John Bajkowski
is the president of AAII.
“Sell in May and go away” is an old Wall Street adage rooted in the generally weaker relative performance of the market over the course of summer and extending through October. Some also refer to it as the Halloween timing strategy, noting that the market’s strongest relative performance is normally between October 31 and the end of April. With the Halloween timing strategy, you are invested in the market for six months (November through April) and out of the market for the six months (May through October).
We have observed that the weakest-performing months for the Model Shadow Stock Portfolio over its 28-year history have been August (0.5% average return), October (0.6% average return) and May (0.6% average return). In contrast, the three best-performing months have been November (2.3% average return), April (2.3% average return) and December (1.9% average return).
We thought it would be interesting to see if the Halloween timing strategy applies the Model Shadow Stock Portfolio. If you held the Model Shadow Stock Portfolio every November through April from 1993 to 2021, you would have realized a 9.7% average annual rate of return, meaningfully higher than the 5.1% annual rate of return observed for the 28 six-month holding periods from May through October. The November through April periods outperformed the preceding May through October periods in 18 of the 28 years.
We noticed a similar pattern with the Vanguard 500 Index fund (VFINX), with the May through October holding period underperforming the November through April holding period: 2.9% versus 7.3%.
We are ignoring the transaction costs in this analysis, but the Halloween timing strategy correctly identifies the relatively stronger and weaker six-month holding periods of the stock market. But before you sell all your stock holdings, pack up your car and head out to your summer home, you should consider that while the market return has been relatively weaker from May to through October, it has been, on average, positive and much higher than the return you would have earned on Treasury bills (T-bills) while out of the market.
By including the Model Shadow Stock Portfolio 5.1% average compound rate of return from the May through October holding periods, we see the 9.7% return of the November through April time period expand to 15.3% annually for the full May 1993 to April 2021 time period we studied. Adding the 1.2% average annual T-bills return for the May through October periods would only have increased your rate of return from 9.7% to 10.9% for the Model Shadow Stock Portfolio.
The same is true for the Vanguard 500 Index fund. Investors would have earned a 10.4% annual return by staying fully invested, compared to an 8.6% average annual return by being invested in the S&P 500 index from November through April and T-bills from May through October. Just in case you are wondering, 7.3% and 1.2% equals 8.6% because of the magic of compounding.
So, while the market tends to undergo its summer doldrums, it has still generally rewarded investors for staying fully invested during the entire year.
Six stocks met the initial selection criteria for the Model Shadow Stock Portfolio as of May 13, 2021, up from four passing stocks one month ago. Of the six passing stocks, three are currently held in the Model Shadow Stock tracking portfolio: Key Tronic Corp. (KTCC), Mesa Air Group (MESA) and Strattec Security Corp. (STRT). Qualifying companies are those held in the Model Shadow Stock Portfolio that currently meet the initial purchase rules. (They are designated as “qualifies” in the notes column of the Model Shadow Stock Portfolio table on AAII.com. However, the notes may not match the list here since the passing list on the website is revised daily and the notes are dynamically updated based on the revised list.)
As of May 13, 2021, Hibbett Sports Inc. (HIBB) had the highest price-to-book-value ratio in the Model Shadow Stock Portfolio. Its ratio of 3.30 is above the 1.00 maximum value used for initially qualifying a stock for inclusion to the portfolio. However, stocks are not removed from the portfolio until their price-to-book-value ratio rises to three times the initial maximum value (3.00). It may help you to think about values below 1.00 as being attractive, while values three times above the initial maximum are expensive. Allowing the price-to-book ratio to expand for stocks that you own allows your winners to run up a little, since the price-to-book ratio typically gets larger as the stock price goes up. The initial price-to-book level is adjusted over time to reflect the changing market conditions, and valuation and size are being examined at this time for the next quarterly portfolio review.
