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Small Is the New Black

The S&P 500 index lost 0.4% in December, as large caps ended an up-and-down month on a negative note. Apparently large-cap stocks were on Santa’s naughty list last month, as small-cap stocks seemed to be favored instead. The S&P SmallCap 600 index gained 2.9% in December. Last month two new stocks were added to the Model Shadow Stock Portfolio—Global Power Equipment Group (GLPW) and L.S. Starrett Co. (SCX), which James Cloonan discusses in the January AAII Journal.

The Model Fund Portfolio saw a very modest gain in December, rising 0.2%, while the Model Shadow Stock Portfolio, which specifically invests in small-company stocks, rose 4.3% last month.

The Model Shadow Stock Portfolio’s 4.3% increase for the month beat its comparison benchmarks: The Vanguard Small Cap Index (NAESX) gained 1.3%, and the DFA US Micro Cap Index fund (DFSCX) rose 3.4%. Last year, the Model Shadow Stock Portfolio declined 5.8%, trailing the Vanguard Small Cap Index fund (up 7.4%) and the DFA US Micro Cap Index fund (up 2.9%). The Model Shadow Stock Portfolio has a compound annual return of 16.9% since its inception in 1993, while the Vanguard Total Stock Market Index fund (VTSMX) has gained 9.4% annually over the same period.

The Model Fund Portfolio’s 0.2% gain in December compares to virtually no change for the Vanguard Total Stock Market Index fund. Last year, the Model Fund Portfolio gained 9.9%, while the Vanguard Total Stock Market Index fund rose 12.4%. The Model Fund Portfolio has a compound annual return of 9.4% since inception in June of 2003, slightly underperforming the Vanguard Total Stock Market Index fund over the same time period, which returned 9.5%.

January Updates

No transactions were made in either the Model Shadow Stock Portfolio or the Model Fund Portfolio this month.

Two stocks in the Model Shadow Stock Portfolio, Olympic Steel (ZEUS) and Rocky Brands (RCKY), qualified for purchase at the start of January. Qualified stocks are companies held within the Model Shadow Stock Portfolio that currently meet the purchase rules. (They are designated as “qualified” in the notes column of the Model Shadow Stock Portfolio table.) One company, Standard Motor Products (SMP), is approaching the size and value limits of the portfolio. Stocks will be deleted if their market capitalization exceeds $900 million during a quarterly review. (Standard Motor Product’s market capitalization was $873 million as of 12/31/2014.) Stocks will also be deleted if their price to book ratio exceeds 2.4 during the quarterly review. (Standard Motor Product’s current price-to-book ratio is 2.38).

The size and value rules of the Model Shadow Stock Portfolio are subject to revision depending on prevailing market conditions. Click here to see the current purchase and sales rules.