Table 1. The Model Shadow Stock Portfolio

	Current Price ($)	52-Week		Market Cap ($ Mil)	P/E Ratio (X)	P/B Ratio (X)	Div Yield (%)	Notes
		High ($)	Low ($)
Company (Ticker)
Alamo Group, Inc. (ALG)	57.18	64.45	43.98	653.2	15.2	1.84	0.6
CDI Corp. (CDI)	6.84	19.24	6.50	134.8	nmf**	0.56	7.6
CSS Industries Inc. (CSS)	29.01	33.00	24.11	262.0	16.3	1.00	2.5	qualified as of 11/30/2015
Ducommun Inc. (DCO)	16.74	33.45	15.40	185.5	nmf	0.74	0.0	earnings probation (2015q3)
Ennis, Inc. (EBF)	19.99	20.74	12.51	516.0	nmf**	1.75	3.5
Flexsteel Industries (FLXS)	47.98	48.59	27.25	362.6	16.0	1.88	1.5
Global Power Equip (GLPW)†	4.62	14.15	3.49	79.3	nmf	nmf	nmf
Hardinge Inc. (HDNG)	9.73	13.09	7.97	124.9	28.6	0.74	0.8
Hooker Furniture Corp. (HOFT)	27.40	28.20	15.18	296.2	19.9	1.99	1.5
Key Tronic Corp. (KTCC)	7.86	12.49	7.66	84.2	13.3	0.85	0.0	qualified as of 11/30/2015
Kimball Electronics (KE)	11.46	17.01	9.26	336.4	13.3	1.06	0.0
L S Starrett Co. (SCX)	11.06	21.95	10.06	78.5	18.7	0.75	3.6
LMI Aerospace, Inc. (LMIA)	10.18	14.79	9.20	135.0	nmf**	1.11	0.0
Marlin Business Services (MRLN)	17.48	19.29	11.17	217.5	12.6	1.43	3.2
PC Connection, Inc. (PCCC)	22.32	29.50	19.20	590.2	13.1	1.52	0.0
PCM Inc. (PCMI)	9.20	10.70	8.50	109.4	nmf**	0.89	0.0
RCM Technologies, Inc. (RCMT)	5.06	7.33	4.16	62.1	13.7	1.46	0.0
Renewable Energy Group (REGI)	9.01	12.80	7.06	395.0	25.7	0.56	0.0
REX American Resources (REX)	62.85	70.94	43.50	434.0	7.7	1.47	0.0
Rocky Brands Inc. (RCKY)	11.36	23.11	10.65	86.0	8.9	0.61	3.9	qualified as of 11/30/2015
Salem Media Group Inc. (SALM)	5.66	8.00	4.38	144.1	24.6	0.70	4.6	qualified as of 11/30/2015
Seneca Foods Corp. (SENEA)*	27.54	31.63	25.06	281.2	14.3	0.76	0.0	qualified as of 11/30/2015
Shoe Carnival, Inc. (SCVL)	19.48	30.00	17.36	398.9	13.4	1.10	1.3
SigmaTron International (SGMA)	6.33	9.12	5.02	26.4	17.1	0.45	0.0
Townsquare Media Inc. (TSQ)*	11.43	14.35	8.60	204.1	31.8	0.56	0.0	qualified as of 11/30/2015
TravelCenters of America LLC (TA)	9.94	18.10	9.15	381.7	6.1	0.66	0.0
Ultra Clean Holdings (UCTT)	5.07	10.29	4.60	163.5	18.1	0.76	0.0
Universal Stainless & Alloy (USAP)	10.80	28.41	8.60	76.7	nmf	0.41	0.0	earnings probation (2015q3)
Vishay Precision Group (VPG)	12.03	17.95	10.25	158.4	nmf**	0.86	0.0
VOXX International (VOXX)	5.74	9.85	4.79	138.9	nmf**	0.36	0.0
Willis Lease Finance (WLFC)	17.49	22.10	15.11	144.0	34.3	0.62	0.0	qualified as of 11/30/2015
nmf = no meaningful figure *Added to portfolio 12/1/2015. **Trailing four-quarter GAAP earnings negative, but adjusted earnings positive. †Global Power is in the process of an ongoing review of its historical financial information and will be restating its 2013 and 2014 financial statements. Source: AAII’s Stock Investor Pro/Thomson Reuters. Data as of 11/30/2015.

Explanation of Notes

Approaching Size Limit: Stocks are sold if their market capitalization goes above three times the initial maximum criterion and there is a stock to replace it. The current market capitalization maximum for initial screening is $300 million. Stocks are marked “approaching size limit” if their current market cap exceeds 2½ times the initial criterion, or $750 million.

