While the market in general keeps approaching and then backing off new highs, the Model Shadow Stock Portfolio has broken through and is now up 28.5% year-to-date as of November 30, 2012. This compares to 14.8% for the S&P 500 index as measured by the Vanguard 500 Index fund (VFINX). The returns for longer periods can be seen in Figure 1 and Table 3.
The presidential election is over, and we are spared the media barrage of negative comments. We do have the fiscal cliff debates and speeches, which seem to be affecting the stock market for about an hour at a time. I hope that problem will be mostly resolved by the time you read this column, but who knows.
I am not a technician, but I certainly have the feeling that the market wants to go up. Even with the mess in Washington and the threat of a serious negative impact on the economy if something isn’t done about taxes and spending, the market hangs in. With billions on the sidelines and in very low yield bonds, there is certainly the scenario for a strong stock market even though post-election years have historically had the weakest average returns of the four-year presidential cycle.
Table 1 lists the current holdings in the Model Shadow Stock Portfolio.
Standex International Corp. (SXI) would have been sold based on its market capitalization being over $600 million, but we have raised the market-cap criterion. Stocks must now have a market cap between $30 million and $240 million to be considered for purchase. Therefore, the sell requirement of three times the initial maximum market cap moves up to $720 million. Stocks will be marked as approaching the size limit if they reach $600 million, 2½ times the initial maximum market cap. The increase in the price of micro-cap stocks required this adjustment.
Since we had no stocks that needed to be sold in our fourth-quarter review, there are no buy transactions this period, as shown in Table 2.
There were 18 qualifying stocks under our liquidity criterion as well as the new market-cap criterion, as shown in Figure 2. Of these, two were already owned and three were Chinese stocks, which we continue to avoid.
The Model Shadow Stock Portfolio has been doing extremely well since the 2007–2008 bear market, considerably better than the overall market and various subindexes.
|Addus Homecare Corp. (ADUS)||6.78||6.90||3.00||73.3||11.5||0.81||0.0|
|Alamo Group, Inc. (ALG)||33.12||34.63||25.51||396.3||12.4||1.29||0.7|
|Capital Senior Living Corp. (CSU)||17.81||18.00||6.70||501.8||nmf||2.87||0.0||approaching value limit|
|CSS Industries, Inc. (CSS)||20.52||22.4||17.86||196.5||13.0||0.81||2.9|
|Ducommun Incorporated (DCO)||15.67||15.89||7.71||166.0||nmf||0.76||0.0|
|Ennis, Inc. (EBF)||15.22||17.74||12.80||398.1||18.3||1.09||4.6|
|Flexsteel Industries (FLXS)||19.89||23.28||13.26||139.4||10.4||0.97||3.0|
|Gilat Satellite Networks (GILT)||5.26||5.60||2.31||217.2||nmf||0.82||0.0|
|Hardinge Inc. (HDNG)||9.59||11.65||7.61||112.1||8.4||0.70||0.8||qualified as of 11/30/2012|
|Hooker Furniture Corp. (HOFT)||13.89||14.25||9.30||149.3||27.8||1.18||2.9|
|Key Tronic Corp. (KTCC)||10.14||13.16||4.40||106.4||7.7||1.27||0.0|
|Kimball International (KBALB)||12.48||13.25||5.03||475.2||28.4||1.21||1.6|
|Marlin Business Services (MRLN)||17.30||23.08||12.39||220.4||21.9||1.23||1.8|
|Medical Action Industries (MDCI)||2.69||6.36||2.25||44.1||nmf||0.30||0.0|
|Mitcham Industries (MIND)||14.49||26.76||12.39||186.1||6.0||1.07||0.0|
|Olympic Steel, Inc. (ZEUS)||19.77||28.31||14.77||215.8||16.8||0.72||0.4|
|PC Connection, Inc. (PCCC)||10.60||12.92||7.34||281.0||8.9||0.94||0.0|
|PC Mall, Inc. (MALL)||5.93||6.70||5.06||71.1||31.2||0.62||0.0||qualified as of 11/30/2012|
|RCM Technologies, Inc. (RCMT)||5.75||6.16||4.89||69.2||22.1||0.99||0.0|
|Renewable Energy Gp (REGI)||5.92||10.65||4.28||180.7||2.2||0.53||0.0|
|REX American Resources (REX)||18.84||33.95||14.43||155.2||8.1||0.62||0.0||qualified as of 11/30/2012|
|Rocky Brands, Inc. (RCKY)||13.31||14.33||8.75||99.9||15.1||0.81||0.0|
|Saga Communications (SGA)||45.35||47.98||33.53||192.7||11.8||1.83||0.0|
|Shoe Carnival, Inc. (SCVL)||22.11||24.66||14.97||452.4||15.2||1.41||0.9|
|Standard Motor Products (SMP)||19.56||25.91||11.94||446.3||6.8||1.46||1.8|
|Standex Int’l Corp. (SXI)||49.26||52.14||31.60||626.9||13.4||2.42||0.6||approaching size & value limits|
|Sterling Construction (STRL)||9.23||12.42||7.12||152.3||nmf||0.72||0.0||earnings probation (2012 Q2)|
|VOXX International (VOXX)||6.74||14.56||5.55||157.7||8.4||0.38||0.0||qualified as of 11/30/2012|
|Willis Lease Finance (WLFC)||14.33||14.82||10.75||127.0||nmf||0.59||0.0|
|Source: AAII’s Stock Investor Pro/Thomson Reuters. Data as of 11/30/2012.|
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 $240 million. Stocks are marked “approaching size limit” if their current market cap exceeds 2½ times the initial criterion, or $600 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.
Earnings Probation: If the 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 fiscal quarter during which the company first reported negative trailing 12-month earnings.
Qualified as of: Stock still qualified as a buy when the screen was run with current data. Stocks that don’t currently qualify as a buy are held until they meet one of the sell rules.
See the Model Shadow Stock Portfolio area of AAII.com for more information.
It is a little perplexing that small stocks in general have not outperformed and value stocks have been lagging growth stocks this period. The only explanation I can think of is that micro caps as we have defined them are different than small caps, which many define as having market capitalization up to $2 billion or more. Also, we have a rather strict definition of value (price-to-book-value ratio less than 0.80), while value stocks as defined in most indexes cover the half of all stocks in a category with the lowest price-to-book ratio. This often includes price-to-book levels of 2.0 or more.
|No buys for fourth quarter.|
|No sells for fourth quarter.|
|Year||Average Annual Return (%)||Cumulative Value of $10,000 ($)|
|Data as of 11/30/2012.|
As I mentioned, I have a slightly bullish bias, but would not suggest any deviations from a long-term allocation. While the average low return of post-election years since the 1930s is 6.7%, there have been some notable exceptions. In fact, four years ago the return on the S&P 500 was 26.5% and the return on this portfolio was 72.3%. In addition, all the major averages are below their all-time highs, which is certainly bullish for the long term, if not the short term.
If the fiscal cliff has been bridged by the time you read this, at least that variable will be put to rest. Of course, looking around the world we still have plenty of variables to be concerned about. We will review the portfolio again in the April 2013 AAII Journal; until then, you can keep abreast here.
Stock purchases must meet these criteria:
Stocks are sold if any of the following occur: