December Model Shadow Stock Portfolio Update

The Model Shadow Stock Portfolio is reviewed quarterly to determine stock sales and additions, a practice put in place since the portfolio’s inception in 1993. The quarterly portfolio review cycle is tied to the standard reporting cycle of most publicly traded firms in the U.S. Companies are examined for violating the earnings, valuation, size and age rules of the Model Shadow Stock Portfolio. Click here to see the current purchase and sell rules for the portfolio.

The primary Model Shadow Stock Portfolio selection criteria target the intersection of the smallest 10% of domestic stocks as measured by market capitalization along with the “cheapest” 10% of domestic stocks as measured by the price-to-book-value (P/B) ratio. These decile breakpoints are determined by examining domestic companies that are listed on the New York Stock Exchange (NYSE).

The analysis of the stocks listed on the NYSE led to an adjustment of the market cap criterion to an initial range of $30 million to $300 million, while the price-to-book ratio initial requirement was adjusted to a maximum value of 0.90. Stocks are then removed from the portfolio if they have values that exceed the initial market cap or price-to-book ratio by a factor of three.

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 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 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.

Stocks are sold once 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 cap ceiling 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.

Quarterly Additions

As of the end of November, 17 stocks met the initial selection criteria for the Model Shadow Stock Portfolio, up from 16 at the end of October. 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 17 Shadow Stock ideas at the end of the month, four were held in the Model Shadow Stock tracking portfolio: Container Store Group Inc. (TCS), CPI Aerostructures Inc. (CVU), Mesa Air Group (MESA) and Universal Stainless & Alloy Products (USAP).

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)

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 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)

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 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)

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 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. The next quarterly review of the Model Shadow Stock Portfolio will take place at the end of November 2019.

These changes were sent out in a special Model Shadow Stock Portfolio email on Friday December 13, 2019.

The next quarterly review of the Model Shadow Stock Portfolio will take place following the end of February 2020. Any changes to the portfolio at that time 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). These changes went out in an email on Friday December 13, 2019.

Performance Update

The stock market continued its strong run in November, with the S&P 500 index posting a total return of 3.6%, boosting its year-to-date performance to 27.6%. The Model Shadow Stock Portfolio gained 3.2% during November and is now up 15.7% year to date. The S&P MidCap 400 index was up 3.0% during November and is now up 22.7% for the year, while the Russell 2000 index gained 4.1% during the month and is up 22.0% year to date. The Vanguard Small-Cap Index fund (NAESX) was up 4.1% during the month and has a year-to-date performance of 24.5%, while the DFA U.S. Micro Cap fund (DFSCX) was up 3.0% during November and is up 16.5% for this year through the end of November.

The performance of growth- versus value-oriented stocks was slanted toward value stocks in the large-cap segment, while growth stocks outperformed value stocks in the mid- and small-cap segments during the month.

In the large-cap segment, value stocks were up 3.9% for the month, bringing their year-to-date performance up to 27.9% for 2019. Large-cap growth stocks are now weaker year to date, with a 27.4% gain, and were up 3.4% during November.

In the mid-cap segment, value stocks are up 22.2% for the year, after gaining 2.8% during November. Mid-cap growth stocks are up 23.2% for the year, after gaining 3.2% during the month.

Small-cap value stocks are up 18.2% year to date, while small-cap growth stocks are up 25.6%. Small-cap value stocks gained 2.3% during November, while small-cap growth stocks gained 5.9% during the month.

Stocks in the information technology (+43.8%), telecom services (+30.1%) and industrial (+29.4%) sectors are leading the market this year. Sectors that are lagging this year include energy (+5.5%), health care (+16.6) and materials (+20.9%). All the sectors are up for the year, but there is a large difference between the top- and bottom-performing groups.

Since its inception in 1993, the AAII Model Shadow Stock Portfolio has a compound annual average return of 14.1% versus the Vanguard 500 Index fund’s gain of 9.6% 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%.

