The Model Shadow Stock Portfolio still has not reached its pre-2008 high but it has moved up 14.9% year to date (May 31, 2010). That is significantly better than the S&P 500, which is down 1.5% so far this year (as measured by the Vanguard 500 Index fund). Complete performance data can be viewed in Figure 1 and Table 3.
Volatility remains high with all the dramatic news in the eurozone and our own Gulf of Mexico oil disaster. As I write this in early June, the market has had several very weak days and it looks like volatility may remain high well into the summer.
Table 1 lists the current holdings and Table 2 explains the rules for the portfolio. As shown in Figure 2 on page 33, the number of stocks passing the initial screen increased slightly to 16. Most of those passing were already in the portfolio and we made our final selection based on liquidity and lower price-to-book ratios.
One of the differences between a theoretical portfolio and a real one, in addition to transaction costs, is that in the real world investors make errors and I have made a number over the years. At
the end of last March, MedCath MDTH should have been sold but I missed the negative
earnings report on February 3. Now MDTH has reported positive earnings on May 5, so I am not going to sell it unless it violates probation again.
|AeroCentury Corp. (ACY)||18.95||25.00||7.85||29.2||4.7||0.7||0.0||not qualified as a buy for 2 yrs|
|Alamo Group, Inc. (ALG)||23.20||27.05||9.77||272.6||13.0||1.2||1.0|
|Capital Senior Living (CSU)||4.66||6.49||3.62||126.0||46.6||0.8||0.0||qualified as of 6/4/2010|
|Conn’s, Inc. (CONN)*||6.71||15.19||4.42||150.8||83.9||0.4||0.0||qualified as of 6/4/2010|
|CSS Industries (CSS)||17.88||27.28||16.09||173.0||nmf||0.7||3.4||earnings probation (2010q2)|
|Ennis, Inc. (EBF)||15.59||19.35||10.35||403.7||11.5||1.3||4.0|
|Flexsteel Industries (FLXS)||11.46||16.50||6.51||76.1||10.2||0.7||1.7||qualified as of 6/4/2010|
|Hastings Entertainment (HAST)||7.72||9.38||3.60||71.8||12.1||0.7||0.0||qualified as of 6/4/2010|
|Jackson Hewitt Tax (JTX)||1.62||7.58||1.46||46.6||nmf||nmf||0.0||earnings probation (2010q3)|
|Lithia Motors, Inc. (LAD)||7.95||16.49||5.18||206.5||20.9||0.7||2.5|
|Marlin Business Servs (MRLN)||12.05||13.36||3.57||154.3||48.2||1.0||0.0||not qualified as a buy for 2 yrs|
|MedCath Corp. (MDTH)||8.67||13.63||6.62||177.9||nmf||0.6||0.0||earnings probation (2009q4)|
|Mitcham Industries (MIND)*||6.12||8.43||4.09||60.1||122.4||0.7||0.0||qualified as of 6/4/2010|
|OYO Geospace Corp. (OYOG)||45.58||52.50||19.05||274.9||93.0||2.2||0.0||approaching value limit|
|Paragon Shipping (PRGN)||3.90||5.67||3.25||199.8||3.0||0.4||5.1|
|PC Connection (PCCC)*||6.56||7.95||4.77||178.1||65.6||0.8||0.0||qualified as of 6/4/2010|
|PC Mall, Inc. (MALL)||4.70||8.98||4.40||57.9||23.5||0.6||0.0||qualified as of 6/4/2010|
|RCM Technologies (RCMT)||4.93||5.01||1.47||64.1||17.0||1.0||0.0||not qualified as a buy for 2 yrs|
|Saga Communications (SGA)||27.50||29.00||4.95||117.1||105.8||1.7||0.0|
|Shoe Carnival (SCVL)||21.25||29.26||11.54||279.9||13.4||1.2||0.0|
|Standard Motor Products (SMP)||7.67||15.71||5.28||174.5||18.3||0.9||2.6|
|Standex Int’l Corp. (SXI)||25.79||30.93||9.27||321.8||12.8||1.6||0.8|
|SureWest Communic’ns (SURW)||6.02||13.93||6.00||86.5||75.3||0.3||0.0||qualified as of 6/4/2010|
|Twin Disc, Inc. (TWIN)||12.29||15.23||6.21||137.5||102.4||1.3||2.3|
|Willis Lease Finance (WLFC)||10.05||17.61||10.05||92.9||5.9||0.5||0.0||not qualified as a buy for 2 yrs|
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 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.
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.
Stock purchases must meet these criteria:
Stocks are sold if any of the following occur:
I am looking at the comments at the end of my April column and I could write exactly the same thing again. The bulls and bears are pretty well balanced, there are major concerns all around the world and as of this date there has not been much resolution to any
of them, and many of the uncertainties are not under United States’ control. We have the “wall of worry,” but the stock market does not seem to be climbing it.
Perhaps the nature of the market’s concerns will be different when I report on the Model Shadow Stock
Portfolio in the October AAII Journal. In the meantime, you can follow the portfolio at AAII.com.
|Annual Rate of Return (%)|
|Shadow Stock Portfolio||15.2||14.9||72.3||-50.8||-1.8||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)||7.4||-1.5||26.5||-37.0||5.4||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)||8.9||6.7||36.1||-36.0||1.2||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)||10.7||8.8||28.1||-36.7||-5.2||16.2||5.7||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 5/31/2010.|