The Model Shadow Stock Portfolio looks for stocks with a market capitalization (share price times shares outstanding) greater than $30 million but less than $400 million when adding stocks to the portfolio. Shadow stocks with a market cap three times the initial market cap maximum ($400 million × 3 = $1,200 million) at the time of a quarterly review are sold from the portfolio, assuming there is a suitable replacement. Hibbett Sports also has the highest market cap in the portfolio with a value of $1,213.6 million as of May 13, 2021. Hibbett Sports is the only stock in the Model Shadow Stock Portfolio at risk of being sold for exceeding this ceiling.
Click here to see the current purchase and sell rules for the portfolio.
The Model Shadow Stock Portfolio gained 4.1% during April, bringing its year-to-date gain to 43.2%. The S&P 500 as measured through the Vanguard 500 Index fund was up 5.3% in April and is up 11.8% year to date, while the Vanguard Small-Cap Index fund (NAESX) gained 4.0% in April and is up 14.6% year to date. The DFA U.S. Micro-Cap fund (DFSCX) was up 1.6% during April and is up 23.3% for the year.
The performance of growth- versus value-oriented stocks generally favored growth stocks during the month.
In the large-cap segment, growth stocks were up 6.9% for the month, bringing their year-to-date performance to a gain of 9.1% for 2021. Large-cap value stocks were up 3.7% during April and are now up 14.9% year to date.
In the mid-cap segment, value stocks were up 4.8% for the month, bringing their year-to-date performance to a gain of 24.1% for 2021. Mid-cap growth stocks were up 4.2% during April and are now up 13.1% year to date.
Small-cap growth stocks squeaked past small-cap value stocks during April, up 2.2% versus 2.0%. However, for the year, small-cap value stocks are up 23.6%, while small-cap growth stocks are up 7.2% year to date.
Energy stocks lagged other sectors during April, up 0.6% during the month. They continue to be the strongest-performing sector during 2021 with a 31.6% gain year to date.
Real estate was the best-performing sector during April with an 8.3% gain for the month. The real estate sector is now up 18.1% for the year.
Stocks in the energy (+31.6%), financial (+23.5%) and real estate (+18.1%) sectors are leading the market this year. Sectors that are lagging this year include consumer staples (+3.4%), utilities (7.2%) and health care (7.3%).
Since its inception in 1993, the AAII Model Shadow Stock Portfolio has a compound annual average return of 15.5% versus the Vanguard 500 Index fund’s gain of 10.3% per year on average over the same period. Over the same period, the Vanguard Small-Cap Index fund posted an average annual gain of 10.8%.
The next quarterly review of the portfolio will be conducted following the end of May. Any changes to the market cap and valuation limits along with any portfolio additions or deletions 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).
Bassett Furniture Industries Inc. (BSET) was the top performer in the Model Shadow Stock Portfolio for April, up by 41.3%. The stock rose on reported first-quarter results that beat analyst expectations. See more details in the news below.
Delta Apparel Inc. (DLA) was the runner-up for the month, up by 25.4%. The stock rose on a release of preliminary quarterly sales results showing year-over-year growth ahead of its May earnings report. See more details in the news below.
Mesa Air Group (MESA) was the bottom performer for April, down by 16.3%. The company reported a significant impact from the mid-February Texas winter storm, which disrupted its major hubs in Dallas and Houston. Part of the airlines industry as a regional carrier, Mesa Air’s stock has also seesawed in recent months with market sentiment toward recovery from the coronavirus pandemic and the outlook for large international airlines, such as United Airlines Holdings Inc. (UAL) with whom it contracts.
Container Store Group Inc. (TCS) was down by 15.3% for the month. There was no company-specific news to attribute to the stock’s performance for the month. Container Store was generally up on strong quarterly results due to pandemic consumer trends, and the stock has eased back month-to-month since the last quarterly earnings report in February.
Here are some news highlights from April for the holdings in the Model Shadow Stock Portfolio:
Bassett Furniture Industries Inc. (BSET) reported first-quarter 2021 net income of $4.0 million, or $0.40 per diluted share, compared to net income of $1.2 million, or $0.12 per diluted share, in the prior-year quarter. First-quarter earnings per diluted share beat the I/B/E/S consensus estimate of $0.235 per share by 70.2%.
