• Quarterly review led to five deletions for earnings issues and one due to a merger
• Four new stocks were added based on size, value, liquidity and earnings using AAII’s strict selection criteria
• The Model Shadow Stock Portfolio gained 6.7% in May, but remains down 7.3% year to date

After the quarterly review of the Model Shadow Stock Portfolio at the beginning of June, nine changes were made.

Policy announcements and news from Washington, D.C., continue to strongly influence the market. Broad gains were observed during May, but most indexes remain down year to date. The Model Shadow Stock Portfolio gained 6.7% during May, compared to a 6.3% gain for the Vanguard 500 Index fund (VFINX) and a 5.5% gain for the Vanguard Small Cap Index fund (NAESX). The Model Shadow Stock Portfolio is down 7.3% year to date while the Vanguard 500 Index is up 1.0% and the Vanguard Small Cap Index is down 4.7%.

Since its inception in 1993 through the end of May 2025, the AAII Model Shadow Stock Portfolio had a compound average annual return of 12.7%, versus 10.4% for the Vanguard 500 Index over the same period. The Vanguard Small Cap Index posted an average annual gain of 9.6% over the same period. Figure 1 shows performance over other time periods.

Quarterly Portfolio Review and Deletions

The Model Shadow Stock Portfolio is reviewed quarterly to determine portfolio additions or deletions. This review schedule aligns with most companies’ reporting cycles and helps to minimize portfolio turnover costs. AAII’s stock analysis and screening service Stock Investor Pro, with data as of June 10, 2025, was used to determine the size and value breakpoints for this quarterly review.

Size

To determine the size cutoff when adding stocks to the Model Shadow Stock Portfolio, we examined the market-cap levels of domestic companies listed on the New York Stock Exchange (NYSE). The market cap decile threshold declined slightly—from $350 million at the end of February to $347 million. However, we maintained the maximum initial qualifying market cap at $400 million.

Holdings are removed during the quarterly review if their market cap exceeds three times the initial cutoff. At the time of review, Covenant Logistics Group Inc. (CVLG) had the highest market cap in the model portfolio at $611.3 million—well below the $1.2 billion market-cap maximum.

Value

The cutoff for the price-to-book-value (P/B) ratio declined slightly from 0.82 at the end of February to 0.79. The initial qualifying maximum remains unchanged at 0.90.

Holdings are removed for valuation if their price-to-book ratio exceeds three times the initial maximum. At the time of review, Ennis Inc. (EBF) had the highest price-to-book ratio in the portfolio at 1.61—well below the removal threshold of 2.70.

Earnings

If a company has trailing 12-month earnings from continuing operations that are negative, the stock is placed on probation; if a subsequent quarter has negative earnings prior to trailing 12-month earnings becoming positive, the stock is deleted. When available, normalized (non-GAAP) earnings are used to put stocks on probation or remove them.

Four holdings were on earnings probation at the start of the quarterly reporting season, and all four reported losses during the quarter.

Portfolio Deletion: American Vanguard Corp. 

American Vanguard (AVD), a diversified specialty and agricultural products company, develops and markets solutions for crop protection, turf and ornamental management, and public and animal health. The company has been impacted by a cyclical downturn in the agricultural sector, leading to year-over-year declines in quarterly sales and earnings. American Vanguard reported a first-quarter 2025 normalized earnings loss of $0.13 per share on June 6, 2025, while its trailing 12-month adjusted earnings were still negative.

American Vanguard is being removed from the portfolio due to negative earnings. American Vanguard was added to the Model Shadow Stock Portfolio on June 11, 2024, at a price of $8.79 per share. It was deleted on June 11, 2025, at $4.62 per share, for a loss of 47.4%.

Portfolio Deletion: Hooker Furnishings Corp. 

Hooker Furnishings (HOFT) designs, markets and imports casegoods (wooden and metal furniture), leather and fabric-upholstered furniture, lighting, accessories, and home decor. The home furnishings industry continues to face a challenging environment, pressured by a sluggish housing market and weakening consumer sentiment. High borrowing costs have reduced housing mobility—a key driver of furniture demand. On April 17, 2025, Hooker Furnishings reported a fiscal fourth-quarter 2025 adjusted earnings loss of $0.22 per share.

Hooker Furnishings was added to the Model Shadow Stock Portfolio on September 7, 2011, at a price of $8.9379 per share. It was deleted on June 11, 2025, at $11.28 per share, for a gain of 26.2%.

Portfolio Deletion: Nortech Systems Inc. 

Nortech Systems (NSYS) provides design and manufacturing solutions for complex electromedical devices, electromechanical systems, assemblies and components. The company primarily serves the medical, aerospace and defense, and industrial markets. Recent sales were unexpectedly affected by delays in defense customer approvals following the closure of its Blue Earth facility and the transition of production to its Bemidji, Minnesota, plant. On April 17, 2025, Nortech Systems reported a first-quarter 2025 normalized earnings loss of $0.353 per share.