Model Shadow Stock Portfolio News

Townsquare Media Inc. (TSQ) was the strongest stock in the Model Shadow Stock Portfolio with its 22.3% gain for November. Townsquare Media is a media, entertainment and digital marketing platform company principally focused on small- and mid-sized markets across the U.S. As noted in the news section below, Townsquare Media reported that third-quarter net revenue increased by 6.2% to $112.6 million year over year.

Big 5 Sporting Goods Corp. (BGFV) was the weakest stock in the Model Shadow Stock Portfolio, dropping 15.6% during November. Big 5 Sporting Goods is a sporting goods retailer in the western U.S. The company offers a range of products in a sporting goods store format. The company also offers products online through its e-commerce platform. As noted last month, Big 5 Sporting Goods reported net sales for the third quarter of 2019 of $266 million, flat year over year. Net income of $6.4 million and diluted earnings per share of $0.30 were up 106% and 100% year over year, respectively.

Same-store sales increased by 0.3% for the third quarter of 2019, which represents the company’s fourth consecutive quarter of positive same-store sales. Gross profit margin for the quarter was 32.3% of sales, compared to 31% of sales in the third quarter of 2018.

For the fiscal-2019 fourth quarter, Big 5 Sporting Goods expects same-store sales to be in the positive low-single-digit range and expects to realize a loss per share in the range of $0.04 to $0.16, compared to a same-store sales increase of 1.1% and a loss per share of $0.24. Fourth-quarter earnings guidance reflects an expectation for continued merchandise margin expansion. Big 5 Sporting Goods expects full-year earnings to be in the range of $0.22 to $0.34 per diluted share.

Big 5 Sporting Goods also declared a regular quarterly dividend of $0.05 per share, in line with the previous declaration. The dividend was payable December 12 to shareholders of record November 29. The stock traded ex-dividend on Thursday, November 28.

Here are some news highlights from November for the holdings in the Model Shadow Stock Portfolio:

Beazer Homes USA Inc. (BZH) reported fourth-quarter homebuilding revenue of $733 million, up 1.5% year over year. Earnings per share of $0.08 missed the I/B/E/S consensus estimate of $0.51 by 84% and compare to year-over-year earnings per share of $1.88.

Net new orders exceeded the company’s expectations and were increased by 11.7% year over year. The increase in net new orders was driven by a 3.7% increase in average community count to 168. Homebuilding gross margin declined 170 basis points (1.7%) based on softening demand for new homes during the first half of 2019.

For the first quarter of fiscal 2020, Beazer Homes expects orders to be up more than 10%, driven by both community count and sales pace improvements. Closings are expected to be relatively flat compared to last year, and average selling price is expected to be up slightly. Beazer Homes said that despite a tough start to 2019, the company has ended the year in a position to advance toward its long-term growth strategy in 2020.

CPI Aerostructures Inc. (CVU) reported a year-over-year revenue increase of 35% to $25.7 million for the third quarter of 2019. Earnings per diluted share of $0.14 increased 100% year over year but missed the I/B/E/S consensus estimate of $0.18 by 22%.

Revenue growth was driven by CPI Aerostructures’ WMI subsidiary and from its Northrop Grumman E-2D Advanced Hawkeye and Raytheon Next Generation Jammer Mid-Band programs. Gross profit increased to $5.0 million from $3.9 million in the prior-year period, an improvement of about 28%. CPI Aerostructures said that a recent surge in new business awards improved top-line outlook, but the company consumed more cash this year executing its record backlog earlier than originally planned. In addition, the company’s WMI subsidiary has required greater operational, financial and legal resources than previously forecast.

For fiscal 2019, CPI Aerostructures raised its guidance for revenue by 3% and lowered its guidance for pretax income by 1%. CPI Aerostructures now anticipates revenue of about $103 million compared to revenue of $83.9 million for fiscal 2018, and pretax income of about $9 million as compared to $6.8 million in fiscal 2018.

Separately, CPI Aerostructures announced the appointment of Dan Azmon as CFO, effective November 18, replacing Vincent Palazzolo. Most recently, Azmon served as vice president, controller and principal accounting officer of L3 Technologies Inc. until it merged with Harris Corp. as L3Harris Technologies Inc. (LHX). Azmon will lead CPI Aerostructures’ corporate accounting, financial planning and analysis, treasury, tax, risk management and investor relations activities, as well as oversee the company’s IT and human resources departments.

Delta Apparel Inc. (DLA) reported net sales of $108 million for the fourth quarter of 2019, an increase of 16.2% year over year. Earnings per share of $0.50 beat the I/B/E/S consensus estimate of $0.485 by 3% and increased 16.3% year over year.

Net sales in the Delta group segment increased 16.6% over the prior-year period and net sales in the Salt Life group segment increased 12.5% from the prior-year period. Gross profit was $22.9 million, an increase of 19.5% compared to the fourth quarter of 2018. Gross margin was 21.2% compared to 20.6% in the prior-year fourth quarter, driven by year-over-year improvement in both the Delta group and Salt Life group segments.

Looking at the first quarter of 2020, Delta Apparel expects to see sales growth in the mid-single digits, with year-over-year expansions in gross margin and operating profit.

Hallador Energy Co. (HNRG) reported revenue of $83 million for the third quarter of 2019, up by about 5% year over year. Net loss for the quarter was $0.12 per share, which compares to net income of $0.09 per share in the same period one year ago. Hallador Energy also missed the I/B/E/S consensus estimate for earnings per share of $0.08.

Hallador Energy said it is on track to ship eight million tons of coal in 2019, a record for the company. However, strong shipment numbers were offset by three isolated and temporary events that increased costs during the quarter. Average cost per ton increased about 10% year over year to $33.70.

Looking forward, Hallador Energy says it is in good shape, with 88% of its projected eight million total tons sold for 2020 and 75% of its target sold through 2022. The company also believes it will see returning strength to the Illinois basin coal export market as natural gas prices, which Hallador Energy believes are unsustainably low, rise to average levels.

Hibbett Sports Inc. (HIBB) reported that net sales for the third quarter of 2019 of $275.5 million increased 27% year over year. Adjusted earnings per diluted share of $0.32 for the quarter beat the I/B/E/S consensus estimate of $0.162 by almost 100% and compared year over year to adjusted earnings per diluted share of $0.14.

Comparable-store sales increased by 10.7% year over year. The increase in net sales was primarily attributed to the acquisition of City Gear. Footwear sales continued to drive the business, along with positive sales in activewear and accessories related to footwear products.

Hibbett Sports opened four stores, rebranded four Hibbett Sports stores to City Gear stores and closed 19 underperforming stores during the quarter, bringing the store base to 1,097 in 35 states. As previously reported, the company is proceeding with the closing of approximately 95 Hibbett Sports stores in fiscal 2020, which is expected to result in nonrecurring impairment and store closure charges in the range of $0.08 to $0.12 per diluted share in fiscal 2020.

Looking forward, Hibbett Sports expects full-year comparable sales to increase in the mid-single digits. Adjusted diluted earnings per share are expected to be in the range of $2.30 to $2.50, which accounts for the nonrecurring costs of the City Gear acquisition and the accelerated store closure plan.

Hurco Companies Inc. (HURC) declared a regular quarterly dividend of $0.12 per share, in line with the previous declaration. The dividend is payable January 16, 2020, to shareholders of record January 2, 2020. The stock will trade ex-dividend Tuesday, December 31, 2019.

Kimball Electronics Inc. (KE) reported net sales of $313 million for the first quarter of 2020, representing year-over-year growth of 18%. Diluted earnings per share of $0.26 increased 37% year over year.

For the company’s two largest segments, automotive and medical, net sales increased by 17% and 23%, respectively. Combined they accounted for about 71% of net sales for the quarter. Automotive business was driven by increased volumes in each of the company’s markets, led by North America, which was largely the result of new programs. The medical business growth was primarily driven by strong demand for existing programs.

At the time of its earnings report, Kimball Electronics was keeping a close eye on the United Auto Workers strike at General Motors Co. (GM), which slowed production lines in October to fractions of their normal run rates.

Mesa Air Group (MESA) reported adjusted earnings per share of $0.36, which were down year over year from adjusted earnings per share of $0.65, and missed the I/B/E/S consensus estimate of $0.55.

