September 2018 Model Shadow Stock Portfolio Update

The September 2018 AAII Model Portfolios Update is now available online.

Quarterly Portfolio Review & Changes

After conducting the quarterly review of the Model Shadow Stock Portfolio, one stock was sold from the model portfolio: Roadrunner Transportation Systems Inc. (RRTS).

As we have noted previously, shortly after Roadrunner Transportation was added to the Model Shadow Stock Portfolio back in late 2016, the company alerted the public that it was made aware of “various potential accounting discrepancies” at multiple operating subsidiaries. As a result, the company announced that it would restate its financial statements for the annual periods ending December 31, 2014, and December 31, 2015, as well as for multiple quarterly periods. Also, this restatement delayed the release of 10-K reports for the periods ended December 31, 2016, and December 31, 2017. Roadrunner recently filed its 10-K for the period ended December 31, 2017. This, along with its 2016 10-K report, shows that the company generated annual losses from continuing operations of $9.40 and $2.57 per share for 2016 and 2017, respectively. As a result, the company triggered the portfolio’s earnings sell rule and was removed from the Model Shadow Stock Portfolio.

The proceeds of the Roadrunner sale were not significant enough to warrant a new addition to the portfolio, so a new stock will not be added to the Model Shadow Stock Portfolio at this time.

The portfolio management rules of the Model Shadow Stock Portfolio encourage investing in positions roughly equal to the average position size of the portfolio. This avoids investing in overweighted or underweighted positions, thereby diminishing the diversification impact of a given stock. Roadrunner dropped so far in price that the proceeds from the sale plus the portfolio’s existing cash balance did not provide enough cash to buy a new position. Cash is less than 1% of the actual portfolio, so no stocks were added this quarter.

As noted by James Cloonan at the time of the initial Roadrunner disclosure, the Model Shadow Stock Portfolio has only had a handful of situations with financial statements where major revisions were necessary over the portfolio’s long history of operation. The strategy has been to wait for revised financials and not sell on price action alone. We will continue to review this strategy and study to see if it makes investment sense to act on the initial announcement in the future.

Model Shadow Stock Portfolio holding Amira Nature Foods Ltd. (ANFI) just announced that it will be late in providing its audited financial statements and is in violation of NYSE listing requirements. Amira is a foreign company founded in 1915 with its headquarters in Dubai, United Arab Emirates. The company is a global manufacturer, marketer and distributor of branded packaged specialty rice and other related food products, with sales across five continents around the world. Notably, Amira generates the majority of its revenue through the sale of basmati rice.

When screening for new companies for the Model Shadow Stock Portfolio, any company is eliminated that has that has failed to file a 10-Q (quarterly) report in the last six months. As a foreign company listed on the NYSE, Amira files annual 20-F reports, while interim reports are filed through 6-K disclosures. Interim reports for Amira range from quarterly to semiannually. Some foreign companies report on a semiannual basis, although Amira has mix of six-month and three-month interim reporting periods. Amira last filed an interim report this past January.

On August 16, 2018, Amira noted that it will not be in compliance with the continued listing requirements of the NYSE because its report on Form 20-F for the year ended March 31, 2018, will not be filed in a timely manner.

The company notes that the delay is the result of its independent auditors, ASA & Associates LLP (ASA) requiring additional time to complete the audit of the company’s financial statements for the period due to delays in receiving confirmations and documents from third parties. Amira notes that it is confident in the veracity of its fully audited historical results that it intends to file its Form 20-F as soon as practicable after ASA completes its review. Under NYSE rules, Amira has six months to comply with the listing standard. In the interim, the company’s shares will continue to be listed on the NYSE, subject to compliance with other continued listing requirements.

Model Shadow Stock Portfolio Performance & News

The AAII Model Shadow Stock Portfolio posted a strong gain in August, up 7.8% for the month and is now up 5.7% year to date. The S&P 500 index as measured through the Vanguard S&P 500 Index fund (VFINX) gained 3.3% during August. The Vanguard Small Cap Index fund (NAESX) also added 3.3% on a total-return basis while the DFA U.S. Micro Cap fund (DFSCX) gained 3.8%.

The Model Shadow Stock Portfolio benefited from double-digit gains from several stocks.

The breadth of the portfolio, which measures the general direction of the underlying stocks in the actual Model Shadow Stock tracking portfolio, turned positive in August. Of the 31 stocks that were in the portfolio at the end of July, 18 posted gains in August compared to 11 stocks with losses; two stocks ended the month unchanged. The strongest stock in the Model Shadow Stock Portfolio in August was Container Store Group Inc. (TCS) which gained 70.4% during month, overcoming its 21.2% decline during the month of July. Roadrunner Transportation was the weakest holding in the Model Shadow Stock Portfolio with its 40.6% loss.

