Model Shadow Stock Portfolio Changes

After conducting the quarterly review of the Model Shadow Stock Portfolio, Renewable Energy Group (REGI) and PC Connection (CNXN) were removed from the tracking portfolio during regular trading hours on Thursday, December 12.

With the proceeds from these two sales, as well as the cash held in the portfolio, three new stocks were added to the Model Shadow Stock Portfolio during regular trading hours on Friday, December 13. It is the policy of the Model Shadow Stock Portfolio not to 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

Renewable Energy Group (REGI)

Renewable Energy Group was removed because of the Model Shadow Stock Portfolio’s negative earnings rule. On August 6, the company reported an adjusted second-quarter loss of $1.64 per share, which pushed the trailing 12-month earnings negative. On November 5, Renewable Energy Group reported a third-quarter adjusted loss of $0.41 per share while trailing 12-month earnings remained negative.

It is the policy of the Model Shadow Stock Portfolio to sell a stock once its trailing 12-month adjusted earnings go negative and the company reports a quarterly loss in a subsequent quarter while trailing earnings are still negative.

PC Connection (CNXN)

At the end of November, PC Connection exceeded the market capitalization sell cut-off of $900 million with a market cap of $1.31 billion. It is the policy of the Model Shadow Stock Portfolio to sell a stock once its market cap reaches three times the initial purchase limit, which is now $300 million.

Buy Alerts

With the proceeds from the Renewable Energy and PC Connection sales and the existing cash position of the Model Shadow Stock Portfolio, there were enough funds to take a position in three companies at roughly the average position size for the existing holdings in the tracking portfolio. The portfolio additions are:

• Bassett Furniture Industries (BSET); December 12, 2019, closing share price of $15.15
  
  Based on Bassett Furniture’s closing price of $15.15 on December 12, we suggest paying no more than $16.23. 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 0.9) to the current price-to-book ratio of the stock. The price-to-book ratio for Bassett Furniture as of the close on December 12 was 0.84, so the calculation is: [$15.15 × (0.9 ÷ 0.84)] = $15.15 × 1.071 = $16.23.
  
  Bassett Furniture was added to the Model Shadow Stock Portfolio on December 13, 2019, at an average price per share of $15.387.

• Cumulus Media Inc. (CMLS); December 12, 2019, closing share price of $17.35
  
  Based on Cumulus Media’s closing price of $17.35 on December 12, we suggest paying no more than $20.28. 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 0.9) to the current price-to-book ratio of the stock. The price-to-book ratio for Cumulus Media was 0.77 as of the close on December 12, 2019, so the calculation is: [$17.35 × (0.9 ÷ 0.77)] = $17.35 × 1.169 = $20.28.
  
  Cumulus Media was added to the Model Shadow Stock Portfolio on December 13, 2019, at an average price per share of $17.16.

• Perion Network Ltd. (PERI); December 12, 2019, closing share price of $5.38
  
  Based on Perion Network’s closing price of $5.38 on December 12, we suggest paying no more than $5.78. 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 0.9) to the current price-to-book ratio of the stock. The price-to-book ratio for Perion as of December 12 was 0.88, so the calculation is: [$5.38 × (0.9 ÷ 0.88)] = $5.38 × 1.023 = $5.50. However, we added an extra 5% cushion, given the closeness of Perion Network’s price-to-book ratio to the existing cutoff. Adding 5% to $5.50 results in a maximum purchase price of $5.78.
  
  Perion Network was added to the Model Shadow Stock Portfolio on December 13, 2019, at an average price per share of $5.36.

Monthly Updates & Next Quarterly Review

The full December Model Shadow Stock Portfolio Update reviewing performance as of the end of November, will be sent out on Monday, December 16. The next monthly Model Shadow Stock Portfolio Update will take place on Wednesday, January 15. On that day, a monthly Model Shadow Stock Portfolio Update email will go out and the AAII Shadow Stocks area of AAII.com will be updated with new performance data.

The next quarterly review of the Model Shadow Stock Portfolio will take place following the end of February 2020. 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).