As of the end of July, 30 stocks met the initial selection criteria for the Model Shadow Stock Portfolio, up from 23 at the end of June. AAII members can see and research which companies are currently passing the initial selection criteria in the Shadow Stock Ideas table on AAII.com. The list of new Shadow Stock Ideas is updated daily—Tuesday through Saturday.
Of the 30 qualifying companies at the end of the month, eight are currently held in the Model Shadow Stock tracking portfolio: CPI Aerostructures Inc. (CVU), Delta Apparel Inc. (DLA), Hallador Energy Co. (HNRG), Hooker Furniture Corp. (HOFT), Mesa Air Group (MESA), Olympic Steel Inc. (ZEUS), 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, if you go online, the notes may not match the list here since the notes on the website table are dynamically updated daily.)
Currently, PCM Inc. (PCMI), with a price-to-book-value ratio of 2.67, is approaching the price-to-book ratio limit of 3.00. Shadow Stocks with a price-to-book ratio above 3.00 at the time of a quarterly review are sold from the model portfolio, assuming there is a suitable replacement.
PC Connection Inc. (CNXN) is approaching the market capitalization cut-off of $1.2 billion. PC Connection had a month-end market cap of $867 million. Shadow Stocks with a market cap above $1.2 billion at the time of a quarterly review are sold from the model portfolio, assuming there is a suitable replacement.
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 S&P 500 index as measured through the Vanguard 500 Index fund (VFINX), was up 1.4% during July, boosting its year-to-date performance to 20.2%. The Model Shadow Stock Portfolio bucked the overall trend during the month, losing 2.4% during July and reducing its 2019 year-to-date performance to 5.6%. The S&P MidCap 400 index was up 1.2% during July and is now up 19.4% for the year, while the Russell 2000 index gained 0.6% during the month and is up 17.6% year to date. The Vanguard Small-Cap Index fund (NAESX) was up 1.3% during the month and has a year-to-date performance of 20.9%, while the DFA U.S. Micro Cap fund (DFSCX) was up 0.7% during July and is up 13.4% for this year through the end of July.
The performance of growth- versus value-oriented stocks was mixed during the month with large-cap value stocks typically doing better than large-cap growth issues, while small- and mid-cap growth companies outperformed value counterparts.
In the large-cap segment, value stocks were up 1.8% for the month, bringing their year-to-date performance up to 18.8% for 2019. Large-cap growth stocks are stronger year to date with a 21.6% gain but were up only 1.2% during July.
In the mid-cap segment, value stocks are up 18.2% for the year, after gaining 1.1% during July. Mid-cap growth stocks are up 20.5% for the year, after gaining 1.3% during the month.
Small-cap value stocks are up 13.6% year to date, while small-cap growth stocks are up 21.5%. Small-cap value stocks gained just 0.2% during July, while small-cap growth stocks were up 1.0%.
Stocks in the information technology (+31.4%), communication services (+23.1%) and consumer discretionary (+23.0%) sectors are leading the market this year. Sectors that are lagging this year include health care (+6.4%), energy (+11.1%) and utilities (14.4%).
Since its inception in 1993, the AAII Model Shadow Stock Portfolio has a compound annual average return of 13.9% versus the Vanguard 500 Index fund’s gain of 9.5% per year on average over the same period. Over the same period, the Vanguard Small-Cap Index fund posted an average annual gain of 10.0%.
Beazer Homes USA Inc. (BZH) was the strongest stock in the Model Shadow Stock Portfolio with its 22.0% gain for July. Beazer Homes is a geographically diversified homebuilder that posted a positive earnings surprise on August 1, 2019.
Delta Apparel was the weakest stock in the Model Shadow Stock Portfolio, dropping 17.9% during July. Delta Apparel is an apparel design, marketing, manufacturing and sourcing company that features a diverse portfolio of lifestyle basic and branded activewear apparel, headwear and related accessory products. As noted below, Delta Apparel reported weaker-than-expected revenue and profits for the quarter.
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 June for the holdings in the Model Shadow Stock Portfolio:
Big 5 Sporting Goods Corp. (BGFV) reported second-quarter 2019 results on July 30. Net income for the second quarter of fiscal 2019 was $28,000, or $0.00 per diluted share, including a $0.03 per diluted share net benefit primarily related to the favorable settlement of a software contract termination. This compared to a net loss for the second quarter of fiscal 2018 of $0.2 million, or $0.01 per share.
Big 5 Sporting Goods’ net sales were $241 million for the second quarter of 2019, compared with $240 million in net sales in the same quarter last year. Same-store sales increased 0.7% for the second quarter of fiscal 2019, marking the company’s third consecutive quarter of same-store sales growth.