Since its inception in 1993, the AAII Model Shadow Stock Portfolio has a compound annual average return of 15.7% versus the Vanguard 500 Index fund’s (VFINX) gain of 9.7% per year on average. Over the same period, the Vanguard Small Cap Index fund (NAESX) posted an average annual gain of 10.5%.

As of the end of August, 17 stocks met the initial selection criteria for the Model Shadow Stock Portfolio, up from 13 at the end of July. Of these, five are currently held in the Model Shadow Stock tracking portfolio (up from four the month before): CPI Aerostructures Inc. (CVU), Delta Apparel Inc. (DLA), New Home Company Inc. (NWHM), Olympic Steel Inc. (ZEUS) and Strattec Security Corp. (STRT). Companies held in the Model Shadow Stock Portfolio that currently meet the initial purchase rules are designated as “currently qualifies” in the notes column of the Model Shadow Stock Portfolio table on AAII.com; however, the notes will not match the list here since the webpage is constantly updated.

As of the end of August, RCM Technologies Inc. (RCMT) and Vishay Precision Group Inc. (VPG) were approaching the price-to-book-value limit of 3.0, with price-to-book-value ratios of 2.53 and 2.83, respectively. Shadow Stocks with a price-to-book-value ratio above 3.0 at the time of a quarterly review are sold from the model portfolio, assuming there is a suitable replacement.

Currently, PC Connection Inc. (CNXN) is approaching the market-cap cutoff of $1.2 billion (three times the initial limit for consideration of $400 million) with a market cap of $1.040 billion at the end of the month.

The next quarterly review of the AAII Model Shadow Stock Portfolio will take place at the end of November. Any changes to the portfolio will be announced at the time they are made in a special Model Portfolios Update email (sign up at www.aaii.com/email), as well as highlighted in the mid-December AAII Model Portfolios Update email and the Model Portfolios column in the January 2019 issue of the AAII Journal.

Click here to see the current purchase and sell rules for the portfolio. The size and value rules are subject to revision depending on prevailing market conditions.

Here are some news highlights from August for the current holdings in the AAII Model Shadow Stock Portfolio:

• Amira Nature Foods Ltd. (ANFI) announced that with the delayed filing of its Form 20-F to the U.S. Securities and Exchange Commission (SEC), the company is no longer in compliance with the New York Stock Exchange’s (NYSE) listing requirement for timely filings. For foreign private issuers with listed equity shares on U.S. exchanges, the 20-F is equivalent of the Form 10-K required of domestic companies, standardizing reporting requirements so investors can more readily compare foreign and domestic companies.
  
  Amira has six months to comply with the NYSE listing standards and can regain compliance any time within the six-month period. In the interim, Amira’s shares will continue to be listed on the NYSE, but the company may face suspension or delisting after the first six-month period has elapsed. Amira is required by the NYSE to issue a press release when failing to comply with listing requirements. The NYSE notification has no impact on the company’s business operations.

• AutoWeb Inc. (AUTO) reported financial results for the second quarter of 2018. Total revenues in the second quarter of 2018 were $29.3 million, down 15% compared to $34.6 million in the same period one year ago. Advertising click revenues were $5.8 million, down 11% compared to $6.5 million in the year-ago quarter. Net loss in the second quarter of 2018 was $5.2 million, or $0.41 per share, compared to net income of $0.3 million, or $0.02 per share, in the year-ago quarter. Adjusted loss was $2.8 million, or $0.22 per share, compared to adjusted income of $2.5 million, or $0.19 per share, in the second quarter of 2017. The I/B/E/S consensus estimate for earnings per share was $0.00.

• CPI Aerostructures Inc. (CVU) reported financial results for the second quarter of 2018. Revenue was up 22% year over year from $16.7 million to $20.3 million. Net income was $1.3 million, or $0.14 per diluted share, compared to $0.8 million, $0.09 per diluted share, up 63% and 56%, respectively. Diluted earnings per share beat the I/B/E/S consensus estimate of $0.123 by 13.8%.
  
  Looking forward, CPI Aerostructures provided guidance that excludes the acquisition of Welding Metallurgy Inc, which was expected to close in the second quarter of 2018 but is now in litigation before the Supreme Court of New York. Revenue is expected in the range of $82 million to $85 million, pretax income is expected in the range of $8.0 million to $8.2 million, with an effective tax rate in the range of 19% to 21%.
  