Nortech Systems was added to the Model Shadow Stock Portfolio on June 11, 2024, at a price of $10.77 per share. It was deleted on June 11, 2025, at $9.12 per share, for a loss of 15.3%.

Portfolio Deletion: Titan Machinery Inc. 

Titan Machinery (TITN) owns and operates a network of full-service agricultural and construction equipment dealerships, with more than 93 locations in North America, 39 locations in Europe and 15 locations in Australia. The company is currently facing a slowdown due to the cyclical downturn in the agricultural market. Titan Machinery reported a first-quarter 2025 normalized earnings loss of $0.58 per share on May 22, 2025.

Titan Machinery was added to the Model Shadow Stock Portfolio on September 15, 2020, at a price of $13.21 per share. It was deleted on June 11, 2025, at $20.1154 per share, for a gain of 52.3%.

Portfolio Deletion Due to Merger: Landsea Homes Corp. 

On May 12, Landsea Homes (LSEA) announced that it had entered into a definitive merger agreement to be acquired by New Home Co. for $11.30 per share in an all-cash transaction. The acquisition transforms the company into a privately held enterprise, so shareholders needed to tender their shares or sell their stock ahead of the tender offer expiration. Since the market price largely reflected the acquisition price of $11.30 per share, the holding was removed from the Model Shadow Stock Portfolio.

Landsea Homes was added to the Model Shadow Stock Portfolio on December 16, 2024, at a price of $9.6099 per share. It was deleted on June 11, 2025, at $11.295 per share, for a gain of 17.5%.

Quarterly Portfolio Additions

As of June 10, 20 stocks met the initial selection criteria for the Model Shadow Stock Portfolio. See the companies currently meeting the initial selection criteria in the Shadow Stock Ideas table on AAII.com.

Seven of the 20 qualifying stocks were already in the Model Shadow Stock Portfolio. The remaining 13 stocks were examined to ensure adequate liquidity, timely financial filings, and appropriate industry and foreign considerations. The Shadow Stock Portfolio Rules on AAII.com provide guidance on factors to consider when selecting stocks.

With the proceeds from the deletions, as well as the cash held in the portfolio, the Model Shadow Stock Portfolio was able to take positions in four companies, each at roughly the average position size for the existing holdings in the tracking portfolio.

Table 1 presents a complete list of current portfolio holdings. Table 2 summarizes the deletions and additions for the second quarter.

Portfolio Addition: Euroseas Ltd.

Euroseas (ESEA) provides ocean-going transportation services worldwide. The company owns and operates containerships that transport dry and refrigerated containerized cargoes. As of April 30, 2025, it had a fleet of 22 containerships.

Euroseas has a book value per share of $51.50 as of December 31, 2024. If you wish to stay within the 0.90 price-to-book maximum, you should pay no more than $46.35 per share ($51.50 x 0.90). However, if the stock price has moved up after being added to the portfolio, you can still purchase the stock unless the price-to-book ratio goes above 1.00, which equates to a price of $51.50 per share.

Portfolio Addition: Oil States International Inc. 

Oil States International (OIS) is a global provider of manufactured products and services used in the drilling, completion, subsea, production and infrastructure sectors of the oil and natural gas industry, as well as in the industrial and military sectors.

You should pay no more than $9.95 per share if you wish to stay within the 0.90 price-to-book maximum. However, if the stock price has moved up after being added to the portfolio, you can still purchase the stock unless the price-to-book ratio goes above 1.00, which equates to a price of $11.05 per share.

Portfolio Addition: Olympic Steel Inc.

Olympic Steel (ZEUS) is a U.S. metals service center focused on the direct sale of processed carbon, coated and stainless flat-rolled sheet, coil and plate steel, aluminum, tin plate, and metal-intensive branded products. The company’s subsidiary Chicago Tube & Iron (CTI) is a distributor of steel tubing, bar, pipe, valves and fittings for the electric utility industry.

You should pay no more than $46.30 per share if you wish to stay within the 0.90 price-to-book maximum. However, if the stock price has moved up after being added to the portfolio, you can still purchase the stock unless the price-to-book ratio goes above 1.00, which equates to a price of $51.44 per share.

Portfolio Addition: Smith Douglas Homes Corp.

Smith Douglas Homes (SDHC) designs, constructs and sells single-family homes in the southeastern U.S. The company was added to the portfolio based on a price-to-book calculation that included minority interest of subsidiaries. While minority interest, also known as noncontrolling interest, is presented within the equity portion of a company’s balance sheet, it reflects the portion of a subsidiary’s equity that is not owned by the parent company. Excluding minority interest from equity raises the price-to-book ratio from 0.44 to 2.25. Smith Douglas Homes loses its qualifying designation with this change.

Next Portfolio Review

The next quarterly review of the Model Shadow Stock Portfolio will take place in September 2025. If there are any changes to the model portfolio, they will be announced at the time in the Model Shadow Stock Portfolio Update email. Sign up for this email at www.aaii.com.email so you don’t miss it!