Expectations that the U.S. and China were close to reaching a trade deal were shattered in May, resulting in strong market sell-off and renewed concerns that the trade tariffs will result in reduced global economic growth. Expectations had been growing that the threat of a tariff increase was just a negotiation tactic that would not be implemented. As we know now, these expectations were proven wrong. Tariffs on $200 billion of Chinese goods imported into the U.S. were increased from 10% to 25% and cover a wider array of goods that will force consumers to pay more and will hurt company sales and profits if the costs can’t be passed to customers.
The market sell-off extended to commodities such as oil and pushed down the yield of bonds, as investors see a greater likelihood that the Federal Reserve will need to lower interest rates to offset some of the negative economic impact of the escalation of tariffs.
The S&P 500 index as measured by the Vanguard 500 Index fund (VFINX), lost 6.4% during May, but the damage was even worse for the Model Shadow Stock Portfolio which declined 13.7% during the month, pushing its performance into the red for the year. Overall, small-cap stocks underperformed large-cap stocks during May and value-oriented stocks generally underperformed growth stocks during the month as well. The Model Shadow Stock Portfolio is now down 0.2% year to date, while the Vanguard 500 Index fund is up 10.7%. The Vanguard Small-Cap Index fund (NAESX) was down 7.3% during May and has a year-to-date performance of 11.6%, while the DFA U.S. Micro Cap fund (DFSCX) was up 9.1% during the month and is up 4.9% for this year through the end of May.
Value-oriented stock indexes are lagging growth stocks on a year-to-date basis. Large-cap value stocks were down 7.6% during May, reducing their year-to-date performance to 8.0%, while large-cap growth stocks lost 5.3% during the month and are now up 13.2% through the first five months of the year.
In the mid-cap segment, value stocks are up 7.9% for the year after losing 9.7% during May. Mid-cap growth stocks are up 11.2% for the year after losing 9.7% during May.
Small-cap value stocks are up 6.7% year to date, while small-cap growth stocks are up 11.7%. Small-cap value stocks lost 8.2% during May, while small-cap growth stocks were down 7.4%.
Stocks in the information technology (+16.5%), telecom services (+14.2%) and consumer discretionary (+13.0%) sectors are leading the market this year. Sectors that are lagging this year include pharmaceuticals (+0.2%), health care (+1.3%) and energy (+3.5%).
Since its inception in 1993, the AAII Model Shadow Stock Portfolio has a compound annual average return of 13.8% versus the Vanguard 500 Index fund’s (VFINX) gain of 9.2% per year on average. Over the same period, the Vanguard Small-Cap Index fund (NAESX) posted an average annual gain of 9.7%.
AAII Model Shadow Stock Portfolio Changes
After conducting the quarterly review of the Model Shadow Stock Portfolio, two stocks were removed from the tracking portfolio during regular trading hours on Tuesday, June 4.
With the proceeds from these two sales, as well as the cash held in the portfolio, one new stock was added to the Model Shadow Stock Portfolio. It is the policy of the Model Shadow Stock Portfolio to not underweight or overweight new positions. Instead, it is better to hold excess cash until there is enough to buy a new stock with a position size roughly equivalent to the average position size in the portfolio.
Sell Alerts
Amira Nature Foods Ltd. (ANFI)
Amira Nature Foods has been on earnings probation since it announced its second-quarter 2018 earnings. At that time, the company’s trailing 12-month earnings per share turned negative. In August of last year, the company announced it would be late in filing its Form 20-F for the year ended March 31, 2018. The company filed its Form 20-F in mid-March, at which time it was shown that its six-month results for the period ended September 30, 2018, were negative. If a Shadow Stock that is on earnings probation reports a subsequent quarterly loss (or in this case a subsequent six-month loss), it is removed from the portfolio.
CSS Industries Inc. (CSS)
CSS Industries has been on earnings probation since it announced its second-quarter 2019 earnings on November 1, 2018. At that time, the company’s trailing 12-month earnings per share turned negative. On May 30, the company reported a quarterly loss. If a Shadow Stock that is on earnings probation reports a subsequent quarterly loss, it is removed from the portfolio.