Consolidated sales for the quarter grew 1.4% year over year to $113.7 million. The company’s wholesale segment posted sales of $70.3 million, up 8.3% year over year. First-quarter sales for the retail segment declined by 8.3% year over year to $60.4 million. The company’s logistical services unit reported that revenues declined 5.8% year over year to $20.1 million. Consolidated retail operating income for the quarter was $1.1 million compared to a loss of $1.2 million in the first quarter of 2020.
Beazer Homes USA Inc. (BZH) reported second-quarter 2021 homebuilding revenue of $547.4 million, up by 12.2% year over year. Earnings per share of $0.81 increased by 131% year over year and beat the I/B/E/S consensus estimate of $0.565 per share by 43%.
The increase in homebuilding revenue was driven by an 8.7% increase in home closings year over year to 1,388 homes and a 3.2% increase in the average selling price year over year. Net new orders increased 11.6% to 1,854 year over year, driven by a 42.3% increase in the absorption rate, partially offset by a 21.6% decrease in average community count. Homebuilding gross margin increased 140 basis points to 22.2%, driven by lower sales incentives and pricing increases.
For full-year 2021, the company expects to see earnings per share above $3.00, primarily due to continued strength in new home demand and the enhanced visibility provided by a backlog. CEO Allan Merrill said, “Our balanced growth strategy and commitment to expanding our already robust ESG program, has positioned us to generate further improvements in profitability and returns for shareholders in the years ahead while creating durable and growing value for our customers, employees and partners as well.”
Covenant Logistics Group (CVLG) reported first-quarter 2021 adjusted earnings of $0.56 per share, compared to a net loss per share of $0.09 in the prior-year quarter. Adjusted earnings per share beat the I/B/E/S consensus estimate of $0.357 per share by 56.9%. The company’s quarterly revenue increased 4.8% year over year to $220.9 million.
“Going forward, our short-term focus will be to improve the profitability of our dedicated segment,” said CEO David Parker. “The freight environment and our new business pipeline are both currently robust, which we believe will support our commercial plan. Potential headwinds include inefficiencies from reengineering or replacing certain contracts, driver availability and cost, accident experience, the cost and volatility of claims, general inflation and supply and demand factors for our customers and our industry. At present, we expect to make steady, incremental progress on our dedicated segment’s margins over the remainder of 2021.”
CPI Aerostructures Inc. (CVU) reported net income of $0.11 per diluted share for the fourth quarter of 2020, compared to a net loss per diluted share of $0.12 in the prior-year quarter. Earnings for the quarter beat the I/B/E/S consensus estimate of $0.06 per share by 83.3%. Revenues declined 11.9% year over year to $25.4 million.
Gross profit increased 84% to $4.6 million year over year, compared to $2.5 million in the prior-year quarter. Gross profit margin expanded by 730 basis points to 18.2% for the quarter.
“During the back half of 2020, the seeds of our defense-oriented business development strategy began to bear fruit as a number of newer defense programs ramped up, driving revenue growth from defense contracts and margin gains,” said CEO Douglas McCrosson said. “With several of these programs moving into production in 2021, we expect to sustain momentum in the business. This momentum along with a funded backlog of $170 million boosts our confidence in our outlook for higher revenue, operating income and operating cash flow in 2021 compared to 2020.”
Delta Apparel Inc. (DLA) reported preliminary sales and operating results for the second quarter of 2021. The company expects net sales to increase year over year by about 12% to $108 million. The increase was a result of double-digit sales growth in both the Delta Group and Salt Life Group segments. Based on this sales growth—coupled with margin expansion and spending controls—operating income is expected to more than double year over year, with diluted earnings per share in the range of $0.58 to $0.60 compared to $0.19 per share in second-quarter 2020. Full results will be released in May.
Ennis Inc. (EBF) reported diluted earnings per share of $0.20 for the fourth quarter of 2020, which declined year over year by 40%. Diluted earnings missed the I/B/E/S consensus estimate of $0.27 per share by 26%. Total revenues of $89.9 million declined by 15.7% over the same period. Gross profit margin was 29.6%, compared to 28.1% for the same quarter last year.
