Shadow Stock Portfolio Rewards Investors Who Stayed in Stocks

by James B. Cloonan

Shadow Stock Portfolio Rewards Investors Who Stayed In Stocks Splash image

Well, we finally made it! As of the end of February the Model Shadow Stock Portfolio is 7% above its pre-crash (June 2007) high.

It is scary to see a portfolio drop 60% and difficult to stay the course and not sell. Many investors reduced their equity holdings (beyond the reduction supplied by the market) near the March 2009 low, and I know several individuals who closed out of equities completely a bit before the low.

Ideally, we all should have rebalanced and added equities through the bad time. Congratulations to any of you who had the discipline to do this. I didn’t in my personal portfolio and, in fact, while I kept my equity holdings, I did switch a bit into safer, dividend-paying holdings. Consequently, I am not quite back to even.

The lesson for all of us is that if we violated our general strategy because of the market pressure, then we should adjust the riskiness of our overall portfolio downward. We have been averaging a severe downturn about every 10 years, and nobody knows when the next one will be. So keep a long-term view, but get the short-term violence down to where you can stomach it.

Table 1 lists the current holdings of the Model Shadow Stock Portfolio, and Figure 1 and Table 2 report on the portfolio’s performance. The portfolio is only up 2.7% year-to-date compared to 5.9% for the general market as measured by the Vanguard 500 Index fund (VFINX). In the longer term, we compare more favorably.

Company (Ticker) Current
52-Week Market
($ Mil)
AeroCentury Corp. (ACY) 16.61 25.00 13.00 25.6 5.8 0.59 0.0 qualified as of 3/4/2011
Alamo Group, Inc. (ALG) 27.79 29.27 17.18 328.2 13.0 1.31 0.9  
Audiovox Corp. (VOXX) 8.10 9.74 6.17 185.4 15.3 0.50 0.0 qualified as of 3/4/2011
Books-A-Million (BAMM) 5.63 8.43 5.27 87.5 6.3 0.79 3.6  
Capital Senior Living (CSU) 9.54 9.57 4.34 258.3 73.4 1.57 0.0  
CONN’S, Inc. (CONN) 4.64 9.13 2.94 147.4 13.6 0.34 0.0  
CSS Industries (CSS) 17.87 21.92 14.87 173.9 nmf 0.70 3.4 earnings probation (2010q2)
Ennis, Inc. (EBF) 15.75 19.62 14.33 408.2 9.1 1.21 3.9  
Flexsteel Industries (FLXS) 15.03 19.69 10.08 100.6 9.4 0.82 2.0  
Hastings Entertainment (HAST) 6.01 9.38 3.82 52.9 8.8 0.52 0.0  
Jackson Hewitt Tax Service (JTX) 1.24 2.52 0.75 35.9 nmf nmf 0.0 earnings probation (2010q3)
Kendle International (KNDL) 9.07 19.67 7.68 135.3 19.7 0.56 0.0 qualified as of 3/4/2011
Key Tronic Corp. (KTCC)* 4.58 6.86 4.55 47.4 4.6 0.73 0.0 qualified as of 3/4/2011
Kimball International (KBALB)* 7.25 8.65 4.81 197.6 33.0 0.72 2.8 qualified as of 3/4/2011
Lithia Motors, Inc. (LAD) 14.93 16.07 5.87 390.7 28.2 1.24 1.3  
Marlin Business Servs (MRLN) 12.39 13.74 8.58 159.5 34.4 1.03 0.0  
Mitcham Industries, Inc. (MIND) 10.65 12.28 5.56 105.9 30.4 1.15 0.0  
Paragon Shipping Inc. (PRGN) 3.11 5.05 3.04 159.2 7.1 0.32 6.4  
PC Connection, Inc. (PCCC) 8.59 9.91 5.75 230.5 10.1 0.89 0.0  
PC Mall, Inc. (MALL) 10.13 10.88 3.20 122.9 16.6 1.15 0.0  
RCM Technologies (RCMT) 5.01 5.30 2.84 65.3 10.2 0.93 0.0  
Rex American Resources (REX) 14.91 19.30 12.96 141.5 11.2 0.57 0.0 qualified as of 3/4/2011
Rocky Brands, Inc. (RCKY) 14.83 15.34 5.68 110.6 14.5 1.05 0.0  
Saga Communications (SGA) 29.00 30.59 14.33 123.4 38.7 1.63 0.0  
Shoe Carnival, Inc. (SCVL) 26.65 30.09 16.24 351.8 13.7 1.37 0.0  
Standard Motor Products (SMP) 12.22 14.39 7.03 276.9 11.4 1.32 2.3  
Standex Int’l Corp. (SXI) 35.89 36.95 21.21 448.5 13.5 2.09 0.7 approaching value limit
SureWest Communica’ns (SURW) 12.56 14.19 5.61 177.0 52.3 0.63 0.0 qualified as of 3/4/2011
Willis Lease Finance Corp. (WLFC) 13.38 17.61 8.12 162.9 20.6 0.61 0.0 qualified as of 3/4/2011

Explanation of Notes

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.