For the fiscal-2019 third quarter, the company expects same-store sales to be in the flat to positive low-single-digit range and earnings per diluted share to be in the range of $0.15 to $0.23, compared to a same-store sales decrease of 2.0% and earnings per diluted share of $0.15 in the third quarter of fiscal 2018. The company’s fiscal-2019 third-quarter earnings guidance reflects an anticipated increase in merchandise margins over the prior-year period.
Container Store Group Inc. (TCS) announced revenues of $209.52 million for the first quarter, which surpassed year-ago revenues of $195.82 million by 7%. However, the company reported a quarterly net loss of $4.1 million. The loss per share of $0.08 beat the I/B/E/S consensus estimate of a per-share loss of $0.10, marking a 20% earnings surprise and matching earnings per share losses of $0.08 a year ago.
Custom closets sales increased 11.1%, which contributed 5% to the overall increase in comparable-store sales, while all other product categories increased by 5.1%. Container Store’s gross margin decreased to 57.4% as a result of increased expenses following marketing and merchandising campaigns that drove a higher mix of campaign-driven sales. The decrease in gross margin was partially offset by an improvement in foreign currency translation.
CPI Aerostructures Inc. (CVU) announced that it has been awarded a $65.7 million indefinite-delivery/indefinite-quantity contract from the U.S. Air Force to provide structural modification kits, program management, logistics and other sustainment services. The company also received its first delivery order under the contract valued at $3.4 million for which work will commence immediately.
Delta Apparel Inc. (DLA) reported quarterly net income of $4.9 million, or earnings of $0.70 per share, for the third quarter. Adjusted earnings of $0.60 per share missed the I/B/E/S consensus estimate of $0.63 per share and made for a negative 4.8% earnings surprise. This compares to earnings of $0.62 per share a year ago.
The company also posted revenues of $119.26 million for the quarter ended June 2019, missing the estimates by 0.73% and falling short of year-ago revenues of $112.18 million. The company’s gross profit was $24.8 million, an increase of 2.2% compared to $24.3 million in the prior-year third quarter. Quarterly operating income also increased to $8.4 million compared with income of $6.7 million in the prior year. Looking forward, the company said it will continue to focus on expanding its go-to-market strategies, sales channels and plans to invest in more manufacturing and distribution speed technology.
Kimball Electronics Inc. (KE) announced that net sales for the fourth quarter of 2019 increased 15% from the prior fiscal year to $318.6 million. Earnings per share for the quarter came in at $0.29, which surpassed earnings of $0.22 per share from a year ago. Gross margin in the fourth quarter was 7.3%, which declined from 8.2% in the fourth quarter of 2018.
The indirect impact on the overall demand and the added strain on supplier and customer relationships as a result of the ongoing trade dispute between China and the U.S. were named as major concerns for the company. During the fourth quarter of fiscal-year 2019, over $1 million of tariffs on purchased raw material were rebilled to Kimball customers.
Looking forward, the company said that margin expansion and capital efficiency will continue to be priorities of focus.
New Home Company Inc. (NWHM) announced second-quarter 2019 net income of $1.6 million, or $0.08 per diluted share, which compared to $0.1 million, or $0.01 per diluted share, for the 2018 second quarter. Quarterly earnings compared to the I/B/E/S consensus estimate of $0.016 per share.
Home sales revenue for the 2019 second quarter increased 20% to $140.5 million, compared to $117.5 million in the prior-year period. The increase in home sales revenues was driven by a 56% increase in deliveries, which was partially offset by a 23% decrease in average home selling price. Total revenues for the 2019 second quarter were $162.7 million compared to $155.6 million in the prior-year period. The company also generated $31.1 million in cash flow from operations.
Looking forward, the company plans to focus on maintaining a lower cost structure, strengthening its balance sheet and generating long-term value for shareholders.
Universal Stainless & Alloy Products Inc. (USAP) reported that net sales for the second quarter of 2019 were $71 million, an increase of 17.8% from sales of $60.3 million in the first quarter of 2019. The growth was driven by record premium alloy and aerospace sales. Aerospace remained the company’s largest target market with sales of $49.3 million, or 69.5% of total net sales. This compares with $40.2 million in the second quarter of 2018.
Net income for the second quarter of 2019 totaled $2.1 million, or $0.24 per diluted share, which fell short of the I/B/E/S consensus estimate of $0.30 per share and 2018 second-quarter earnings of $0.50 per share. Gross margin totaled 13.3% of sales, surpassing last quarter’s gross margin of 12.2% but falling short of year-ago numbers of 17.7%. The company anticipates continued strong performance for the rest of 2019.
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