Buy Alert
With the proceeds from the Amira Nature Foods and CSS Industries sales and the existing cash position of the Model Shadow Stock Portfolio, there were enough funds to take a position in one company at roughly the average position size for the existing holdings in the tracking portfolio. That portfolio addition is:
Based on Mesa’s closing price of $9.00 on June 3, we suggest paying no more than $11.84. To calculate the maximum buy price based on the price-to-book-value ratio, multiply the current share price by the ratio of the maximum price-to-book ratio to be considered for the Model Shadow Stock Portfolio (currently 1.0) to the current price-to-book ratio of the stock. The price-to-book ratio for Mesa Air Group as of June 3 was 0.76, so the calculation is: [$9.00 × (1.0 ÷ 0.76)] = $9.00 × 1.316 = $11.84.
Model Shadow Stock Portfolio Notes & News
As of the end of May, 25 stocks met the initial selection criteria for the Model Shadow Stock Portfolio, up from 17 at the end of April. Of these, seven are currently held in the Model Shadow Stock tracking portfolio: CPI Aerostructures Inc. (CVU), Hallador Energy Co. (HNRG), Mesa Air Group (MESA), Olympic Steel Inc. (ZEUS), RCI Hospitality Holdings (RICK), Universal Stainless & Alloy Products (USAP) and VSE Corp. (VSEC). 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 notes on the website table are dynamically updated daily.)
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.
The next quarterly review of the AAII Model Shadow Stock Portfolio will take place around the end of August 2019, after most of the Shadow Stock holdings have announced their quarterly earnings. Any changes to the portfolio 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).
Here are some news highlights from May for the holdings in the Model Shadow Stock Portfolio:
Beazer Homes USA Inc. (BZH) reported homebuilding revenue of $421 million for the second quarter of 2019, down 5% year over year. Compared to the second quarter of 2018, home closings decreased by 10% to 1,134 but the average selling price increased by 7% to $371,200.
Beazer Homes reported a net loss for the second quarter of 2019 of $101 million, or $3.28 per diluted share, compared to a net income of $12 million, or $0.36 per share, in the same period one year ago. The two analysts polled by I/B/E/S were expecting earnings per share of $0.05 for the quarter.
The net loss for the quarter was a result of impairment charges totaling $109 million related to the company’s 15 California assets. Beazer Homes said that it became necessary to sell or “activate” all of its remaining California assets. Citing the weakening housing market and California’s affordability challenge, Beazer Homes said that the price reductions it took pushed certain assets into impairment status.
Container Store Group Inc. (TCS) reported that fourth-quarter consolidated net sales were $253 million, up 9% year over year. Comparable-store sales increased by 9%. Management noted that the company’s most important market campaign of the year takes place during the fourth quarter, which this year drove significant interest in the company’s custom closets category, up 8% year over year.
Net income for the quarter was $16 million, or $0.33 per share, which compares to 2017’s fourth-quarter net loss of $0.4 million, or $0.18 per share. Earnings per share for the quarter of $0.33 beat the I/B/E/S analyst consensus estimate of $0.30 per share by 10%.
CPI Aerostructures Inc. (CVU) reported that revenue for the first quarter of 2019 improved 41% year over year to $26 million. Revenue growth was primarily driven by an increase in the production rate of the company’s Next Generation Jammer Pod program for Raytheon and revenue from the company’s Welding Metallurgy Inc. subsidiary.
Net income for the quarter was $2 million, or $0.14 per share, up 31% and 0%, respectively, year over year. CPI Aerostructures had 32% more diluted shares outstanding in the first quarter of 2019 when compared year over year, which management cited as the reason for the flat earnings per share growth.
CPI Aerostructures also reaffirmed its guidance for fiscal 2019, with revenue in the range of $98 million to $102 million and pretax income in the range of $11.0 million to $11.3 million.
