Model Shadow Stock Portfolio: A Step Ahead of the Market

    by James B. Cloonan

    For the three months ending February 28, AAII’s model Shadow Stock Portfolio didn’t match the 25.7% of the previous three months—but that would have been a bit much to expect. The portfolio is up 10.4% since November 30 and 5.8% for 2005 year-to-date, which compares quite favorably with the S&P’s 3.0% gain for the three months and 0.4% loss year-to-date. Results for various periods are shown in Figure 1.

    This has been a tricky year for the general market so far. The year after presidential elections is the weakest year in the election cycle. However, for some unknown reason years ending in “5” have always been exceptionally strong. I pointed this out in my column in 1994 (“A Modest Timing Possibility Based on the Business Cycle,” November 1994 AAII Journal; available at when the market looked sick—and sure enough 1995 was a strong year, posting +37.4 % on the S&P 500.

    While I can discern no rational reason for such a 10-year cycle, the S&P has averaged +33.6 % in years ending in five since 1935 and 27% when it was the year after an election.

       Model Portfolios on
    The next AAII Journal update on the Model Shadow Stock Portfolio will be in the July issue. Changes to the portfolio are only made once a quarter, but monthly performance updates appear on the AAII Web site. Our Web site also features monthly performance updates of the AAII Mutual Fund Portfolio; this portfolio is reviewed for changes twice a year and discussed in the February and August AAII Journals.

    Click here to access the Shadow Stock Portfolio and the Mutual Fund Portfolio. The Model Portfolios area includes:

    • Current composition for each portfolio,
    • Monthly performance results for each portfolio,
    • Selection rules for each portfolio, and
    • Explanations of important concepts.
    Updates are posted in the middle of the month.

    Quarterly Changes

    There were no changes in the AAII Shadow Stock Portfolio during the last three months, although two stocks on probation—AirNet Systems (ANS) and T-3 Energy Systems (TTES) did not file their quarterly earnings reports before February 28, which is the time we would make our changes for this quarter.

    Therefore, we won’t make any decisions until our next quarterly deadline, with any changes reported in the July AAII Journal. But those of you with Stock Investor Pro [AAII’s stock research database and screening program] who evaluate monthly and act before we do can watch them.

    Table 2. First-Quarter 2005 Transactions
    Company (Ticker) Reason
    No Transactions

    No Transactions


    Figure 1.
    Shadow Stock Portfolio
    Performance vs Benchmarks
    (through 2/28/05)

    Also, Metals USA (MUSA) is just a few dollars short of a market cap of $500,000, which would require a sale. Most likely it will be a sell in the second quarter, but things can change. Like Hub Group (HUBG) last quarter, it is migrating to what we consider to be small cap. In the Shadow Stock Portfolio, we buy stocks at nano-cap size (under $250 million), hold them through micro-cap size (up to $500 million) and sell them when they become small caps. These size definitions change with changes in the overall market, but the concept—investing in nano- and micro-caps—holds steady.

    To conserve space we are not listing the Shadow Stock Portfolio Rules this issue. You can find them in the January 2005 issue or on our Web site in the Model Portfolios area. We will publish them again in the July issue of the Journal.

    I can’t promise another 25% or even 10% quarter coming up—but who knows?

    James B. Cloonan is founder and chairman of AAII.

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