Model Shadow Stock Portfolio Changes

After conducting the quarterly review of the Model Shadow Stock Portfolio, RCM Technologies (RCMT) was removed from the tracking portfolio during regular trading hours on Friday, September 6. In addition, following the completion of its acquisition by Insight Enterprises, PCM Inc. was automatically sold from our brokerage account on September 3. With the proceeds from these two sales, as well as the cash held in the portfolio, three new stocks were added to the Model Shadow Stock Portfolio. It is the policy of the Model Shadow Stock Portfolio not to underweight or overweight new positions. Instead, it is better to hold excess cash until there is enough to buy a new stock with a position size roughly equivalent to the average position size in the portfolio.

Sell Alerts

RCM Technologies (RCMT)

RCM Technologies was removed based on the Model Shadow Stock Portfolio’s “four-year rule,” which allows for the removal of a Shadow Stock held at least four years that has not posted an average annual gain of at least 10%, provided a suitable replacement is available. RCM Technologies was held for more than 13 years in the portfolio and posted a loss since purchase.

PCM Inc.

On June 24 it was announced that Insight Enterprises and PCM Inc. had entered into an agreement under which Insight Enterprises will acquire PCM Inc. for $35 per share; at the time this represented a 36% premium to PCM Inc.’s one-month average closing share price as of Friday, June 21, 2019. On August 30, Insight Enterprises announced that it completed the PCM Inc. acquisition. On September 3, our broker, TD Ameritrade, automatically sold the Model Shadow Stock Portfolio’s position in PCM Inc. for $35 a share.

Buy Alerts

With the proceeds from the PCM Inc. and RCM Technologies sales and the existing cash position of the Model Shadow Stock Portfolio, there were enough funds to take a position in three companies at roughly the average position size for the existing holdings in the tracking portfolio. The portfolio additions are:

• Covenant Transportation Group (CVTI); September 5, 2019, closing share price of $15.47.
  
  Based on Covenant Transportation’s closing price of $15.47 on September 5, we suggest paying no more than $19.19. To calculate the maximum buy price based on the price-to-book-value ratio, multiply the current share price by the ratio of the maximum price-to-book ratio to be considered for the Model Shadow Stock Portfolio (currently 1.0) to the current price-to-book ratio of the stock. The price-to-book ratio for Covenant Transportation as of the close on September 5 was 0.806, so the calculation is: [$15.47 × (1.0 ÷ 0.806)] = $15.47 × 1.241 = $19.19.
  
  Covenant Transportation Group was added to the Model Shadow Stock Portfolio at an average price per share of $15.46.

• Hibbett Sports, Inc. (HIBB); September 5, 2019, closing share price of $15.99.
  
  Based on Hibbett Sports’ closing price of $15.99 on September 5, we suggest paying no more than $18.38. To calculate the maximum buy price based on the price-to-book-value ratio, multiply the current share price by the ratio of the maximum price-to-book ratio to be considered for the Model Shadow Stock Portfolio (currently 1.0) to the current price-to-book ratio of the stock. The price-to-book ratio for Hibbett Sports as of September 5 was 0.87, so the calculation is: [$15.99 × (1.0 ÷ 0.87)] = $15.99 × 1.149 = $18.38.
  
  Hibbett Sports Inc. was added to the Model Shadow Stock Portfolio at an average price per share of $15.92.
  
  
• Hurco Companies, Inc. (HURC); September 5, 2019, closing share price of $32.85.
  
  Based on Hurco Companies’ closing price of $32.85 on September 5, we suggest paying no more than $34.61. To calculate the maximum buy price based on the price-to-book-value ratio, multiply the current share price by the ratio of the maximum price-to-book ratio to be considered for the Model Shadow Stock Portfolio (currently 1.0) to the current price-to-book ratio of the stock. The price-to-book ratio for Hurco Companies as of September 5 was 0.949, so the calculation is: [$32.85 × (1.0 ÷ 0.949)] = $32.85 × 1.053 = $34.61.
  
  Hurco Companies Inc. was added to the Model Shadow Stock Portfolio at an average price per share of $31.94.

Next Monthly Update & Quarterly Review

The next monthly Model Shadow Stock Portfolio Update will take place on Friday, September 13. On that day, the monthly Model Shadow Stock Portfolio Update email will go out and the AAII Shadow Stocks area of AAII.com will be updated with new performance data.

The next quarterly review of the Model Shadow Stock Portfolio will take place at the end of November 2019. Any changes to the portfolio will be announced at the time they are made in a special Model Shadow Stock Portfolio Update email (sign up at www.aaii.com/email).