CSS Industries Inc. (CSS) reported that net sales for the fourth quarter of 2019 decreased 12% year over year to $72 million. The contraction in sales was driven primarily by lower craft, gift and seasonal volume in the company’s legacy business category.
Net loss for the quarter was $23 million, or $2.65 per share, up year over year compared to a net loss of $38 million, or $4.21 per share. Profit was hurt by $14 million in impairment charges and $3 million of acquisition-related costs. Adjusted net loss per share was $1.18 for the fourth quarter of 2019 compared to an adjusted net loss of $0.55 in the same period one year ago.
Looking ahead to 2020, CSS Industries expects to generate net sales of $355 million to $365 million, a decrease of 4% to 7% year over year. Net loss is expected to be in the range of $0 million to $2 million compared to a net loss of $54 million in fiscal 2019.
Delta Apparel Inc. (DLA) reported that net sales for the second quarter of 2019 were $103 million, up 3% year over year. The company’s Delta group segment results were bolstered by triple-digit sales growth in its digital print business. Delta’s Salt Life group segment saw sales decline 4% year over year. the segment was affected by the unfavorable cold and wet weather at the start of the spring season. Last year’s comparable quarter was boosted by the later Easter Holiday season, as well.
Net income for the quarter was $0.9 million, or $0.13 per diluted share, down 75% and 73%, respectively, year over year. Profit was affected by anticipated transition costs from changes in the private label product mix and higher cost of materials in the Delta group segment and from higher-than-expected digital print acquisition integration expenses and delayed spring sales in the Salt Life group segment. Delta Apparel’s quarterly earnings per share missed the one analyst estimate of $0.23 per share by 44%.
Ducommun Inc. (DCO) reported that revenue for the first quarter of 2019 grew 15% to $173 million. Ducommun saw year-over-year-sales growth in its military and space, commercial aerospace and industrial end-use markets.
Net income for the quarter was $8 million, or $0.64 per diluted share, compared to $3 million, or $0.22 per diluted share, in the same period one year ago. Ducommun said that the net income reflected a $9 million increase in gross profit due to higher revenue and improved operating performance. Ducommun’s earnings per share for the quarter beat the I/B/E/S analyst consensus estimate of $0.44 per share by 45%.
Looking forward, Ducommun said it was still expecting revenue growth of 5% to 7% across its commercial aerospace programs for the year despite questions abounding from Boeing’s issues with its 737 MAX platform. Ducommun ended the quarter with another record backlog of $884 million.
Flexsteel Industries Inc. (FLXS) announced a restructuring plan that would begin with an exit from the commercial office and custom-designed hospital product lines and closure of its manufacturing facility in California. Flexsteel said that the product lines the company is exiting from represented about 7% of annual revenue and no longer aligned with the company’s profitable core businesses. In total, Flexsteel expects to incur approximately $4 million in one-time cash charges for employee severance and related costs and approximately $9 million in noncash charges for inventory impairments due to the restructuring action.
Hallador Energy Co. (HNRG) reported that revenue for the first quarter of 2019 increased 34% year over year to $89 million. Tons sold for the quarter was also up by 25% year over year. The company’s primary business, Sunrise Coal, has 79% of its sales contracted for the next four years, about 25 million tons.
Net income for the first quarter was $7 million, or $0.23 per share, compared to net income of $2 million, or $0.07 per share in the same period in 2018. Earnings per share for the quarter vastly beat the one analyst estimate of $0.06 per share.
Additionally, with a majority of its assets located in Indiana, Hallador Energy announced that it is moving its corporate headquarters from Denver, Colorado to Terre Haute, Indiana.
Kimball Electronics Inc. (KE) reported that net sales for the third quarter of 2019 grew 10% year over year to $313 million. The quarter’s performance was based on double-digit growth in Kimball Electronics’ medical and industrial vertical end-markets. The company exceeded its 8% organic growth goal.
Net income for the quarter was $12 million, or $0.46 per share, up 9% and 15%, respectively, year over year. Kimball Electronics’ operating income represented a percentage of net sales at 4.6%, above the company’s goal for 4.5% of net sales.
