As might have been expected, AAII’s Model Shadow Stock Portfolio took a bit of a breather after gaining 19.1% in the June through August three-month period.

Figure 1. Model Shadow Stock Portfolio vs. Benchmarks (Through 11/30/05) CLICK ON IMAGE TO SEE FULL SIZE.

The three-month period thru November was about even (up 0.83%), but year-to-date through November the portfolio remains at an impressive 18.8%, compared to 4.8% for the Vanguard S&P 500 Index fund and 7.5% for the Vanguard Small Cap Index fund during the same period.

Figure 1 provides returns over various periods for the Model Shadow Stock Portfolio and comparison indexes.

Quarterly Changes

Table 1 highlights activity during the last three months and Table 2 shows the current holdings and their status in the Model Shadow Stock Portfolio.

The two takeovers that were pending, Metals USA (MUSA) and Haggar Corp. (HGGR), were finalized during November at the expected prices of $22 and $29, respectively. We held Metals USA until the end because of the high discount prior to completion and we did not have a need for more funds. Haggar was bought out during the decision period.

We sold Cavco Industries (CVCO) and Ladish Co. (LDSH) because they had gone above the value limit we set for continued holding. Finlay Enterprises (FNLY) was sold because of a loss that violated its earnings probation.

New stocks we purchased during November were Bonso Electronics (BNSO), D&E Communications (DECC), Dominion Homes (DHOM), and SigmaTron International (SGMA). We also added to our Rex Stores (RSC) holding because it currently qualifies and was a bit underweighted.

Delistings and Deregistrations

Two of our holdings, Willis Lease Finance (WLFCE) and Pomeroy IT Solutions (PMRYE), were put on notice that their financial reports are overdue and they can be de-listed—hence the addition of an E to their ticker symbols. This has happened several times before and usually has been resolved favorably. (And just as I wrote this, Willis Lease filed and was restored to ticker symbol WLFC.)

Pomeroy looks a little more complex. Our procedure in the case of a delisting is to continue to hold a position until it violates our rules or indicates it is going to violate our rules. We do get data on bulletin board and pink sheet stocks, so we are able to continue our evaluations. McRae Industries (MCR.A or MRINA pink sheets) is a different story. While we keep stocks that are delisted, we don’t hold stocks that deregister with the SEC.

Several companies have gone private or deregistered over the past several years to avoid the cost of complying with the tighter corporate accounting rules passed with the Sarbanes-Oxley Act, which can run $1 million for the first year. These have been good companies, but when we cannot get performance data and there is no oversight, we can’t keep them. [For more on deregistrations, see the article “Going Dark: The Harsh Reality of Voluntary Deregistration,” by John Deysher, starting on page 12.]

The problem is that McRae has not made a final decision. If the deregistration goes through, and it now looks like it will, those with less than 200 shares will get $14.25 a share. If you have over 200 shares or more, I would not be too anxious to sell. Since the decision will not be made in time for us to act this quarter, we will hold until February and see what happens. However, the company must make a decision by December 31, 2005. The American Stock Exchange has now delisted them, so if they decide not to deregister they will be in the pink sheets for awhile. We will provide any update on AAII.com in the Shadow Stock Portfolio area.

The Outlook

We are including a complete set of rules for the portfolio as we do every six months (Table 3).

By the time you read this, we will be in the January time that is usually good for small-cap stocks, but seasonality has been changing a bit lately. More analysts are saying it is time for large growth stocks to catch up at the expense of small value. However, I believe the micro-cap value stocks will continue to do well.