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 Shadow Stock Portfolio area of for more information.


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Model Shadow Stock Portfolio Rules

Purchase and Sales Rules

Stock purchases must meet these criteria:

  • No bulletin board or pink sheet stocks will be purchased.
  • Price-to-book-value ratio must be less than 0.80. (Figure will change gradually with changes in overall market values.)
  • Market capitalization must be between $17 million and $200 million. (Figure will change gradually with changes in overall market values.)
  • The firm’s last quarter and last 12 months’ earnings from continuing operations must be positive.
  • No financial stocks or limited partnerships will be purchased.
  • No stocks on foreign exchanges or ADRs will be purchased because of different accounting and/or withholding tax on dividends.
  • The share price must be greater than $4.
  • In order to reduce trading by avoiding stocks that are forever marginal, any stock that was sold within two years will not be rebought.
  • Note second item under Stock Order Guidance concerning spreads when buying shares.
  • Price-to-sales ratio must be less than 1.2. (Figure may change gradually with changes in overall market values.)

Stocks are sold if any of the following occur:

  • 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 from continuing operations becoming positive, the stock is sold.
  • The stock’s price-to-book-value ratio goes above three times the initial criterion.
  • Market capitalization goes above three times the initial maximum criterion.

Stock Order Guidance

  • These rules are for general guidance. Your own experience, market conditions and the size of the position will impact your own decisions. The results in the model portfolio were obtained while sometimes paying more.
  • Market orders are not used. Instead, if the quoted bid-ask spread is less than 2% (ask price minus bid price, divided by ask price), place a limit order at the ask price for a buy and at the bid price for a sell. If the bid-ask spread is more than 2%, try to place a limit order between the bid and ask prices to keep transaction costs low. If necessary, build a position gradually. With low commissions, it is often better to place partial orders than to try to establish a large position all at once. Be patient.
  • Be careful if the average daily number of shares traded is not four times the amount needed for your position. It may be too difficult to get in and out of the position, but you may be able to grow the position gradually and sell gradually.
  • For NASDAQ stocks, it appears to be better to use day orders. If the order is not filled, it is placed again with a slight adjustment. For NYSE and Amex stocks, good-till-canceled (GTC) orders are used to keep a place in line in the specialists’ books. If the market isn’t close to the desired price, the price is adjusted in a few days with a new GTC order.
  • If price changes cause a stock to become ineligible (due to changes in price-to-book-value ratio or market capitalization) when only part of the order has been filled, stocks already purchased are kept but the balance of the order is canceled.

Management Rules

  • Equal dollar amounts are invested in each stock initially.
  • Decisions are made only at the end of each quarter. In order to react to the majority of earnings reports as soon as possible, quarterly reviews are made in February, May, August, and November.
  • Best judgment is used for tenders or mergers, but all criteria must be obeyed.
  • At the end of a quarter, if receipts from stocks sold exceed requirements for new purchases, the excess receipts—up to 5% of the portfolio’s value—are kept in cash until the next quarter. If the excess receipts are greater than 5% of the total portfolio value, the amount above 5% is distributed to smaller holdings that still qualify as buys. Efficient quantities are purchased: If over 10% of the portfolio is in cash, the price-to-book-value ratio can be moved up, but never over 0.90.
  • At the end of a quarter, if receipts from stock sales are insufficient to buy all newly qualifying stocks, purchases are made in order of lowest bid/ask spreads.
  • • Note that if you are managing your own portfolio, it should consist of at least 10 stocks. If you are developing the portfolio gradually, you can do it stock by stock, but don’t put more than 10% of your funds in each additional stock. More than 20 stocks is not needed until the portfolio exceeds $1 million.

Portfolio Changes

Once again we had to sell a stock that had quadrupled since we bought it. Twin Disc, Inc. (TWIN) may find happiness in someone’s growth portfolio, but it is no longer a value stock.