  Separately, CPI Aerostructures announced that Raytheon Company (RTN) has awarded the company a contract of $12.5 million through 2019 for the engineering and manufacturing development phase of the Next Generation Jammer Mid-Band project, which ultimately stems from a U.S. Navy-Raytheon contract.

• CSS Industries Inc. (CSS) reported financial results for the first quarter of fiscal 2019. Net sales of $64.1 million increased 33% from $48.3 million in the prior fiscal-year quarter. Net loss was $18.5 million in the quarter compared to $7.1 million in the prior-year quarter. Adjusted net loss was $11.9 million compared to $4.8 million in the prior-year quarter. The diluted net loss per share was $2.03 compared to $0.78 per share in the prior-year quarter, and the adjusted diluted net loss per share was $1.31 compared to $0.53 per share in the prior-year quarter. CSS Industries missed the I/B/E/S consensus estimated loss of $0.63 per share by over 100%.
  
  CSS Industries reaffirmed its guidance for net sales for fiscal 2019 and revised its net loss guidance for fiscal 2019. The company expects to generate net sales of $398 million to $412 million for the fiscal year, year-over-year growth of 10% to 14%. Net loss is expected to be in the range of $5 million to $7.5 million compared to a net loss of $36.5 million in fiscal 2018.
• Delta Apparel Inc. (DLA) announced financial results for the third quarter of 2018. Net sales for the third quarter were $112 million, up 8% from $104 million in the prior-year third quarter. Net income for the quarter was $4.6 million, a year-over-year increase of 2% from $4.5 million. Earnings increased 9% to $0.62 per diluted share from $0.57 per diluted share in the prior-year period. Delta Apparel beat the I/B/E/S consensus earnings per share estimate of $0.59 by 5.1%. Looking forward, CEO and chairman Robert Humphreys said, “we believe we are positioned for a strong finish to fiscal-year 2018 and good momentum going into the new fiscal year.”

• Ducommun Inc. (DCO) reported financial results for the second quarter of 2018. Revenue for the second quarter of 2018 was $154.8 million compared to $140.9 million for the second quarter of 2017, an increase of 9.9%. Net income for the second quarter of 2018 was $1.6 million, or $0.14 per diluted share, compared to $3.8 million, or $0.33 per diluted share, for the second quarter of 2017. The year-over-year decrease was due to $5.4 million of restructuring charges recorded in the quarter. Ducommun missed the I/B/E/S consensus earnings per share estimate of $0.163, a miss of 14.1%.
  
  Looking forward, CEO Stephen Oswald said, “Our company-wide restructuring program is on track to reduce total plant footprint roughly 16% this year and result in estimated savings of $14 million annually. At the same time, Ducommun’s robust backlog illustrates increasing demand for our narrowbody platforms and certain defense programs, supporting our growth momentum and positive view going forward.”
  
  Separately, Ducommun announced a $200 million contract to produce nacelle components for a leading engine original equipment manufacturer to support a high rate single-aisle commercial aircraft. The contract runs through 2029, and Ducommun will complete the composite product design and process development in 2018–2019, expecting to begin full production in 2020.

• Flexsteel Industries Inc. (FLXS) reported financial results for the fourth quarter of fiscal 2018. Net sales were $113.1 million, down 3.7% to prior-year-quarter net sales of $117.4 million and inclusive of a $4.4 million year-to-date adjustment recorded in the fourth quarter. Residential revenue, 85% of the quarter’s reported revenue, was down 3.5%. Net income for the quarter was $2.2 million, or $0.28 per diluted share, down 64% and 63%, respectively, from net income in the same period one year ago of $6 million, or $0.76 per share.
  
  Flexsteel Industries expects sales growth of mid-single digits in the first fiscal quarter of 2019, with continued inflationary pressure on raw materials and moderating labor cost increases. Additionally, the company is acutely aware of the impending tariff affecting all imported furniture and certain furniture components from China into the U.S., which represents a significant risk to earnings. Should these tariffs go into effect, the company plans to pass through any incremental costs to customers during the time these tariffs are enforced. During fiscal-year 2019, Flexsteel Industries anticipates spending $9 million for capital expenditures and incurring $3 million of selling, general & administrative (SG&A) expenses related to the business information system project.
• Hallador Energy Co. (HNRG) reported financial results for the second quarter of 2018. Total revenue was $57 million, down 11% from revenue of $64 million in the same quarter one year ago. Tonnage sold for the quarter was down 5% year over year from 1.548 million tons to 1.477 million tons. The average price per ton was also down 5% for the quarter: from $40.59 to $38.54. Net loss for the quarter was $23,000, or $0.00 per share, down compared to net income of $389,000, or $0.01 per share, in the same period one year ago. Hallador Energy missed the I/B/E/S consensus estimate for earnings per share of $0.09.
  