Going forward, Kimball Electronics said that it is cautiously optimistic that it will begin to consistently deliver its goals of 8% organic net sales growth and 4.5% operating income.
New Home Company Inc. (NWHM) reported that total revenues for the first quarter of 2019 were $119 million, down 3% year over year. Revenue from home sales increased 25% year over year to $99 million, with the increase driven by an 18% increase in deliveries and a 6% increase in the average selling price to $1 million.
New Home reported a net loss for the quarter of $2 million, or $0.10 per diluted share, down compared to a net loss of $0.6 million, or $0.03 per diluted share, in the same period one year ago. Adjusted loss per share for the quarter of $0.04 means a 49% surprise when compared to the I/B/E/S analyst consensus estimate for a loss per share of $0.08.
The year-over-year decrease in income was primarily attributable to $1.8 million in pretax severance charges related to reducing headcount, an increase in selling and marketing costs as a percentage of homes sales revenue and a decrease in fee-building margin due to lower fee construction activity.
Looking forward to the second quarter of 2019, New Home is expecting home sales revenue of $110 million to $130 million, fee-building revenue of $15 million to $20 million and home sales gross margins of 12.0% to 12.5%.
Olympus Steel Inc. (ZEUS) reported that first-quarter 2019 net sales increased 19% year over year to $446 million. The increase in net sales was driven by higher average selling prices.
Net income for the quarter was $2.1 million, or $0.18 per share, both down about 72%, respectively, year over year. Olympus Steel missed the I/B/E/S analyst consensus earnings per share estimate for the quarter of $0.22 by 18%. According to the company, profit margins were pressured by declining steel prices.
Looking ahead, CEO Rick Marabito said, “the second quarter is usually seasonally stronger than our first quarter, and we expect this will be the case this year. We remain focused on controlling our operating expenses and improving our inventory turnover during the remainder of the year.”
PC Connection Inc. (CNXN) reported that net sales for the first quarter of 2019 increased by 1.3% to $632 million. Average daily sales during the quarter increased by 2.9%, compared to the prior-year quarter. A greater portion of the quarter’s software sales were recognized on a net basis, putting downward pressure on net sales growth.
Net income for the quarter was up 13% year over year to $13 million, or $0.48 per diluted share. PC Connection beat the I/B/E/S analyst consensus estimate of $0.45 per share by 6%.
RCM Technologies Inc. (RCMT) reported that revenue in the first quarter of 2019 increased 1.5% year over year to $51.6 million. Net income for the quarter was $1.5 million, or $0.11 per diluted share, up 50% and 22%, respectively, year over year. Diluted earnings per share beat the I/B/E/S analyst consensus estimate of $0.06 per share by 83%.
CEO Bradley Vizi commented, “we are pleased with our first-quarter 2019 results relative to recent expectations. More importantly, we continue to believe we are poised for strong second-half performance in fiscal 2019.”
RCI Hospitality Holdings Inc. (RICK) announced that it delayed the filing of its second-quarter Form 10-Q due to an ongoing inquiry by the U.S. Securities and Exchange Commission (SEC). The company explained that in mid- and late 2018, a series of negative articles about RCI Hospitality was anonymously published in forums associated with the short-selling community, which prompted the SEC to begin an informal inquiry.
RCI Hospitality has hired an independent counsel to conduct an internal review, and the company and its management are cooperating with the SEC.
As anticipated, RCI Hospitality has also received its notice from the Nasdaq Stock Market with regard to its potential delisting from the exchange until the delayed Form 10-Q has been filed.
RCI Hospitality presented preliminary (unaudited) results for the second quarter. Revenue is expected to increase 9% year over year to $44.8 million; diluted earnings per share is expected to increase 41% year over year based on the midpoint of the estimate range of $0.65 to $0.70 compared to $0.48; and free cash flow is expected to come in at $8.8 million, based on net cash provided by operating activities of $9.5 million less capital expenditures of $0.7 million.
