Rough End to a Challenging Year for Stocks and the Model Portfolios

Domestic stocks posted their worst annual performance since 2008, with domestic listed stocks down on average 8.8% during 2015 and down 4.7% during December. The large-cap Vanguard 500 Index fund (VFINX) suffered a loss of 1.6% during December, but posted a positive total return of 1.3% during 2015. The market-capitalization-weighted index benefited from the performance of a relatively small number of large-cap stocks. In a market-cap-weighted index, the greater the market size of a company’s stock, the greater its impact on the performance of the index. The stocks in the S&P 500 index lost 2.8% on average during the month and 3.1% during 2015. Smaller-cap stocks generally had weaker performance during the month and year. The average stock in the S&P MidCap 400 index lost 5.3% during December and 5.1% during 2015; the average S&P SmallCap 600 index stock lost 5.7% during December and 6.0% during 2015. The Model Shadow Stock Portfolio lost 2.3% during December and lost 15.2% during 2015. The Model Fund Portfolio was down 2.8% during December and lost 4.5% during 2015.

A quick look at the sectors within the S&P 500 reveals that only four sectors were up during 2015: consumer discretionary (up 8.4%), health care (up 5.2%), information technology (up 4.3%) and consumer staples (up 3.8%). In contrast, the weakest sectors were energy (down 23.6%), materials (down 10.4%), utilities (down 8.4%), industrials (down 4.7%), financials (down 3.5%) and telecom services (down 1.7%).

For now, fear over weakening China and falling oil and natural resource prices are pushing the market lower during 2016. If only someone would ring a bell to tell investors when the selling is over.

The Model Shadow Stock portfolio had only 12 out of 30 stocks up for the month. RCM Technologies (RCMT)—a provider of business and technology solutions designed to enhance and maximize the operational performance of its customers through the adaptation and deployment of advanced engineering, information technology and specialty health care services—posted a profit of 28.5% during the month as its board of directors declared and paid a special $1.00 per share dividend during the month.

Rocco Campanelli, president and CEO of RCM Technologies, commented: “We are excited to announce a special dividend of $1.00 per share and continue our impressive record of returning capital to our shareholders. Including an estimate of this upcoming $1.00 special dividend, the $1.00 special dividend declared in December 2012, the $2.00 special dividend declared in December 2014, the $7.5 million stock buyback initiative completed in January 2013 and approximately $2.6 million in shares we have repurchased in fiscal 2015 to date, RCM has returned approximately $61.5 million to our shareholders in a relatively short time frame. We are optimistic about the prospects of our business on a go-forward basis and we expect to continue to generate strong cash flow in 2016 and beyond.” Kevin Miller, chief financial officer, added: “We expect that approximately $0.75 or more of the special dividend will receive the tax-advantageous characterization of return of capital to shareholders.”

During 2015, the Model Shadow Stock Portfolio declined 15.2%, while the Vanguard Small Cap Index fund (NAESX) was down 3.8% and the DFA U.S. Micro Cap Index fund (DFSCX) was down 3.6%. Since its inception in 1993, the Model Shadow Stock Portfolio has a compound annual average return of 15.4%, while the Vanguard 500 Index fund has gained 8.9%.

The Model Fund Portfolio’s 2.8% loss in December compares to a 1.6% decrease for the Vanguard 500 Index fund. Since its inception in June of 2003, the Model Fund Portfolio has a compound annual average return of 8.1%, just behind the 8.2% return of the Vanguard 500 Index fund over the same time period.

January Updates

There are no changes to the Model Shadow Stock Portfolio this month. The portfolio underwent its quarterly review at the end of November and we discussed the changes last month.

Thirty-six stocks passed the screen at the end of December. Eight of stocks in the actual portfolio qualified for purchase at the end of December, up from seven at the end of November: CSS Industries (CSS), Key Tronic Corp. (KTCC), Rocky Brands (RCKY), Salem Media Group (SALM), Seneca Foods Corp. (SENEA), SigmaTron International (SGMA), Townsquare Media (TSQ) and Willis Lease Finance Corp. (WLFC). Qualified stocks are companies held within the Model Shadow Stock Portfolio that currently meet the initial purchase rules. (They are designated as “qualified” in the notes column of the Model Shadow Stock Portfolio table.)

The next quarterly review of the Shadow Stock portfolio will take place in March 2016.

Click here to see the current purchase and sell rules. The size and value rules are subject to revision depending on prevailing market conditions.

There were no changes to the Model Fund Portfolio this month. The next quarterly review of the portfolio will take place in February 2016.