  Looking forward, the 2018 annualized sales forecast increased from 6.8 million metric tons (MM) to 7.0MM from December 31, 2017, guidance. The Carlisle Mine was reopened July 9 to assist with sales in the second half of the year, and the new Princeton Rail Loop became fully operational during the quarter and is expected to ship 625,000 tons during the last six months of 2018.
• Hooker Furniture Corp. (HOFT) reported financial results for the second quarter of 2019. Net sales were $168.7 million, up 8% year over year from net sales of $156.3 million. Year over year, net income increased 11.8% to $8.7 million from $7.8 million and earnings per diluted share increased 10.4% from $0.67 to $0.74. Hooker Furniture missed the I/B/E/S consensus earnings estimate of $0.79 per share by 6.3%.
  
  Looking forward, CEO Paul Toms Jr., said, “a generally positive macro environment is driven by recent GDP growth of 4.1%, a stock market pushing all-time highs, strong employment and consumer confidence at record levels. Our expectation for the fall selling season and the balance of the year is guardedly optimistic.”
• Kimball Electronics Inc. (KE) announced financial results for its fourth quarter of 2018. Fourth-quarter net sales were $277 million, up 15% from the prior-year fourth-quarter net sales of $241 million. Net sales for the quarter include a 4% favorable impact from foreign currency movements compared to the prior-year quarter. Net income for the quarter was $5.8 million, or $0.22 per share, down 28% and 27%, respectively, year over year from $8.1 million. Adjusted net income was $7.2 million, or $0.27 per adjusted diluted share, down 12% and 10%, respectively, year over year from adjusted net income of $8.1 million, or $0.30 per share.
  
  Looking toward fiscal 2019, Kimball Electronics expects net sales organic growth of 8%, operating margin of 4.5% and capital expenditures, excluding acquisitions, approximately between $25 million and $30 million.

• New Home Company Inc. (NWHM) reported financial results for the second quarter of 2018. Total revenues for the quarter were $155.6 million, up 8% compared to $144.1 million in the prior-year period. Home sales, 75% of total revenue, were $117.5 million, up 21% year over year compared to home sales of $96.9 million. Net income attributable to the company was $115,000, or $0.01 per share, down 92% and 86%, respectively, compared to net income in the same period last year of $1.5 million, or $0.07 per share. New Home Company missed the I/B/E/S consensus earnings estimate of $0.027 per share by 63%.
  
  Looking forward to full-year 2018, New Home Company expects home sales of $580 million to $620 million, home sales gross margin of 14.2% to 14.7% and income from unconsolidated joint ventures of $0.5 million to $1.0 million.
• Olympus Steel Inc. (ZEUS) reported financial results for the second quarter of 2018. Net sales increased 27% from $356 million to $453 million, which is the highest quarterly sales level posted in the company’s history. Second-quarter net income in 2018 increased 230% to $15.8 million, or $1.39 per diluted share, compared with net income of $4.8 million, or $0.42 per diluted share, in 2017’s same quarter. Olympus Steel beat the I/B/E/S consensus earnings estimate of $1.26 per share by 10.3%.
• PC Connection Inc. (CNXN) reported financial results for the second quarter of 2018. Net sales as presented for the quarter were $706.6 million. Net sales prior to the impact of the new revenue recognition standard increased by 9.3% to $819.8 million, compared to $749.8 million for the prior year’s quarter. Net income for the second quarter increased by 34.2% to $18.2 million, or $0.68 per diluted share, compared to net income of $13.6 million, or $0.51 per diluted share for the prior year’s quarter. PC Connection beat the I/B/E/S consensus estimate of $0.63 per share by 7.9%.
• RCI Hospitality Holdings (RICK) reported financial results for the third quarter. Total revenues increased $5.2 million from $37.4 million to $42.6 million as all core revenue lines continued to grow. Net income for the quarter was $5.4 million, or $0.55 per diluted share, up 42% and 38%, respectively, year over year from net income of $3.8 million, or $0.40 per diluted share.
  
