John Bajkowski
is the president of AAII.
The Model Shadow Stock Portfolio declined 2.2% in September, as rising interest rates and broad weakness among smaller companies weighed on stock prices. Despite the decline, the portfolio outperformed its small- and micro-cap benchmarks, maintaining its 2026 performance advantage.
The portfolio’s year-to-date return stands at 37.2%, compared to gains of 12.6% for Vanguard 500 Index fund (VFINX), 11.3% for Vanguard Small Cap Index fund (NAESX) and 17.5% for DFA U.S. Micro Cap fund (DFSCX). Over the trailing 12 months, the model portfolio has gained 43.0%, compared to returns ranging from 13.3% to 20.3% for the three benchmarks.
September’s results reflect a combination of broad market pressures and company-specific developments. Kimball Electronics Inc. 
(KE) led the portfolio with a 15.7% gain, while Mistras Group Inc. (MG) advanced following the announcement that it agreed to be acquired. At the other end of the performance spectrum, all five of the worst-performing holdings recorded double-digit declines.
September was a difficult month for U.S. equities, particularly among smaller companies. The S&P 500 index declined 0.3%, while the S&P MidCap 400 index fell 4.2% and the S&P SmallCap 600 index lost 5.6%. The large-cap index’s relatively modest decline masked much broader weakness across the market.
Market breadth was decidedly negative. Among S&P 500 companies, 112 stocks advanced and 391 declined. Only 78 S&P MidCap 400 stocks advanced, compared to 322 decliners. In the S&P SmallCap 600, 135 stocks rose while 466 fell. The Advance/Decline (A/D) ratios were 0.24 for mid-caps and 0.29 for both large caps and small caps, indicating that declining stocks substantially outnumbered advancing stocks across all three capitalization ranges.
The divergence between large- and small-cap performance reflected an increasingly narrow market. Large-cap information technology and communication services stocks provided much of the support for the S&P 500, while most other sectors experienced significant declines.
Importantly, Treasury yields sharply increased during September. The 10-year Treasury yield ended the month near 5.3%, reflecting concerns about persistent inflation, monetary policy and government borrowing requirements. Higher yields increase borrowing costs and can place additional pressure on smaller companies, particularly those dependent on external financing or operating in interest-rate-sensitive industries.
Geopolitical tensions and elevated energy prices added to market uncertainty. Although higher oil prices can benefit energy producers, they can also contribute to inflation pressures and higher operating costs across the economy. These competing influences complicated the outlook for economically sensitive companies.
The weakness was also apparent across investment styles. Large-cap growth stocks gained 2.0% in September, while large-cap value stocks declined 3.1%. Mid-cap growth fell 2.9%, compared to a 5.6% decline for mid-cap value. Small-cap growth lost 5.2%, while small-cap value declined 5.9%.
The stronger relative performance of growth stocks was particularly evident among large-cap companies, where technology-related gains offset weakness elsewhere. Among smaller companies, both growth and value stocks experienced substantial declines.
Sector performance highlighted the concentration of market leadership. Information technology was the only sector to advance during September across all three capitalization ranges, gaining 4.5% among large caps, 6.4% among mid-caps and 4.8% among small caps. The communication services sector also gained among large caps, up 4.3%, but declined 6.3% among mid-caps and 5.3% among small caps.
Financials was among the weakest sectors, declining between 7.2% and 7.9% across the three capitalization ranges. The consumer discretionary sector also struggled, falling 5.8% among large caps, 6.7% among mid-caps and 7.9% among small caps. The consumer staples sector declined 10.2% among small-cap companies, while the industrials sector fell 7.0% in the same capitalization range.
Energy stocks experienced a reversal of some of their earlier gains, declining 2.7% among large caps, 9.0% among mid-caps and 7.4% among small caps. Materials stocks were also weak, falling between 5.9% and 9.9% across the three capitalization ranges.
Despite September’s losses, small-cap stocks retained their year-to-date performance lead. The S&P SmallCap 600 gained 14.1% through September, compared to increases of 12.7% for the S&P 500 and 9.9% for the S&P MidCap 400. Over the trailing 12 months, the S&P SmallCap 600 gained 16.0%, slightly ahead of the S&P 500’s 15.7% return.
The Model Shadow Stock Portfolio’s relatively modest September decline was notable given the weakness across smaller companies and value-oriented stocks. However, the broad market sell-off also demonstrates that smaller companies remain sensitive to changing interest rates, economic expectations and investor risk appetite.