“We continued to invest in our business, including our most recent acquisition of Infoseal at the end of 2020, a leader in the production of pressure seal documents,” said CEO Keith Walters. “This well-known brand brings added capabilities and expertise to our expanding product offering including our existing VersaSeal pressure seal product line. Infoseal products are sold through our traditional sales channel of independent distributors and this business continues our strategy to support our loyal distributors with an industry-leading product offering.”
Ennis also declared a quarterly dividend of $0.23 per share, up 11.1% from its previous declaration of $0.23 per share. The dividend is payable on August 9 to shareholders of record as of July 9. The stock will trade ex-dividend Thursday, July 8.
Kimball Electronics Inc. (KE) announced that its CFO, Michael K. Sergesketter, will be retiring on June 30, 2021, after 25 years with the company. He will be succeeded by the current vice president of finance, Jana Croom.
Mesa Air Group (MESA) reported a 15.9% drop in operating hours for March 2021 compared to March 2020, a result of reduced schedules during the coronavirus pandemic. Mesa Air said that operating hours for the second quarter, which ended March 31, were down significantly year over year and missed the company’s previous guidance. Lower-than-expected operating hours were a result of a mid-February significant winter storm and subsequent power outages in Texas. The company canceled almost 1,300 flights due to substantial disruptions for its major operations in Dallas and Houston.
Orion Group Holdings (ORN) reported first-quarter revenue of $153 million, down 8% year over year from $167 million. This decrease was primarily driven by the severe winter storm that affected the company’s Texas operations as well as the timing and mix of projects in the marine segment in the prior period.
Orion Group’s adjusted net income fell 48% to $1.2 million compared with $2.4 million in the first quarter of 2020. Earnings per share saw a 50% decrease from $0.08 per share in the prior-year period to $0.04 per share in the current period and beat the I/B/E/S consensus estimate by 50%. Backlog at the end of the first quarter was $365 million, which compares with backlog under contract of $592 million at the end of last year’s first quarter.
“In the first quarter, we generated solid free cash flow, which further enhanced our balance sheet, providing us with the flexibility to continue to execute on projects in backlog and pursue new awards, while at the same time enabling us to execute on our strategic plan, including positioning ourselves for potential accretive acquisition opportunities. We would expect our pending asset sales to contribute to additional improvement in our financial position in the coming quarters,” stated CEO Mark Stauffer. “Overall, with the project opportunities we see on the horizon, our continuously improving execution resulting from our ISG program and our strong financial position, we remain confident in our ability to achieve our goals for the current year and generate growth in profitability and shareholder value as we move toward a post-pandemic economy.”
Penn Virginia Corp. (PVAC) released a financial update as well as a revised 2021 outlook. The company sold 16,324 barrels of oil per day (BOPD) for the first quarter of 2021, exceeding the high end of the most recent guidance range. Estimated capital expenditures for this year’s first quarter were $54 million, which was below the low end of the most recent guidance range. The realized oil price for the quarter was $44.80 per barrel and the company generated free cash flow for the sixth consecutive quarter, which lowered long-term debt to $376 million and net debt to $364 million.
Penn Virginia upgraded its previous full-year 2021 oil sales volume from a range of 17,200 to 19,000 BOPD to a range of 18,300 to 20,100 BOPD. The company also changed its guidance for its lease operating expenses from a range of $4.75 to $5.05 per barrel of oil to a range of $4.70 to $5.00 per barrel of oil. The company’s outlook is based on maintaining a two-rig development program.
Strattec Security Corp. (STRT) reported third-quarter 2021 revenue of $122 million, up 4% from $117 million in the fiscal third quarter of 2020. Net sales for the quarter were impacted by supply chain shortages, which resulted in several of Strattec Security’s customers shutting down certain plants and/or production lines for extended periods of time. Net income grew 50% year over year from $3 million to $4.5 million ,while earnings per share increased 46% from $0.79 per share to $1.15 per share. Earnings beat the I/B/E/S consensus estimate by over 35%.
