“When the United States sneezes, the world catches a cold” is a common phrase used to describe the socioeconomic significance of the American economic and political activity upon the global macro system. But the global economy is not static and the relative impact nations have upon the world as a whole changes. The phrase itself is attributed to Austrian diplomat Klemens von Metternich who witnessed the impact of the French revolution and Napoleon’s rise to power and noted that when France sneezes, Europe catches a cold.
With the outbreak of the coronavirus and the growing significance of the Chinese economy, one cannot help but wonder if this is the type of “shock to the system” that comes out of nowhere and ends up harming the long-running economic expansion of the U.S. China has a population of over 1.3 billion individuals, and the international monetary fund now indicates that the Chinese economy is the world’s largest, measured by gross domestic product. China has more millionaires and billionaires than any country other than the U.S.
Time will reveal the impact of the coronavirus on the global economy, but the stock market attempts to be forward-looking and the year has been off to a rocky start. The publishers of the Stock Trader’s Almanac have observed since 1950 that when the market is up during the first five trading days of the year, 82% of the time the market is up for the whole year.
The analysts at DataTrek noted that while large-cap stocks started 2020 off strongly, every other segment is weaker for the first five trading days.
Within the S&P 500, the technology and communications sectors were not only the strongest sectors but they make up a third of the index and helped boost its performance.
The market has come back, but the S&P 500 index as measured by the Vanguard S&P 500 fund (VFINX) ending up losing 0.1% during January. The Model Shadow Stock Portfolio was down 8.4% for January, while the Vanguard Small Cap fund (NAESX) lost 2.0% and the DFA US Micro Cap fund (DFSCX) lost 5.5% during the month.
Growth-oriented stocks outperformed value-oriented stocks across all market capitalizations during January. In the large-cap segment, growth stocks gained 2.3% for the month while value stocks lost 2.6%. Mid-cap growth stocks lost 1.2% during January, while mid-cap value stocks lost 4.1%. Small-cap growth stocks lost 1.1%, while small-cap value stocks lost 5.4%.
Stocks in the utility (+6.7%), information technology (+4.0%) and communication services (+0.9%) sectors ended up with the greatest gains for the month. Sectors that lagged during January include energy (–11.1%), materials (–6.2%) and health care (–2.7%).
What is somewhat lost when just looking at the gains and losses of each sector is the impact upon the S&P 500. Since the S&P 500 is market-cap weighted, stocks and sectors that perform well over the long term start to dominate the movement of the index. Utilities were the best-performing sector in January—but at only 3.5% of the index, had a relatively minor impact compared to the information technology sector which makes up 24.2% of the index. The table below provides the sector weights within the market-cap-weighted S&P 500 as of end of January.
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 9.7% per year on average over the same period. Over the same 27-year period, the Vanguard Small Cap Index fund (NAESX) posted an average annual gain of 9.9%.
As of the end of January, 20 stocks met the initial selection criteria for the Model Shadow Stock Portfolio. Of these, seven are currently held in the Model Shadow Stock tracking portfolio: Container Store Group Inc. (TCS), CPI Aerostructures Inc. (CVU), Cumulus Media Inc. (CMLS), Hurco Companies Inc. (HURC), Mesa Air Group (MESA), Strattec Security Corp. (STRT) and Universal Stainless & Alloy Products (USAP). 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 passing list on the website is revised daily and the notes are dynamically updated based on the revised list.)
Currently, none of the holdings in the Model Shadow Stock Portfolio are approaching the price-to-book valuation limit of 2.7 or the market cap cut-off of $900 million.
The next quarterly review of the AAII Model Shadow Stock Portfolio will take place around the end of February 2020, 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 January for the holdings in the Model Shadow Stock Portfolio:
Bassett Furniture Industries Inc. (BSET) reported a net loss of $0.51 per diluted share for the fourth quarter of 2019, compared to net income of $0.18 per diluted share in the same period one year ago. Adjusted earnings per diluted share of $0.07 missed the I/B/E/S consensus estimate of $0.159 per share by 56%.