Renewable Energy Group Inc. (REGI) reported first-quarter 2019 revenue of $478.2 million on 162.5 million gallons of fuel sold. Revenue was down 31% year over year, but total gallons sold was up 20% year over year. Average selling price per gallon decreased 16.7% year over year to $2.65.
Renewable Energy Group is awaiting the reinstatement of the federal biodiesel tax credit (BTC), whose amendments to extend the tax credit beyond 2017 were introduced in Congress during April 2019. The company estimates that if the currently lapsed BTC is retroactively reinstated for 2019 and 2018 on the same terms as in 2017, net income and would increase by approximately $55 million for the first quarter of 2019.
For the first quarter, net loss was $43 million, or $1.16 per share, which compares to net income of $213 million, or $5.39 per share. Renewable Energy Group missed the I/B/E/S analyst consensus estimate for a loss of $0.72 per share by 62%.
REX American Resources Corp. (REX) reported that net revenue for the first quarter of 2019 decreased 13% year over year to $104 million. The decline in year-over-year revenue primarily reflects lower production due to weather-related logistical issues as well as lower average selling prices for ethanol during the current-year quarter.
Net income for the quarter was $2.8 million, or $0.45 per diluted share, down 71% and 69% year over year, respectively. The one analyst polled by I/B/E/S expected earnings per share for the quarter of $0.17, leading to a 165% surprise from the company.
Rocky Brands Inc. (RCKY) announced a new purchase agreement with the Defence Logistics Agency for the purchase of up to $27 million of boots for the U.S. Navy through 2022. The first shipment from this agreement is expected to occur in the third quarter of 2019. All of these boots will be manufactured in the company’s factory in Moca, Puerto Rico.
Rocky Brands also declared a dividend of $0.14 per share, representing a 17% increase from the previous dividend.
Townsquare Media Inc. (TSQ) reported that first-quarter net revenue increased 7% year over year to $93.7 million. The company said that double-digit revenue growth in its Townsquare Interactive and Townsquare Ignite divisions led to the company’s overall year-over-year revenue growth. Digital revenue contributed over one-third of the company’s total revenue for the quarter, the first time it has done so.
Net loss for the quarter was $4.8 million, an 82% decrease in net loss for the company. Townsquare reported diluted earnings per share from continuing operations of $0.09, which missed the I/B/E/S analyst consensus earnings estimate of $0.13 per share by 32%.
Vishay Precision Group Inc. (VPG) reported that revenue grew 5% year over year in the first quarter of 2019 to $76.5 million. CEO Ziv Shoshani said, “performance in the quarter was largely the result of execution on our strategic plan, which was bolstered by a favorable mix of business during the period.”
Fiscal first-quarter 2019 net income was $8.2 million, or $0.61 per diluted share, up 64% and 65% year over year, respectively. Foreign currency exchange rates for the first quarter of 2019 increased net income by $0.3 million, or $0.02 per diluted share, relative to the prior-year period. Vishay beat the I/B/E/S analyst consensus earnings estimate of $0.52 per share by 17%.
Looking forward, Shoshani commented, “given the current business environment and our most recent order intake, at constant first-fiscal-quarter 2019 exchange rates, we expect net revenues in the range of $70 million to $76 million for the second fiscal quarter of 2019.”
VSE Corp. (VSEC) reported revenue of $169.9 million in the first quarter of 2019, down 4% year over year. The decrease in revenues was primarily attributable to VSE Corp.’s federal services and supply chain management groups. The decrease was partially offset by an increase in revenue from the company’s aviation group, which was primarily attributable to revenues from the 1st Choice Aerospace acquisition and increased parts distribution sales in international markets.
Net income for the first quarter was $11.8 million, or $0.60 per diluted share, down 6% and 8%, respectively, year over year. The decrease in net income is primarily attributable to increased interest expense.
VSE Corp. also declared a dividend of $0.09 per share, representing a 13% increase from the previous dividend.
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