June Model Shadow Stock Portfolio Review
May was an up-and-down month for stocks. Most broad domestic indexes were lower through the first half of the month, but an end-of-month rally sent most to monthly gains. The S&P 500 index itself finished May with a 1.8% gain, less than 2% below its all-time high close set on May 21, 2015.
Overall, mid-cap issues outperformed large-cap and small-cap stocks for the month. The S&P MidCap 400 index gained 2.3% in May, compared to a 1.7% gain for the S&P SmallCap 600 index and a 1.8% increase for the S&P 500. The strength in large-cap stocks is also apparent when comparing the performance of the Guggenheim S&P 500 Equal Weight ETF (RSP)—up 1.5%—to that of the market-cap-weighted SPDR S&P 500 ETF (SPY) and its 1.8% gain. Year to date, RSP is up 5.7%, while SPY has posted a 3.5% gain for the year through the end of May. During 2015, the SPDR S&P 500 fund posted a gain of 1.3%, while the Guggenheim S&P 500 fund declined by 2.6%.
In a reversal from last month, growth-oriented stocks outperformed value-oriented stocks across all market capitalizations in May. The S&P 500 Growth index rose 2.7% during May, while the S&P 500 Value index gained 0.9%. The pattern was repeated for the S&P SmallCap 600 segment—a 2.8% gain in May for growth versus 0.5% for value—and the S&P MidCap 400, which posted a 3.3% gain for growth and a 1.4% increase for value during May.
There were also some reversals of fortune at the sector level in May. The top sector in May was information technology with a 4.9% gain. This followed April’s decline of 5.4%, when it was the poorest-performing sector. Health care was the second-best-performing industry in May, posting a 2.2% gain as political headwinds seemed to fade. Financials also received a boost in May on hopes of a June rate increase (which seem to have also faded), tacking on 2.0%.
After a strong April in which it climbed 8.7%, the energy sector was the biggest “loser” in May, slipping 0.8%. Materials, which was the second-best-performing sector in May, dipped 0.3%. Year to date, utilities have posted the best sector performance with a 14.4% gain, followed by energy, which is up 11.7%. The only sectors that were in the red year to date through the end of May were financial services (down 0.6%) and health care (down 0.7%).
Twelve of the 30 stocks in the Model Shadow Stock Portfolio were up for the month of May, paced by Key Tronic Corp. (KTCC) with a profit of 25.0%. Key Tronic, doing business as KeyTronicEMS, is a value-added electronic manufacturing service provider specializing in printed circuit board assembly and full product assembly, plastic molding, precision metal stamping, fabrication and finishing, and engineering services.
Overall, the Model Shadow Stock Portfolio, which is a collection of micro-cap value stocks, fell 2.1% in May after posting three straight months of gains. Year to date, the portfolio is up 1.7%. Meanwhile, the Vanguard Small Cap Index fund (NAESX) was up 1.9% for May and is up 4.7% for the year. The DFA U.S. Micro Cap Index fund (DFSCX) gained 1.1% in May and is up 3.1% for the year. Since its inception in 1993, the Model Shadow Stock Portfolio has a compound annual average return of 15.2%, while the Vanguard 500 Index fund (VFINX) has gained 8.9% a year, on average, over the same period.
