93||68.5||9.3||0.8||0.0||currently qualifies|
|Rex Stores Corp. (RSC)||15.95||22.68||14.62||161.6||7.5||0.7||0.0||currently qualifies|
|Rocky Brands (RCKY)||6.80||19.23||6.56||37.3||97.1||0.4||0.0||currently qualifies|
|Shoe Carnival (SCVL)*||11.55||35.26||10.54||146.3||9.3||0.7||0.0||currently qualifies|
|SigmaTron Int’l (SGMA)||10.55||13.37||7.70||40.0||18.5||0.8||0.0||currently qualifies|
|Standard Motor Prods (SMP)*||8.23||19.45||7.35||151.6||13.1||0.8||4.4||currently qualifies|
|Tufco Technologies (TFCO)||6.85||9.51||6.03||31.1||62.3||0.8||0.0|
|West Marine (WMAR)*||9.04||18.38||8.46||197.4||129.1||0.7||0.0||currently qualifies|
|Willis Lease Finance (WLFC)||12.92||16.50||9.65||108.9||8.6||0.8||0.0||currently qualifies|
|*Company is new to the model portfolio.|
|Source: AAII’s Stock Investor Pro/Reuters. Data as of 12/7/2007.|
Approaching Size Limit: Stocks are sold if their market capitalization goes above three times the initial maximum criterion. The current market capitalization maximum for initial screening is $200 million. Stocks are marked “approaching size limit” if their current market cap exceeds 2½ times the initial criterion, or $500 million.
Approaching Value Limit: Stocks are sold once their price-to-book-value ratio goes above three times the initial criterion. The current initial price-to-book ceiling is 0.80. Stocks are marked “approaching value limit” if their current price-to-book-value ratio exceeds 2½ times the initial criterion, or 2.00.
Currently Qualifies: Stock still qualifies as a buy when the screen is run with current data. Stocks that don’t currently qualify as a buy are held until they meet one of the sell rules.
Earnings Probation: If last 12 months’ earnings from continuing operations are negative, the stock is put on probation; if a subsequent quarter has negative earnings prior to 12-month earnings becoming positive, the stock is sold. The date within the parentheses lists the calendar quarter during which the company first reported negative trailing 12-month earnings.
Not Qualified as a Buy for 2 Yrs: Stock has not met the buy criteria for over two years and can be sold if cash is needed.
Table 2 shows the current status of the portfolio.
Table 3 shows the current rules. As previously mentioned, we cut back the price-to-book ratio requirement to 0.80.
While we normally would have completed our trades at the end of November, this year because of my schedule we completed them early in December.
|California Coastal Communities, Inc. (CALC)||negative earnings|
|Carriage Services, Inc. (CSV)||two-year rule|
|Duckwall-ALCO Stores, Inc. (DUCK)||two-year rule|
|ePlus Inc. (PLUS)||deregistered|
|Espey Manufacturing & Electronics (ESP)||two-year rule|
|Hanger Orthopedic Group (HGR)||two-year rule|
|Merix Corporation (MERX)||negative earnings|
|Northwest Pipe Co. (NWPX)||two-year rule|
|T-3 Energy Services (TTES)||exceeded value limits|
|BlueLinx Holdings Inc. (BXC)|
|Building Materials Holding Corp. (BLG)|
|Cobra Electronics Corp. (COBR)|
|Edge Petroleum Corp. (EPEX)|
|Gehl Co. (GEHL)|
|Haverty Furniture Companies (HVT)|
|PGT, Inc. (PGTI)|
|Shoe Carnival, Inc. (SCVL)|
|Standard Motor Products Class A (SMP)|
|West Marine, Inc. (WMAR)|
As I discussed in earlier columns in 2007, unless the remaining few days in December prove to be spectacular, the stock market will have been unusually weak for the year before an election.
Last January I mentioned that the strong 2006 year-end showing might have been stolen from 2007, but that was only a supposition.
In the election year cycle, 2008 should be an average year, but an average year may not be in the cards with the sub-prime problem not completely resolved, currency issues at home and abroad, the continuing energy problem, and the swings in the war on terror.
But, as always, I suggest keeping fully invested.
We will update the Shadow Stock Portfolio in the April AAII Journal, and in the meantime you can keep abreast at AAII.com.
Stock purchases must meet these criteria:
Stocks are sold if any of the following occur: