John Bajkowski
is the president of AAII.
After the quarterly review of the Model Shadow Stock Portfolio at the beginning of December, two stocks are being removed and three stocks are being added.
A broad market rally is helping to pull most market segments into positive territory for the year. As investor sentiment has improved, stock price increases are extending beyond the Magnificent Seven technology stocks that has been pulling the S&P 500 index up during the year, while most stocks languished during the bulk of 2023.
The S&P 500 as measured by the performance of the Vanguard 500 Index fund 
(VFINX) is up 20.6% for 2023 through November. The S&P 500’s impressive performance is largely attributed to the Magnificent Seven; since it is a market-capitalization-weighted index, larger companies have a greater impact on its performance. The seven stocks together—Apple Inc. (AAPL), Amazon.com Inc. (AMZN), Alphabet Inc. (GOOGL), Nvidia Corp. (NVDA), Meta Platforms Inc. (META), Microsoft Corp. (MSFT) and Tesla Inc. (TSLA)—are up 102.3% on average through the end of November and make up 27.8% of the Vanguard 500 Index fund. In comparison, the equally weighted index of the S&P 500 companies is up 6.4% through the end of November, as measured by the Invesco S&P 500 Equal Weight ETF (RSP).
The recent broad market rally has been christened the “everything rally,” as we are seeing gains in stocks, bonds, gold, cryptocurrency and home prices. Declining interest rates seem to be the greatest catalyst for the everything rally, and interest-sensitive sectors such as real estate have benefited the most. Within the S&P 500, real estate was up 12.3% during November, topped only by the information technology sector, which gained 12.7% during the month. Consumer discretionary was also up double digits during the month with a 10.8% gain. Within the large-cap index, the only sector down during November was energy, giving up 1.7%. Other relatively weak sectors were the defensive consumer staples (up 3.8%) and utilities (up 4.5%).
Information technology continues to be the leading sector for the year with a 50.7% gain, followed by communication services (up 47.3%) and consumer discretionary (up 33.0%). As seen in the table, these are the only sectors up double digits for the year within the S&P 500. There are four sectors in the red for the year, utilities (down 11.7%), energy (down 4.6%), consumer staples (down 4.5%) and health care (down 3.7%).
In the large-cap segment, value stocks were up 9.6% for the month, increasing their year-to-date gain to 15.8% for 2023. Large-cap growth stocks remain stronger year to date with a 25.4% gain after increasing 8.8% during November.
In the mid-cap segment, value stocks are now up 4.7% for the year, after gaining 9.6% during November. Mid-cap growth stocks are up 9.4% for the year, after gaining 7.6% during the month.
Small-cap value stocks are up 1.3 year to date, while small-cap growth stocks are up 4.5%. During November, small-cap value stocks gained 9.0% compared to a 7.5% gain for small-cap growth stocks.
Small-cap stocks remain attractively priced relative to large-cap stocks. The median price-to-book-value (P/B) ratio of the companies in the S&P SmallCap 600 index is 1.69, well below the 3.25 median ratio for the companies in the S&P 500. The S&P SmallCap 600 normally trades at a discounted multiple relative to the S&P 500. The discount has averaged 0.67 since 1998 and is currently 0.52.
The Model Shadow Stock Portfolio gained 5.6% for the month and is now up 8.7% for the year through the end of November. The S&P 500 was up 9.1% for month, boosting the year-to-date gain to 20.6% for the Vanguard 500 Index fund. The Vanguard Small Cap Index fund (NAESX) gained 9.2% during November, pulling its year-to-date return into the black. The fund is up 7.1% through the first 11 months of the year.
Since its inception in 1993, the AAII Model Shadow Stock Portfolio has a compound annual average return of 13.4%, versus the Vanguard 500 Index fund’s gain of 9.9% per year on average over the same period. Over the same period, the Vanguard Small Cap Index fund posted an average annual gain of 9.5%.
The Model Shadow Stock Portfolio was designed to test the strategy of investing in the 1% intersection of the smallest and cheapest publicly traded stocks. Research conducted by Eugene Fama and Kenneth French (Journal of Finance, June 1992) showed that the smaller the market cap of a company, the higher its stock returns. In addition, the lower the ratio of market price to book value, the higher the returns. The highest returns came from those stocks that were in the lowest market-cap decile and the lowest price-to-book decile.
The primary Model Shadow Stock Portfolio selection criteria target the intersection of the smallest 10% of domestic stocks as measured by market cap, along with the “cheapest” 10% of domestic stocks as measured by the price-to-book ratio. These decile breakpoints are determined by examining domestic companies that are listed on the New York Stock Exchange (NYSE) and then applying the size and value breakpoints for stocks listed on all domestic exchanges. The intersection of 10% constitutes the primary initial selection universe.
The Model Shadow Stock Portfolio is reviewed quarterly to determine portfolio deletions and additions. The quarterly review cycle is tied to the reporting cycle of most firms and limits costly portfolio turnover. AAII’s stock analysis and screening service Stock Investor Pro, with data as of December 11, 2023, was used for the quarterly review.
Value
The price-to-book cutoff has decreased slightly from 0.85 in September to 0.81. The current initial qualifying maximum price-to-book ratio is 0.90 and we left it unchanged. Qualifying stocks must have a price-to-book ratio of 0.90 or lower when added to the model portfolio. There are currently 1,314 exchange-listed securities with a price-to-book ratio less than or equal to 0.90. Stocks in the model portfolio are removed for valuation if they exceed three times the initial maximum price-to-book ratio at the time of a quarterly portfolio review.
No stocks in the model portfolio exceeded the maximum price-to-book ratio at the time of review.
Size
We examined the market-cap levels of domestic companies listed on the NYSE to determine the size cutoff for the lowest decile when adding stocks to the model portfolio. The lowest decile market-cap level declined from $270 million in September to $267 million using data in Stock Investor Pro. We are leaving the maximum initial qualifying market-cap value unchanged at $300 million. There are currently 1,545 exchange-listed securities with a market cap between $30 million and $300 million. Holdings are removed if their market cap goes above three times the initial criterion at the time of the quarterly review.
There were two holdings in the model portfolio that exceeded the $900 million market-cap maximum at the time of review: Beazer Homes USA Inc. (BZH) and VSE Corp. (VSEC).
Size Deletion: Beazer Homes USA Inc. (BZH)
Beazer Homes USA exceeded the market-cap deletion cutoff of $900 million with a market cap of $935.9 million and was removed from the portfolio. Beazer Homes was added to the Model Shadow Stock Portfolio on September 1, 2016, at a price of $11.15 per share. It was removed on December 13, 2023, at $28.728 per share, for a gain of 157.7%.
Size Deletion: VSE Corp. (VSEC)
VSE Corp. exceeded the market-cap deletion cutoff of $900 million with a market cap of $961.1 million and was removed from the portfolio. VSE Corp. was added to the Model Shadow Stock Portfolio on December 4, 2018, at a price of $29.55 per share. It was removed on December 13, 2023, at $60.76 per share, for a gain of 105.5%.
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, adjusted (non-GAAP) earnings are used to put stocks on probation or remove them.
Hooker Furnishings Corp. (HOFT) has been on earnings probation since the first quarter of 2023. While it reported positive quarterly earnings in July and December, its trailing 12-month earnings are still in the red and the company remains on earnings probation.
Lazydays Holdings Inc. (LAZY) went on earnings probation this quarter when it reported a third-quarter loss of $0.48 per share. This also pushed trailing 12-month earnings into the red.
No holdings were removed during the quarterly review because of negative earnings.
Age
We also examine the portfolio for stocks that have been held for at least four years and have not had strong price appreciation and no longer meet the initial qualifications. Holdings that no longer qualify and have not gained at least 10% annually are usually removed. However, with the bear market environment for small-cap companies and the relatively low number of qualifying candidates, no holdings were removed this quarter for tenure.
As of December 11, 24 stocks met the initial selection criteria for the Model Shadow Stock Portfolio. AAII members can see and research which companies are currently passing the initial selection criteria in the Shadow Stock Ideas table on AAII.com. The list of new Shadow Stock Ideas is updated daily—Tuesday through Saturday.