Here are some news highlights from May for the holdings in the actual Model Shadow Stock Portfolio:
|•||Alamo Group Inc. (ALG) reported first-quarter earnings of $0.75 per diluted share, a 17.1% increase over the previous year. This also surpasses the I/B/E/S consensus estimate of $0.73 per share. Net sales for the first quarter of 2016 were $211.0 million, an increase of 1.5% from a year ago. In addition, Alamo Group was added to the S&P SmallCap 600 index as of the close of trading on May 20, 2016.|
|•||CDI Corp. (CDI) reported first-quarter 2016 revenues of $233.5 million, a decrease of 9.3% from a year ago. The company also reported an adjusted per diluted share loss of $0.24 versus an adjusted earnings per diluted share gain of $0.04 a year ago. This was in line with the consensus estimate from I/B/E/S.|
|•||CSS Industries Inc. (CSS) reported a 5.6% increase in sales for the fourth quarter of fiscal 2016 to $56.74 million. Its net loss for the fourth quarter of fiscal 2016 was $0.06 per diluted share, versus a loss of $0.14 per diluted share a year ago. The company is not tracked by analysts, so it did not have a consensus estimate.|
|•||Ducommun Incorporated (DCO) reported net revenue for the first quarter of 2016 of $142.1 million, compared to $172.9 million a year ago. Net income for the first quarter of 2016 was approximately $13.6 million, or $1.21 per diluted share, compared to a net loss of $2.0 million, or $0.18 per share, the year before.|
|•||Ennis Inc. (EBF) reported fourth-quarter earnings of $0.29 per share, compared to the I/B/E/S consensus of $0.28 per share. The company’s consolidated net sales for the quarter were $128.2 million, compared to $140.2 million for the same quarter last year, a decrease of 8.6%. Also in May, Ennis announced that it completed the previously announced sale of its apparel division to Gildan Activewear. On May 25, 2016, the transaction was completed for an all-cash purchase price of $109.4 million.|
|•||Hardinge Inc. (HDNG) reported first-quarter net sales of $67.8 million, up 1% from a year ago. The non-GAAP adjusted net loss was $0.3 million, or a $0.03 loss per diluted share, which improved from a $0.7 million adjusted net loss, or $0.05 loss per diluted share, a year ago. The single analyst tracking the company had forecast the company to break even for the quarter. In addition, Hardinge’s board of directors concluded the previously announced review of strategic alternatives for the company. While Hardinge received indications of interest from a number of financial and strategic buyers to acquire the company, the board determined that it is in the best interests of the company’s stakeholders to conclude the strategic review process. The board believes a focus on organic growth and potential opportunistic acquisitions combined with targeted cost reductions through incremental operational restructuring plans is the best current path to enhancing long-term shareholder value.|
|•||Key Tronic Corp. (KTCC) reported fiscal third-quarter earnings of $1.8 million, or $0.16 on a per-share basis. This exceeded the consensus estimate for the quarter of $0.12 per share from I/B/E/S. The company posted revenue of $118.4 million in the period, an increase of 4.9% from a year ago.|
|•||Kimball Electronics Inc. (KE) reported fiscal third-quarter net income of $7.5 million. On a per-share basis, the company reported earnings of $0.26, beating the I/B/E/S consensus estimate of $0.20 per share. The company posted revenue of $214.1 million in the period, 3.5% higher than a year ago.|
|•||LMI Aerospace Inc. (LMIA) reported first-quarter net sales of $87.3 million, compared to $92.5 million a year ago. The company also reported a net loss of $1.8 million, or $0.14 per diluted share, for the quarter, compared to a net loss of $1.5 million, or $0.11 per diluted share, a year ago. Analysts polled by I/B/E/S were expecting the company to break even for the quarter.|
|•||RCM Technologies Inc. (RCMT) reported revenues of $47.2 million for quarter ended April 2, 2016, a 1.7% decrease from a year ago. Net income for quarter was $1.0 million, or $0.08 per diluted share, compared to $1.4 million, or $0.11 per diluted share, a year ago.|
|•||Renewable Energy Group Inc. (REGI) reported first-quarter net income of $1.6 million, a 104.5% increase from the $38.1 million loss a year ago. Adjusted for non-recurring gains, the company lost $0.01 per share for the quarter. The one analyst tracking the company was forecasting the company to break even for the quarter.|
|•||Salem Media Group (SALM) reported first-quarter earnings of $353,000, a 33.3% increase from a year ago. This translated into earnings of $0.01 per share, which fell short of the consensus estimate of $0.03 per share. The company also reported revenue of $64.6 million in the period, which was 4.4% higher than a year ago.|
|•||Seneca Foods Corp. (SENEA) posted a 9.3% increase in fourth-quarter revenue to $303.7 million and a profit of $13.8 million. On a per-share basis, the company reported profit of $1.38. Earnings, adjusted for non-recurring gains, came to $0.63 per share.|
|•||Shoe Carnival Inc. (SCVL) reported first-quarter sales of $260.5 million, 3.0% higher than a year ago, and earnings per share of $0.56. Analysts polled by I/B/E/S were predicting earnings for the period of $0.57 per share. In addition, Shoe Carnival expects full-year earnings to be $1.58 to $1.65 per share, with revenue in the range of $1.01 billion to $1.03 billion. Currently, six analysts expect fiscal-year earnings of $1.62 per share, down from $1.64 a month ago.|
|•||TravelCenters of America (TA) reported a first-quarter loss of $9.9 million, down 164% from a year ago. The company’s quarterly loss was $0.26 per share, falling short of the consensus estimate of a loss of $0.21 per share for the quarter. The company posted revenue of $1.16 billion in the period, down 17.3% from a year ago.|
|•||Vishay Precision Group Inc. (VPG) reported first-quarter net revenues of $56.6 million, which was unchanged from a year ago. First-quarter adjusted diluted earnings per share were $0.13, falling short of the consensus estimate of earnings of $0.17 per share for the quarter. The company also reaffirmed fiscal-2016 adjusted diluted earnings per share in the range of $0.80 to $1.00. Analysts polled by I/B/E/S are forecasting full-year earnings per share of $0.88, unchanged from a month ago.|
|•||Voxx International Corp. (VOXX) posted revenue for its fiscal fourth quarter of $169.7 million, down 0.1% from a year ago. The company also reported a loss of $5.4 million, or $0.22 per share. Losses, adjusted for asset impairment costs, were $0.10 per share. This fell short of the consensus estimate for the quarter of $0.03 per share.|
The Model Fund Portfolio’s 0.4% gain in May compares to a 1.8% gain for the Vanguard 500 Index fund. The Model Fund Portfolio has gained 3.3% year-to-date, while the Vanguard 500 Index fund is up 3.5%. Since its inception in June of 2003, the Model Fund Portfolio has a compound annual average return of 8.2%, while the Vanguard 500 Index fund has also averaged an 8.2% annual gain over the same period.
June Portfolio Updates
Following the June quarterly review, there are no changes to the Model Shadow Stock Portfolio.
Based on current market conditions, there were no rule changes to the Model Shadow Stock Portfolio this month. Twenty-four stocks passed the predefined Model Shadow Stock screen in Stock Investor Pro at the end of May, down from 28 at the end of April. Four of the 30 stocks currently in the portfolio qualified for purchase at the end of May, down from five that qualified the previous month. These companies are Key Tronic Corp. (KTCC), L S Starrett Co. (SCX), Salem Media Group Inc. (SALM) and Willis Lease Finance Corp. (WLFC).
CSS Industries (CSS) dropped from the ranks of qualifying shadow stocks at the end of May because it reported negative quarterly earnings at the end of May. In order to initially qualify as a Shadow Stock, a company must have positive GAAP earnings from continuing operations for the latest fiscal quarter and the trailing 12 months (last four fiscal quarters). However, the trailing 12-month adjusted earnings from continuing operations for CSS is positive, so it is currently not at risk for being sold.
Two new stocks were added to the probation list this month following their latest quarterly earnings announcements. Shadow stocks go on probation when a company’s last 12 months’ adjusted earnings from continuing operations are negative. CDI Corp.’s (CDI) 12-month adjusted earnings from continuing operations were negative after its April 27 announcement of a first-quarter loss of $0.24 per share. Likewise, LMI Aerospace (LMIA) also saw its trailing adjusted earnings from continuing operations turn negative after the company announced a first-quarter loss of $0.11 per share on May 9. If either of these companies announces negative adjusted earnings from continuing operations in any quarter prior to 12-month trailing earnings turning positive, they will be sold from the Model Shadow Stock Portfolio at the next quarterly portfolio review. Ducommun Inc. (DCO) has been on probation since its third-quarter 2015 earnings announcement, but has not reported negative adjusted earnings from continuing operations in any subsequent quarter, which is why it remains in the Model Shadow Stock Portfolio.
No stocks in the portfolio approached the value limit (three times the initial 1.0 price-to-book-value filter) or the size limit (three times the initial $300 million market cap filter) at the end of May.
You can read AAII chairman James Cloonan’s latest quarterly Model Portfolios commentary in the July issue of the AAII Journal. The next quarterly review of the Model Shadow Stock Portfolio will take place in September.
Click here to see the current purchase and sell rules. The size and valuation rules are subject to revision based on prevailing market conditions.
There were no changes made to the Model Fund Portfolio this month.
Click here to learn how the mutual fund and exchange-traded funds (ETFs) in the Model Fund Portfolio are chosen.
The next Model Fund Portfolio review will take place in July and will appear in the August 2016 issue of the AAII Journal.