Net sales for the wholesale segment were $62.5 million, down 4.0% compared to $65.2 million for the fourth quarter of 2018. The decrease was primarily driven by a 6.3% decrease in shipments to the Bassett Home Furnishings network and an 82% decrease in juvenile furniture shipments as the company continues to exit this furniture line. Net sales for the 70 company-owned Bassett Home Furnishings stores were $70.0 million for the fourth quarter of 2019, down 0.2% compared to $70.1 million for the fourth quarter of 2018. This decrease was due to a 6.8% decrease in comparable-store sales.
“There are several disruptive trends in the marketplace today that threaten the traditional furniture industry and retail in general,” said CEO Rob Spilman. “Ongoing deflation in key categories, the seismic shift to digital marketing and online commerce, tariffs on Chinese-made goods, evolving generational consumption behavior, and the tight labor market and the aging of the core baby boomer workforce are factors that must be dealt with—both for today and for the future.”
Bassett Furniture also declared a regular quarterly dividend of $0.125 per share, in line with the previous declaration. The dividend was payable February 28 to shareholders of record as of February 14.
Beazer Homes USA Inc. (BZH) reported first-quarter 2020 homebuilding revenue of $417.4 million, up 4.1% year over year. Net income from continuing operations of $2.8 million was down year over year from $7.3 million. However, adjusted earnings per share of $0.09 beat the I/B/E/S consensus estimate by 20%.
Homebuilding revenue was up, with a 2.7% increase in home closings to 1,112 and a 1.4% increase in average selling price to $375,400. Homebuilding gross margin was 15.1%, flat year over year. Excluding impairments, abandonments and amortized interest, homebuilding gross margin was 19.8%. The dollar value of homes in backlog as of December 31, 2019, increased 23.4% to $732.1 million, or 1,847 homes, compared to $593.1 million, or 1,525 homes, at the same time last year. The average selling price of homes in backlog was $396,400, up 1.9% year over year.
“Longer term, our focus on delivering ‘extraordinary value at an affordable price,’ principally to first-time and downsizing buyers, is ideally aligned with demographics and responsive to the challenge of providing affordable new homes,” said CEO Allan Merrill. “We remain confident in our ability to improve profitability and returns while reducing debt below $1 billion in the years ahead.”
Covenant Transportation Group (CVTI) reported fourth-quarter total revenue of $233.1 million, a decrease of 14.4% compared with the fourth quarter of 2018. Earnings per diluted share of $0.06 were down compared year over year to earnings per diluted share of $0.89 in the fourth quarter of 2018. Adjusted earnings per share of $0.10 missed the I/B/E/S consensus estimate by 27%.
Total revenue in truckload operations was $176 million, a decrease of $28.8 million compared with the fourth quarter of 2018. This decrease consisted of $23.6 million lower freight, primarily related to a 10.4% decrease in average freight revenue per truck and a 3.4% decrease in the average size of the operational truck fleet. The managed freight segment’s freight revenue decreased by 15.5% to $57 million year over year. The primary reason for the reduced revenue was a reduction in certain customers’ peak season capacity needs this year.
“For the fourth quarter and all of 2019, we battled a difficult operating environment, marked by excess industry capacity, lackluster freight volumes, intense competition from freight brokerage competitors, and higher operating costs,” said CEO David Parker. “In this environment, we continued to execute our enterprise-wide efforts to become more deeply embedded in our customers’ supply chains, capture more consistent and profitable year-round freight, and allocate capital to operations with better returns.”
Flexsteel Industries Inc. (FLXS) reported a net loss of $0.68 per diluted share for the second quarter compared to net income of $0.20 per diluted share in the prior-year quarter. The company reported that net sales were $102.9 million for the second quarter compared to net sales of $118.4 million in the prior-year quarter, a decrease of 13%.
For the quarter, the ongoing 25% tariff and related price increases to the market continued to pressure sales and resulted in lower volume. However, in December, some price increases in key product groups that have completed relocation to Vietnam were rolled back and sales began to show positive signs of recovery. Following two quarters of solid sequential growth in e-commerce sales, the momentum continued with fiscal second quarter e-commerce net sales topping 30% year-over-year growth due to robust holiday demand and strong execution.
Hallador Energy Co. (HNRG) declared a regular quarterly dividend of $0.04 per share. The dividend was payable February 14 to shareholders of record as of January 31.