  Separately, RCI Hospitality announced that a subsidiary signed a definitive agreement to acquire the assets of Blush Gentlemen’s Club & Sports Bar, a top club located in Pittsburgh, and related real estate for total consideration of $15 million. Under the terms of the agreement, the RCI subsidiary will pay $10 million for the club, consisting of a $2.5 million cash payment and $7.5 million in seller-financing, and $5 million in cash for the real estate.
• RCM Technologies Inc. (RCMT) announced financial results for the second quarter. RCM Technologies reported revenues of $51.7 million for the quarter, a 13.6% increase as compared to $45.5 million for the comparable period one year ago. Net income was $0.4 million, or $0.03 per diluted share, for the current quarter as compared to net income of $0.2 million, or $0.02 per diluted share, for the comparable prior-year period. Earnings per diluted share missed the I/B/E/S consensus estimate of $0.110. Looking forward, executive chairman Bradley Vizi said, “we are confident our fiscal-2018 revenues will exceed $200 million.”
• Renewable Energy Group (REGI) announced financial results for the second quarter. Revenue of $580.2 million was up 8% year over year, primarily due to the increase in gallons sold and higher average selling price per gallon. Net income for the quarter was $33 million, or $0.78 per diluted share, up year over year from net loss of $34.8 million, or $0.90 per diluted share. The I/B/E/S consensus earnings estimate was $0.46 per share.
  
  The company estimates that if the currently lapsed biodiesel tax credit (BTC) is retroactively reinstated for 2018 on the same terms as in 2017, Renewable Energy Group’s net income, adjusted net income and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) would each increase by approximately $66.2 million for business conducted in the quarter ended June 30, 2018, and would each increase by approximately $108.7 million for business conducted in the first six months of 2018
• REX American Resources (REX) reported financial results for the second quarter of 2018. Revenue was up 19% for the quarter from $108.7 million in the prior-year quarter to $128.8 million. Net income rose over 200% to $9.2 million from $2.9 million in the prior-year quarter, and diluted earnings per share were also up over 200% from $0.45 to $1.43. REX American Resources beat the I/B/E/S consensus earnings estimate of $1.21 per share by 18.2%.
• Roadrunner Transportation Systems Inc. (RRTS) reported financial results for the second quarter. Revenue for the quarter was $558 million, an increase of 10% from revenue in the second quarter of 2017. Net loss increased to $42 million in the second quarter of 2018 compared to $37.9 million in the second quarter of 2017. Diluted loss per share available to common stockholders was $1.09 for the second quarter of 2018, compared to diluted loss per share of $0.99 for the second quarter of 2017.
  
  Based on Roadrunner’s longer-term business plans, the company expects to achieve revenue of over $2.2 billion and adjusted EBITDA of over $100 million by the end of 2020. This represents a 2020 target for adjusted EBITDA margin similar to the company’s 2015 revenue and adjusted EBITDA of $2.0 billion and $93.6 million, respectively.
• Strattec Security Corp. (STRT) reported financial results for the fourth quarter of fiscal 2018. Net sales were $116.7 million, up 1% compared to net sales of $108.4 million one year ago. Net income was $4.0 million in the current-year quarter compared to $1.8 million in the prior-year quarter, up 122%. Diluted earnings per share for the 2018 fourth quarter were $1.07 compared to $0.48 in the prior-year quarter, also up 122%.
• Townsquare Media Inc. (TSQ) reported financial results for the second quarter. Revenue increased $2.3 million, or 1.9%, to $119.6 million, as compared to $117.3 million in the same period last year. Net income for the quarter decreased $3.9 million, or 70.6%, to $1.6 million, as compared to $5.6 million in the same period last year. Adjusted net income for the quarter increased $2.3 million, or 29.2%, to $10.1 million, as compared to $7.8 million in the same period last year. Adjusted earnings per share were up 33% to $0.36, compared to adjusted diluted earnings per share of $0.27. The I/B/E/S consensus earnings estimate was $0.292 per share.
• Universal Stainless & Alloy Products Inc. (USAP) announced that it has entered into an amended and restated five-year $120 million asset-based lending credit agreement with PNC Bank. The new agreement increases the maximum line of the company’s revolving credit facility to $110 million, reduces the term loan facility to $10 million and includes a more favorable interest rate structure. The new credit agreement will expire in August 2023 and supersedes Universal Stainless’ prior credit agreement with PNC Bank, which was scheduled to expire in January 2021.
• Vishay Precision Group Inc. (VPG) reported financial results for the second quarter. Revenue was up 19% year over year to $74.2 million. Adjusted net income was $7.7 million, $0.57 per diluted share, both up near 100% compared to net income of 3.9 million, or $0.29 per diluted share, in the same period one year ago. The I/B/E/S consensus estimate for quarterly earnings per share was $0.435, which Vishay Precision beat by 31%. Looking forward, at constant fiscal second-quarter 2018 exchange rates, Vishay Precision expects net revenues to be in the range of $70 million to $77 million for the third fiscal quarter of 2018.