The portfolio’s strongest performer for the month was Kimball Electronics, which gained 15.7%. The electronic manufacturing services company reported improving operating results in August, including sequential sales growth of 5% for its fiscal fourth-quarter 2026 ended June 30. The company provided fiscal-year 2027 guidance that incorporated expectations for organic sales growth and benefits from its acquisition of Helvoet Polymer Technologies B.V.
Mistras Group gained 12.3% after its September 18 announcement that it had entered into a definitive agreement to be acquired by affiliates of H.I.G. Capital for $20.35 per share in cash. The proposed transaction represents an enterprise value of approximately $866 million, including outstanding debt. The acquisition is expected to close in late 2026 or early 2027, subject to shareholder and regulatory approvals. As is the Model Shadow Stock Portfolio’s policy, the stock will be removed at the time of the next quarterly review.
Kolibri Global Energy Inc. (KGEI) gained 2.5%, supported by continued progress in its oil development program. On September 21, the company announced that it had completed fracture stimulation on three Clifton Mack wells and expected to begin reporting initial production results in the following weeks. Kolibri Global also reported progress on its first test of the False Caney formation and renewed its share repurchase program. These developments provided potential production catalysts even as the broader energy sector declined.
Among the weakest performers, Smith Douglas Homes Corp. (SDHC) fell 15.9%. The homebuilder faced a difficult environment as higher interest rates and affordability pressures weighed on housing-related stocks. In August, it reported second-quarter 2026 home closings up 25% year over year and home closing revenue up 22% year over year. However, home closing gross margin contracted from 23.2% to 17.6%, while diluted earnings declined from $0.26 to $0.03 per share. The combination of rising sales volumes and declining profitability illustrates the challenges homebuilders face in balancing demand, pricing and construction costs.
NACCO Industries Inc. (NC) declined 14.6%. The company reported improved second-quarter 2026 gross profit and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), but it also recorded a net loss of $1.0 million, or $0.13 per share, including impairment charges associated with solar projects. Management indicated that operating performance could moderate during the second half of 2026. The September decline occurred alongside broad weakness in energy-related stocks.
Amplify Energy Corp. (AMPY) fell 14.4%, as energy stocks experienced widespread selling pressure. The company’s performance reflected the volatility associated with smaller oil and natural gas producers, whose valuations are influenced by commodity prices, production expectations and operating costs. Although elevated oil prices can support revenue and cash flow, higher financing costs and uncertainty surrounding future energy demand can also affect investor sentiment.
Eastern Co. (EML) declined 12.4%. In August, the industrial manufacturer reported that its second-quarter 2026 backlog had increased 45% year over year to $126.2 million, helped by its expansion into aerospace and defense manufacturing. However, its core businesses continued to face uneven demand, and the shares declined during a month when small-cap industrial stocks were broadly weak.
Friedman Industries Inc. (FRD) fell 11.7%, following substantial gains earlier in the year. In August, the steel processing and distribution company reported strong results for its fiscal first-quarter 2027 ended June 30, 2026, including sales growth of 78% and record quarterly sales volume. Despite September’s decline, Friedman Industries remained one of the portfolio’s strongest performers for 2026, with a year-to-date gain of 86.4%.
September’s performance illustrates the different forces influencing smaller companies. Company-specific developments—including the proposed Mistras Group acquisition and operational progress at both Kimball Electronics and Kolibri Global—provided support for selected holdings. However, rising interest rates and weakness across housing, energy and industrial stocks weighed on other positions.
The portfolio’s diversification across industries helped limit the overall decline relative to its small- and micro-cap benchmarks, although individual holdings continued to experience substantial price fluctuations.
As of October 9, 27 stocks met the initial selection criteria for the Model Shadow Stock Portfolio, unchanged from the September quarterly review but up from 20 stocks in August and 19 in July. The number of qualifying companies has increased in recent months, although it remains below the 38 stocks that passed the screen in April 2025.
The Model Shadow Stock Portfolio’s size and value requirements are designed to identify companies among the smallest and least expensive stocks in the market. The selection thresholds are reviewed periodically using the lowest deciles of stocks listed on the New York Stock Exchange (NYSE) for market capitalization and the price-to-book-value (P/B) ratio.