Approaching Value Limit: Stocks are sold once their price-to-book-value ratio goes above three times the initial criterion and there is a stock to replace it. The current initial price-to-book ceiling is 1.00. Stocks are marked “approaching value limit” if their current price-to-book-value ratio exceeds 2½ times the initial criterion, or 2.50.

Earnings Probation: If the last 12 months’ earnings from continuing operations are negative, the stock is put on probation; if a subsequent quarter has negative earnings prior to 12-month earnings becoming positive, the stock is sold. The date in parentheses is the fiscal quarter during which the company first reported negative trailing 12-month earnings.

Qualified as of: Stock still qualified as a buy when the screen was run with current data. Stocks that don’t currently qualify as a buy are held until they meet one of the sell rules.

See the Model Shadow Stock Portfolio area of AAII.com for more information.

Purchase and Sales Rules

Stock purchases must meet these criteria:

• No bulletin board or pink sheet stocks will be purchased.
• Price-to-book-value ratio must be less than or equal to 1.00. (Figure will change gradually with changes in overall market values.)
• Market capitalization must be between $30 million and $300 million. (Figure will change gradually with changes in overall market values.)
• The firm’s last quarter and last 12 months’ earnings from continuing operations must be positive and, if there are earnings estimates, the estimates must be positive for the current quarter and year.
• No financial stocks or limited partnerships will be purchased.
• No stocks on foreign exchanges or ADRs will be purchased because of different accounting and/or withholding tax on dividends. Foreign stocks traded primarily on U.S. exchanges are OK with one exception: The stock of any company whose primary business is in China will not be purchased.
• The share price must be greater than $4.
• In order to reduce trading by avoiding stocks that are forever marginal, any stock that was sold within two years will not be rebought.
• Note second item under Stock Order Guidance concerning spreads when buying shares.
• Price-to-sales ratio must be less than 1.2. (Figure may change gradually with changes in overall market values.)
• Eliminate any company that failed to file a 10-Q (quarterly) report in the last six months.

Stocks are sold if any of the following occur:

• If last 12 months’ earnings from continuing operations are negative, the stock is put on probation; if a subsequent quarter has negative earnings prior to 12-month earnings from continuing operations becoming positive, the stock is sold.
• The stock’s price-to-book-value ratio goes above three times the initial criterion and there is a stock to replace it.
• Market capitalization goes above three times the initial maximum criterion and there is a stock to replace it.

Stock Order Guidance

• These rules are for general guidance. Your own experience, market conditions and the size of the position will impact your own decisions. The results in the model portfolio were obtained while sometimes paying more.
• Market orders are not used. Instead, if the quoted bid-ask spread is less than 2% (ask price minus bid price, divided by ask price), place a limit order at the ask price for a buy and at the bid price for a sell. If the bid-ask spread is more than 2%, try to place a limit order between the bid and ask prices to keep transaction costs low. If necessary, build a position gradually. With low commissions, it is often better to place partial orders than to try to establish a large position all at once. Be patient.
• The average daily dollar volume should be at least 10 times the amount needed for your position. This will ensure liquidity to get in and out of the position, even if you need to grow the position gradually and sell gradually. This will result in a varying number of qualifying stocks for each investor.
• If price changes cause a stock to become ineligible (due to changes in price-to-book-value ratio or market capitalization) when only part of the order has been filled, stocks already purchased are kept but the balance of the order is canceled.

Management Rules

• Equal dollar amounts are invested in each stock initially.
• Decisions are made only at the end of each quarter. In order to react to the majority of earnings reports as soon as possible, quarterly reviews are made in February, May, August, and November.
• Best judgment is used for tenders or mergers, but all criteria must be obeyed.
• At the end of a quarter, if receipts from stocks sold exceed requirements for new purchases, the excess receipts—up to 5% of the portfolio’s value—are kept in cash until the next quarter. If the excess receipts are greater than 5% of the total portfolio value, the amount above 5% is distributed to smaller holdings that still qualify as buys. Efficient quantities are purchased: If over 10% of the portfolio is in cash, the price-to-book-value ratio can be moved up, but never over 1.00.
• At the end of a quarter, if receipts from stock sales are insufficient to buy all newly qualifying stocks, purchases are made based on the width of the bid-ask spread and the number of shares at bid or ask price.
• Note that if you are managing your own portfolio, it should consist of at least 10 stocks. If you are developing the portfolio gradually, you can do it stock by stock, but don’t put more than 10% of your funds in each additional stock. More than 20 stocks is not needed until the portfolio exceeds $1 million.