Six qualifying stocks were already in the Model Shadow Stock Portfolio at the time of the review. The remaining 18 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 for your portfolio.
With the proceeds from the deletions, as well as the cash held in the portfolio, we were able to take positions in three companies at roughly the average position size for the existing holdings in the tracking portfolio.
L.S. Starrett Co. (SCX)
L.S. Starrett is engaged in the business of manufacturing various products for industrial, professional and consumer markets. The company offers measuring and cutting products to the market through multiple channels of distribution throughout the world. Its tools and instruments are sold in North America and in over 100 other countries. The company primarily distributes its precision hand tools and saw and construction products through distributors or resellers both domestically and internationally. It principally serves the global manufacturing industry, including metalworking, construction, machinery, equipment, aerospace and automotive markets.
L.S. Starrett has a book value per share of $17.34 as of September 30. If you wish to stay within the 0.90 price-to-book maximum, you should pay no more than $15.61 per share ($17.34 × 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 $17.34 per share. To calculate the maximum purchase price based on the maximum desired price-to-book ratio, multiply the current book value per share ($17.34 for L.S. Starrett) by the maximum price-to-book ratio to be considered for the Model Shadow Stock Portfolio (currently 0.90, or 1.00 for loosened consideration).
Saga Communications Inc. (SGA)
Saga Communications is a broadcast company. The company is primarily engaged in acquiring, developing and operating broadcast properties. It owns approximately 79 FM radio stations, 34 AM radio stations and 80 metro signals serving over 27 markets, including Asheville, Bellingham, Brattleboro, Bucyrus, Champaign, Charleston, Charlottesville, Clarksville, Columbus, Des Moines, Greenfield, Harrisonburg, Hilton Head Island, Ithaca, Jonesboro, Keene, Manchester, Mitchell, Norfolk, Ocala, Northampton, Portland, Spencer, Springfield and Yankton. The radio stations that the company owns and/or operates employ a variety of programming formats.
Saga Communications has a book value per share of $30.16 as of September 30. If you wish to stay within the 0.90 price-to-book maximum, you should pay no more than $27.14 per share ($30.16 × 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 $30.16 per share.
StealthGas Inc. (GASS)
StealthGas is a provider of international seaborne transportation services to liquefied petroleum gas (LPG) producers and users, as well as crude oil and product carriers to oil producers, refineries and commodities traders. The company owns a fleet of LPG carriers that transport various petroleum gas products in liquefied form, including propane, butane, butadiene, isopropane, propylene and vinyl chloride monomer, which are all byproducts of the production of crude oil and natural gas. The medium-range product carriers in its fleet are capable of transporting refined petroleum products, such as gasoline, diesel, fuel oil and jet fuel, as well as edible oils and chemicals, while its Aframax tanker is used for carrying crude oil. Its fleet consists of approximately 50 LPG carriers, including two chartered-in LPG carriers, two 2008 product carriers, a 2009 product carrier and a 2010 Aframax crude oil tanker.
StealthGas has a book value per share of $14.75 as of September 30. If you wish to stay within the 0.90 price-to-book maximum, you should pay no more than $13.28 per share ($14.75 × 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 $14.75 per share.
The next quarterly review of the Model Shadow Stock Portfolio will take place following the beginning of March 2024. Any changes to the portfolio will be announced at the time they are made in our Model Shadow Stock Portfolio Update emails (sign up at www.aaii.com/email).
(11/16/2023)
Beazer Homes reported fourth-quarter 2023 GAAP earnings per diluted share of $1.80, beating the I/B/E/S consensus estimate of $1.39 per share. Total revenue decreased 22.0% from the prior-year quarter to $645.41 million. Homebuilding revenue was down 4.5% to $2.2 billion, due to a 10.7% decrease in home closings to 4,246, but partially offset by a 7.0% increase in average selling price to approximately $517,000. The company also reported net income of $56 million and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $90 million for the quarter.
(12/08/2023)
Global Ship Lease announced the appointment of Thomas Lister as CEO, effective March 31, 2024. Lister, who has been the chief commercial officer and part of the management team since Global Ship Lease went public in 2008, succeeds Ian Webber. Webber, current CEO since the company’s inception in 2007, will transition to the board of directors.
Hooker Furnishings Corporation (HOFT)
(12/07/2023)
Hooker Furnishings reported third-quarter 2024 GAAP earnings per share of $0.65, beating the LSEG I/B/E/S consensus estimate of $0.255 per share. Total revenue decreased 22.9% from the prior-year quarter to $166.83 million, driven by continued soft demand for home furnishings. Sales declined in each of the three segments compared to the prior-year quarter, but the Home Meridian International segment’s sales increased compared to the first and second quarters of the current fiscal year, sparked by a large volume of shipments for new product placements. Hooker branded sales also increased compared to the previous quarter in the current fiscal year. Consolidated net income increased 45.4% to $7.0 million compared to $4.8 million during the prior-year quarter.
The company also declared a dividend of $0.23 per share, a 4.5% increase from the prior dividend of $0.22 per share. The dividend is payable on December 29, to shareholders of record as of December 15. The stock will trade ex-dividend on Thursday, December 14. Hooker Furnishings’ current dividend yield is 4.4%.
Lakeland Industries, Inc. (LAKE)
(12/06/2023)
Lakeland Industries reported total revenue of $31.7 million for third-quarter 2024, up 11.6% from the prior-year quarter. GAAP net income for the quarter was $2.6 million, up 83% from last year. GAAP earnings per share grew 79% to $0.34. This beat the LSEG I/B/E/S consensus estimate of $0.27 per share by 25.9%. The company did not repurchase common stock under its stock repurchase program during the quarter. As of October 31, approximately $5.0 million was available for the repurchase of its outstanding common stock.
(11/30/2023)
Lakeland Industries completed its acquisition of Pacific Helmets NZ Ltd. This transaction, executed entirely in cash, is valued at approximately $8.5 million, accounting for post-closing adjustments and customary holdback provisions. Pacific Helmets is a premier designer and producer of helmets catering to the structural firefighting, wild land firefighting and rescue sectors. It is headquartered in Whanganui, New Zealand, and has a workforce of 70 employees. The current staff and management team will retain their roles.
Lazydays Holdings, Inc. (GORV)
(11/26/2023)
Lazydays Holdings completed acquisition of Orangewood RV Center, an RV dealership in Surprise, Arizona. The establishment has been rebranded as Lazydays RV of Phoenix at Arrowhead, making it the 24th addition to the company’s nationwide network and reinforcing its foothold in the Western U.S. Lazydays Holdings foresees the new store contributing approximately $40 million in annualized revenue.
SigmaTron International, Inc. (SGMA)
(12/08/2023)
SigmaTron International reported total revenue for its fiscal second-quarter 2024 ending in October of $98.7 million, or –9.0% year-over-year growth. Net income was $28,000, down from a net income of $3.1 million one year ago. Net income per diluted share was $0.00, down from $0.14 per share in the same period of 2023.
CEO Gary R. Fairhead commented on the upcoming quarter stating, “As we head into our third quarter, our short-term backlog remains soft as our customers evaluate their inventory levels starting the new calendar year. We expect the third quarter to be difficult and believe revenue levels will start to increase during our fourth quarter. Putting aside the short-term softness, we are excited about our prospects for the first part of fiscal 2025.”
(11/30/2023)
Titan Machinery reported total revenues of $694.1 million for third-quarter 2023, up 3.8% from the same period one year ago. Net income was $30.2 million, down 26.8% from one year ago. The company reported a diluted loss per share of $1.32, down 27.5% from one year ago. This translates to a 13.5% earnings miss compared to the LSEG I/B/E/S consensus estimate of $1.526 per share.
Titan Machinery revised its earlier projections for full-year 2024 to align with the year-to-date performance of its businesses. The updated estimate for diluted earnings range from $4.60 to $5.25 per share, compared to the prior consensus estimate of $5.05 per share.
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