Of the 27 stocks qualifying as of October 9, five are currently held in the Model Shadow Stock Portfolio: Alpha Pro Tech Ltd. (APT), Hudson Technologies Inc. (HDSN), Regis Corp. (RGS), Smart Sand Inc. (SND) and StealthGas Inc. (GASS).
AAII members can see and research companies currently passing the initial selection criteria in the Shadow Stock Ideas table on AAII.com. The list is updated daily, Tuesday through Saturday. Companies already held in the portfolio that continue to meet the initial criteria are identified on the Ideas list and in the Notes column of the Shadow Stock Portfolio table.
Jerash Holdings (US) Inc. (JRSH), which was added during the September quarterly review, no longer meets the initial selection criteria due to an increase in its price-to-book ratio above 1.00. However, holdings are not automatically removed from the portfolio when they cease to meet the initial addition requirements.
The Model Shadow Stock Portfolio applies separate deletion thresholds intended to avoid excessive portfolio turnover. Stocks are generally considered for removal during quarterly reviews if their price-to-book ratio rises above three times the initial maximum or their market cap exceeds three times the initial size limit, assuming a suitable replacement is available. Under the current rules, those thresholds are a price-to-book ratio above 3.00 or a market cap above $1.2 billion. The portfolio also monitors earnings performance and other developments that may warrant removal.
Shortly after the quarterly review, Mistras Group announced its agreement to be acquired by H.I.G. Capital. With its share price now largely reflecting the proposed cash acquisition price of $20.35 per share, the stock’s potential for additional appreciation is limited unless a higher offer emerges.
The agreement includes a 40-day go-shop period through October 27, during which Mistras Group may solicit and consider alternative acquisition proposals. The proposed transaction remains subject to customary closing conditions, including shareholder and regulatory approvals.
A replacement stock will be identified during the next quarterly review, which will take place around the beginning of December, after most portfolio holdings have reported their third-quarter 2026 results. This replacement, as well as any other changes to the model portfolio, will be announced in the Model Shadow Stock Portfolio Update email. Sign up for this email so you don’t miss it.
September’s results underscore the importance of maintaining a disciplined approach to investing in smaller companies. Although broad market weakness weighed on returns, the Model Shadow Stock Portfolio outperformed its small- and micro-cap benchmarks and retained a substantial year-to-date performance advantage. The Shadow Stocks strategy will continue to evaluate the portfolio’s holdings against its established valuation, size and earnings requirements while monitoring company-specific developments and opportunities among qualifying stocks.
Core Molding Technologies, Inc. (CMT)
(09/28/2026)
Core Molding Technologies promoted Michael J. Gayford to the role of chief operating officer (COO), effective immediately. Gayford joined the company in 2023 as vice president of operations and became executive vice president of operations in 2025. He brings over 25 years of manufacturing and engineering experience.
(09/21/2026)
Ennis reported diluted earnings of $0.37 per share for its fiscal second quarter ended August 31, 2026, down 27.5% from $0.51 per share in the prior-year quarter. Adjusted earnings of $0.38 per share were 2.6% below the S&P Global consensus estimate of $0.39 per share. Revenues were $102.0 million, up 3.3% year over year from $98.7 million. Net earnings were $9.4 million, down 28.8% year over year from $13.2 million.
(09/18/2026)
Mistras Group agreed to be acquired by affiliates of H.I.G. Capital in an all-cash deal valued at approximately $866 million, including debt, with shareholders receiving $20.35 per share. The deal has been unanimously approved by Mistras Group’s board of directors and is expected to close in late 2026 or early 2027, subject to shareholder and regulatory approval. H.I.G. Capital already has support agreements covering about 31% of Mistras Group shares, while a 40-day “go-shop” period through October 27 allows the company to seek competing offers. If the acquisition is completed, Mistras Group would become privately held and its New York Stock Exchange (NYSE) listing would end.
USANA Health Sciences, Inc. (USNA)
(10/07/2026)
USANA Health Sciences announced a new partnership with University of Utah Athletics to support more than 500 student-athletes across 19 sports. Through the agreement, USANA Health Sciences will provide access to nutritional supplements, offer name, image and likeness (NIL) opportunities, and participate in community initiatives designed to promote athletes’ health, performance and personal development. The partnership will also involve the USANA Foundation, creating opportunities for student-athletes to support local communities and help address nutritional needs. For USANA Health Sciences, the agreement expands its portfolio of sponsored athletes while strengthening its ties to the Utah community, where the company was founded in 1992 by University of Utah alumnus Dr. Myron Wentz.
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