  Avg An’l
Ret Since
Incep (%)
Annual Rate of Return
  2010 2009 2008 2007 2006 2005 2004 2003 2002
Model Shadow Stock Portfolio 16.2 2.7 45.4 72.3 -50.8 -1.8 29.4 17.9 43.7 73.1 10.8
Vanguard 500 Index (VFINX) 8.3 5.9 14.9 26.5 -37.0 5.4 15.6 4.8 10.8 28.5 -22.1
Vanguard Small Cap Idx (NAESX) 9.9 6.2 27.7 36.1 -36.0 1.2 15.6 7.4 19.9 45.6 -20.0
DFA US Micro Cap (DFSCX) 11.6 4.7 31.3 28.1 -36.7 -5.2 16.2 5.7 18.4 60.7 -13.3
      Annual Rate of Return
      2001 2000 1999 1998 1997 1996 1995 1994 1993
Model Shadow Stock Portfolio     21.4 -7.7 0.0 -8.9 44.3 22.3 20.7 2.0 32.3
Vanguard 500 Index (VFINX)     -12.0 -9.1 21.1 28.6 33.2 22.9 37.4 1.2 9.9
Vanguard Small Cap Idx (NAESX)     3.1 -2.7 23.1 -2.6 24.6 18.1 28.7 -0.5 18.7
DFA US Micro Cap (DFSCX)     22.8 -3.6 29.8 -7.3 22.8 17.6 34.5 3.1 21.0

In February 2011, the number of initially qualifying stocks was at 18, and this number has been pretty stable for almost two years, as shown in Figure 2. Many of the stocks that qualified for the Model Shadow Stock Portfolio were already owned, and once again I passed over the Chinese stocks because I have no way of separating out those that might have the kind of reporting problems discussed in the financial press. We added Key Tronic Corp. (KTCC) and Kimball International Class B (KBALB). The portfolio changes are summarized in Table 3.

CONN’S, Inc. (CONN) went down considerably without an apparent reason. It turns out that sales are down and earnings are likely to be lower than expected. The CEO recently resigned. It is the nature of a portfolio such as this to have surprises. But it is a portfolio, and you get upside surprises like Rocky Brands, Inc. (RCKY) along with stocks like CONN’S.


Earlier in 2011, everything was looking on-target for a good year. The third year in the presidential cycle hasn’t seen a negative market since the 1930s, and the average gain has been 20%. But, along came Libya and a bit of an oil panic, as well as the possibility of U.S. involvement. In addition, both Democrats and Republicans are talking about budget cuts rather than demonstrating the usual pre-election “spend to get votes” mentality. So who knows what will happen? I still have a slightly bullish bias but not enough of one to alter my normal allocations.

The next Model Shadow Stock Portfolio column will be in the July issue of the AAII Journal. In the meantime you can follow the portfolio at

Company (Ticker) Reason
Twin Disc, Inc. (TWIN) exceeded value limits
Key Tronic Corp. (KTCC)  
Kimball International (KBALB)  
James B. Cloonan is founder and chairman of AAII.


Gareth from FL posted over 3 years ago:

Would be interesting to compare returns over time of Investors Business Daily CAN SLIM Select stocks (let's say those with a composite rating of 80 or higher and an Accumulation/Distribution rating of B or higher) with AAII's Shadow Stock portfolio. For IBD's list "group relative strength" could be added to criteria to further refine the list. At the moment I am using IBD and AAII as my "investment advisors". Subscriptions to both (even assuming a lifetime membership to AAII) are a much better deal than shelling out 0.8% to 1.6% of assets under management to a financial advisor (most of whom underperform the market).

Charles Rotblut from IL posted over 3 years ago:


The Shadow Stock Portfolio and the CAN SLIM are two different strategies, and a direct comparison would not be one that is apples-to-apples. With that caveat stated, if you wanted to compare the results, there are two pages on that will give numbers to use.

The first is from our Stock Screens section. We have to CAN SLIM screening strategies and their results, along the with the results for all of our other screens, can be found at:

The second is the performance of the Shadow Stock portfolio itself. This page is located at:

I hope this helps,

Tony from MA posted over 3 years ago:

Regardless of the rules, Jackson Hewitt should be dropped. Tax preparation is a losing business. Software is taking over. All tax preparers - HR Block, Liberty, JTX - have drastically lowered their pricing, are giving no charge deals or high discounts to get people in the door, etc. Average charge for tax prep has dropped to the $200 range - fed and state combined - from over $300 a few years ago. Impossible to stay in business at that level for a business that only operates 4 months a year. Plus, I can tell you that the tax preparers who worked for these companies are doing the job from their home for $100. And, please note, when was JTX last above $4/sh? Drop it now!

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