Sales to Fiat Chrysler Automobiles decreased in comparison to the prior-year quarter due to lower production volumes of the vehicles Strattec Security supplies, in particular related to Chrysler minivans. Sales to General Motors Co. and Ford Motor Co. increased compared to the prior-year quarter, primarily due to higher sales content on models for which Strattec Security supplies components. Sales to commercial and other original equipment manufacturer customers decreased in comparison to the prior-year quarter, mainly due to decreases in sales related to door handle products and power access products sold to Honda of America Manufacturing Inc. The increased sales to Hyundai/Kia were principally driven by higher levels of production on their newly launched Kia Sedona and Hyundai Starex minivans for which Strattec Security supplies primarily power sliding door components.
Ultralife Corp. (ULBI) reported first-quarter 2021 revenue of $26 million, up less than 1% from the first quarter of 2020. Revenue growth was primarily driven by a 19% year-over-year increase in core battery sales across different end markets but was mostly offset by lower oil and gas market and communications systems sales, which were down year over year by 30% and 24%, respectively.
Net income saw a 36% decline from $1.1 million in the prior-year quarter to $0.7 million in the current quarter. Earnings per share were down nearly 43% year over year from $0.07 per share to $0.04 per share. Adjusted earnings per share were $0.05, down 38% year over year from $0.08 per share and beat the I/B/E/S consensus estimate by nearly 17%. Adjusted earnings per share excludes the provision for deferred income taxes of $0.2 million, which primarily represents non-cash charges for U.S. taxes. Ultralife expects these taxes to be fully offset by net operating loss carryforwards and other tax credits for the foreseeable future. The net adverse impact of the coronavirus pandemic on adjusted earnings per share for the quarter was approximately $0.06 per share.
“Profitability for the quarter reflected our continuing start-up costs to transition several new products to high volume manufacturing and investments in engineering and sales resources for new product development and market launches to support organic growth initiatives,” said president and CEO Michael Popielec. “As we continue to work on completing new products and identify new targets in emerging markets, we are steadily expanding our long-term opportunities to scale the business and realize the operating leverage inherent in our profitable business model.”
VSE Corp. (VSEC) VSE Corp. reported first-quarter 2021 revenue of $165 million, down 7% year over year from $177 million. Fleet segment revenue increased 2.9% on a year-over-year basis, while federal and defense segment revenue was essentially flat on a year-over-year basis, as new contract wins offset the previously announced completion of a U.S. Department of Defense (DOD) program. Aviation segment revenue, excluding the previously divested Prime Turbines and CT Aerospace assets, declined 12.0% on a year-over-year basis, as lower airline revenue passenger miles resulted in reduced commercial maintenance, repair and operation (MRO) activity.
The company reported adjusted net income of $5.3 million, down 46% from $9.8 million in the first quarter of 2020. Earnings fell 51% year over year from $0.89 per share to $0.44 per share and beat the I/B/E/S consensus estimate by nearly 26%. VSE Corp. invested nearly $35 million in new inventory during first-quarter 2021 to support recent aviation program wins.
“VSE remains well-capitalized to support the ongoing growth of the business,” stated CFO Stephen Griffin. “While our recently announced business wins will require working capital investments in new inventory during 2021, we anticipate significant returns on these investments in 2022 and beyond. Disciplined balance sheet management remains a priority for us and we anticipate that we will end 2021 in a similar leverage position as compared to 2020. We are targeting a long-term net leverage ratio of 2.5x.”
VSE Corp. announced its entrance into a 15-year distribution agreement valued at approximately $1 billion over the life of the contract with a global aircraft engine manufacturer. Under the terms of the agreement, VSE Aviation will be the distributor for more than 6,000 flight-critical components used in more than 100 business and general aviation (B&GA) and regional aviation engine platforms. The agreement is expected to commence in second-quarter 2021. VSE Corp. currently expects program revenue from the agreement to be approximately $12 million in 2021 and $45 million in 2022. Once fully implemented, the program is anticipated to generate more than $60 million in annual revenue.
The company also announced approximately $37.5 million in combined new contract awards with the U.S. Air Force and a U.S. government foreign ally. Both contracts are expected to commence during the second quarter of 2021.
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