Hurco Companies Inc. (HURC) reported net income of $0.31 per diluted share for the fourth quarter of fiscal 2019, compared to net income of $1.22 per diluted share for the corresponding period in fiscal 2018. Sales and service fees for the fourth quarter of fiscal 2019 were about $60 million, a decrease of 28% year over year.
“Sales in North America were the highest ever recorded for the region, which minimized the impact of the slower cycle we’ve seen in Europe and Asia, said CEO Michael Doar. “While Europe is typically our largest market and Asia is a targeted growth market, we’ve had a measured response to the slowing demand due to decades of experience in this highly cyclical industry.”
Sales in the Americas for the fourth quarter of fiscal 2019 were down 13% year over year, primarily due to the fact that fourth-quarter fiscal-2018 sales benefited from year-end promotional activities following the International Manufacturing Technology Show, which is held every two years. European sales for the fourth quarter decreased by 35%. The decreases in European sales for the fourth quarter and fiscal 2019 were primarily attributable to a reduced volume of shipments of Hurco machines in Germany and the U.K., as well as a decrease in sales of electro-mechanical components and accessories.
Perion Network Ltd. (PERI) announced its acquisition of Content IQ, a digital publishing orchestration system with proprietary data algorithms and analytics, for $73.05 million. Content IQ’s revenues for the first nine months of 2019 were approximately $26 million. Full-year revenues are expected to be about $39 million.
Strattec Security Corp. (STRT) reported net sales for the fiscal-2020 second quarter of $106.3 million, representing a 5.8% decrease from net sales of $112.9 million in the prior-year second quarter. Net loss for the quarter was $0.36 per diluted share, compared to a net loss of $5.96 per diluted share one year ago.
“We have experienced several non-cash charges in our last 12 months’ operating results as a result of terminating the Strattec defined-benefit pension plan,” said president and CEO Frank Krejci. “The termination of the defined-benefit pension plan completes a multi-year effort to reduce significant balance sheet risk and earnings volatility of maintaining this benefit plan relative to the size of our overall company financial position.”
Sales to Fiat Chrysler Automobiles (FCAU) for the quarter increased over the same period one year ago due primarily to higher product content on their vehicles for which Strattec Security supplies components. Sales also increased year over year to General Motors Co. (GM). Sales to Ford Motor Co. (F) decreased year over year due to lower volumes on their F-series pickup trucks. The decreased sales to Hyundai/Kia were principally due to lower levels of production on the Kia Sedona minivan.
Universal Stainless & Alloy Products Inc. (USAP) reported net income of $0.02 per diluted share for the fourth quarter of 2019, down compared to $0.07 per diluted share in the same period one year ago. Earnings per diluted share for the quarter missed the I/B/E/S consensus estimate of $0.13 per share by 85%.
Net sales for the quarter of $55.2 million were down year over year by 3%. However, sales in the company’s largest end market—aerospace—were up 7% year over year to $37.6 million. Gross margin for the fourth quarter of 2019 was 10.6% of sales, compared with 11.3% of sales in the fourth quarter of 2018. Fourth-quarter gross margin improved sequentially, as operational improvements favorably impacted results and material cost of sales was more closely aligned with selling prices. However, on a year-over-year basis, gross margins were negatively impacted by a less favorable product mix.
Looking forward, Universal Stainless and Alloy Products said it is continuing to assess the Boeing 737 Max production outlook and its potential impact on its order activity. On the commercial side, the company said it has seen favorable developments in tool steel order entry and that it anticipates tool steel sales volumes in 2020 to increase over 2019 levels. The company expects improved material cost alignment in 2020 compared to 2019.
VSE Corp. (VSEC) announced an agreement to sell its subsidiary Prime Turbines LLC for $21 million to PTB Holdings USA LLC. With this divestiture, VSE’s aviation group will no longer offer turboprop engine repair, maintenance and overhaul services, as management reallocates resources toward higher-growth component/accessory repair and parts distribution businesses. Prime Turbines was responsible for about 4% of VSE Corp.’s estimated revenue for 2019. The transaction is expected to close during the first quarter of 2020.
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