The company said that the difference in year-over-year results is primarily due to the timing of scheduled heavy maintenance and airframe maintenance of about $9 million. During the quarter, Mesa Air said that it invested $1 million in its cargo operations, expenses that if excluded would have brought adjusted earnings per share up to $0.38.

Looking forward, Mesa Air is targeting earnings per share of $1.50 to $1.80 for 2020 and a range of $1.90 to $2.30 for 2021. In 2020, pilot hours are expected to be about the same as 2019 while Mesa Air operates fewer aircraft.

Olympus Steel Inc. (ZEUS) reported that third-quarter 2019 net sales of $384 million were 16% lower than net sales in the third quarter of 2018. Earnings per diluted share of $0.05 compared with earnings per diluted share of $1.01 in the same quarter of 2018 and missed the I/B/E/S consensus estimate of $0.067 by 25%.

Net sales were impacted by lower year-over-year shipping volumes and pricing within the carbon flat products segment. The specialty metals flat products segment continued to profitably grow its market share while sales in the tubular and pipe products segment outperformed the market. Olympus Steel said it is encouraged by the positive impact of its business diversification strategy, which includes specialty metals and tubular and pipe products.

Additionally, Olympus Steel declared a regular quarterly dividend of $0.02 per share, in line with the previous declaration. The dividend was payable December 16 to shareholders of record December 2.

RCI Hospitality Holdings (RICK) declared a regular quarterly dividend of $0.03 per share, in line with its annual dividend payment plan. The dividend is payable December 26 to shareholders of record December 10.

Rocky Brands Inc. (RCKY) declared a regular quarterly dividend of $0.14 per share, in line with the previous declaration. The dividend is payable December 17 to shareholders of record December 3.

Townsquare Media Inc. (TSQ) reported that third-quarter net revenue increased by 6.2% to $112.6 million year over year. Adjusted earnings per share of $0.33 were flat year over year and met the I/B/E/S consensus estimate for the quarter.

Advertising net revenue increased by 5.2%, to $93.1 million, Townsquare Interactive net revenue increased by 26%, to $15.9 million, and live events net revenue decreased by 27.3%, to $3.6 million, year over year. Excluding political revenue, net revenue increased $8.2 million, or 7.9%, to $111.9 million, and advertising net revenue increased $6.3 million, or 7.3%, to $92.5 million.

For full-year 2019, net revenue is expected to be between $428 million and $430 million and adjusted EBITDA is expected to be between $102 million and $104 million.

Townsquare Media also declared a regular quarterly dividend of $0.075 per share, in line with the previous declaration. The dividend is payable February 14, 2020, to shareholders of record December 27, 2019. The stock will trade ex-dividend on Thursday, December 26, 2019.

Vishay Precision Group Inc. (VPG) reported sales of $67.4 million for the third quarter of 2019, down 11% year over year. Adjusted earnings per diluted share of $0.37 beat the I/B/E/S consensus estimate of $0.365 but decreased by 35% year over year.

Foreign exchange negatively impacted revenues by $800,000 for the third quarter of 2019 compared to a year ago. Gross margin decreased to 38.3% in comparison to 40.5% in the third quarter of 2018. The year-over-year decrease of $4.8 million was primarily attributable to lower sales volume of, and a negative impact from, foreign currency rates.

For near-term outlook, CEO Ziv Shoshani said, “Given the current business environment and our order trends, at constant third fiscal quarter 2019 exchange rates, and including approximately two months of sales related to the acquisition of Dynamic Systems Inc., we expect net revenues in the range of $63 million to $69 million for the fourth fiscal quarter of 2019.”

Separately, Vishay Precision acquired New York-based Dynamic Systems Inc. (DSI), a specialized provider of dynamic thermal-mechanical test and simulation systems used to develop new metal alloys and optimize production processes, for a purchase price of $41 million plus a potential additional $3 million. Over the past three years, DSI achieved average annual sales of $16 million and high earnings before inflation EBITDA margins. Going forward, DSI will report to the company’s weighing and control systems segment.