John Bajkowski
is the president of AAII.
AAL
BSET
CVU
DCO
DFSCX
EBF
FLXS
HNRG
HOFT
HURC
KE
NAESX
PERI
RCKY
REX
RICK
TSCO
TSQ
UAL
VFINX
VPG
VSEC
V, U and L are not letters being called out by Wheel of Fortune players trying to solve a word puzzle, they are letters called out by economists attempting to plot the future direction of the trajectory of the economy. The sudden halt in the domestic economy as we try to flatten the peak of active coronavirus cases has made an economic slowdown a reality.
Economists are now trying to determine if the steep decline and recovery will resemble a V—where the economy’s downturn lasts only a quarter and the economy comes back quickly to prior levels—or a U—where the downturn lasts a few quarters, but the economy recovers after a coronavirus vaccine is developed and consumers, business spending and production go back to normal. Other economists point out that not only will the coronavirus pandemic have a lasting impact on the economy, other factors such as the collapse of oil prices will have a lasting negative impact on economic activity—resulting in a downward slope in economic activity that remains flat for some time to come, hence the use of the letter L. I can keep calling letters such as W or even M that are also being used to project our economic levels, but I think that you get the picture. Reading through the company news in this issue reveals the deep and sudden impact on many companies as they temporarily reduce operations, borrow money to try to establish cash reserves to weather the storm and withdraw guidance not knowing what the near-term future holds.
Of course, the stock market is a discounting machine looking forward and adjusting prices today in anticipation of future company success. Severe market swings reflect the sudden and frequent changes in investor sentiment as the market collectively digests new information and updates projections. Less-liquid stocks, such as micro-cap stocks, typically go down more deeply during bear market, but then bounce back more strongly in the subsequent bull market.
A recent DataTrek Research commentary examined how some major asset classes performed in the initial recovery period after the financial crisis.
In 2009:
While in 2010:
Generally, riskier and less-liquid assets are the stronger-performing groups in the course of a recovery. During the financial crisis, the Model Shadow Stock Portfolio lost more than the large-cap S&P 500 index (down 63.4% versus 50.1%) but recovered to its previous high more quickly (3.4 years versus 4.7 years). It is important to note that past patterns do not always repeat, but it is helpful to study historical patterns to see if they might apply today.
The Model Shadow Stock Portfolio lost 35.1% during March, bringing its year-to-date loss down to 48.5%. In contrast, the S&P 500 as measured through the Vanguard 500 Index fund (VFINX) was down 12.4% in March and is down 19.6% year to date, while the Vanguard Small Cap Index fund (NAESX) lost 21.9% in March and is down 30.1% year to date through March. The DFA U.S. Micro Cap fund (DFSCX) was down 23.3% during March and is down 34.7% during the first quarter of the year.
The performance of growth- versus value-oriented stocks was slanted toward growth stocks during the month, with value stocks showing greater losses across all market-cap segments.
In the large-cap segment, value stocks were down 15.3% for the month, bringing their year-to-date performance to a loss 25.3% for 2020. Large-cap growth stocks were down 10.0% during March and lost 14.5% year to date.
In the mid-cap segment, value stocks are down 35.1% for the year, after losing 24.2% during March. Mid-cap growth stocks are down 24.7% for the year, after losing 16.8% during the month.
Small-cap value stocks are down 35.7% year to date, while small-cap growth stocks are down 25.8% for the year. Small-cap value stocks gave up 24.7% during March, while small-cap growth stocks lost 19.1% during the month.
Stocks in the information technology (–11.9%), health care (–12.7%) and utilities (–13.5%) sectors are the best-performing groups in the market this year.
Sectors that are down the most this year include energy (–50.5%), financials (–32.0%) and industrials (–27.1%). All of the sectors are down 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 11.4% versus the Vanguard 500 Index fund’s gain of 8.7% per year on average over the same period. Over the same period, the Vanguard Small-Cap Index fund posted an average annual gain of 8.5%.
Model Shadow Stock Portfolio News
As of April 13, 2020, 39 stocks met the initial selection criteria for the Model Shadow Stock Portfolio, down from 49 stocks that passed on March 17, 2020. Of these, seven are currently held in the Model Shadow Stock tracking portfolio: Delta Apparel Inc. (DLA), Hibbett Sports Inc. (HIBB), Hooker Furniture Corp. (HOFT), Perion Network Ltd. (PERI), RCI Hospitality Holdings Inc. (RICK), Universal Stainless & Alloy (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 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.
We conducted our quarterly review at the end of March, but no stocks met our quantitative valuation, size or earnings quality sell rules. We will conduct our next review toward the end of May. 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 March for the holdings in the Model Shadow Stock Portfolio:
Bassett Furniture Industries Inc. (BSET) declared a regular quarterly dividend of $0.125 per share, in line with the previous declaration. The dividend is payable on May 29 to shareholders of record as of May 15. The stock will trade ex-dividend on Thursday, May 14.
Separately, Bassett Furniture said in a filing with the U.S. Securities and Exchange Commission (SEC) that its Bassett Home Furnishings retail stores have been temporarily closed due to the coronavirus pandemic. Some remain open through digital means, while some remain open for in-person appointments for case-specific situations.
Big 5 Sporting Goods Corp. (BGFV) withdrew its financial guidance for the first quarter of 2020, as more than half of its retail stores have temporarily closed in response to the coronavirus pandemic. Although additional stores may need to be closed in the short term, Big 5 Sporting Goods said its e-commerce platform is still operational.
Container Store Group Inc. (TCS) withdrew its financial guidance for fiscal 2019 amid its response to the coronavirus pandemic. Forty stores have been temporarily closed based on guidance from regional governments, and the remaining stores that are still open have reduced operating hours amid new social distancing protocols. All store employees impacted by the temporary closures will receive two weeks’ pay and benefits. A portion of corporate employees are also being furloughed due to reduced operations, and executive officers have reduced their base salaries.
Additionally, Container Store Group has drawn on $50 million of its revolving credit facility, leaving an outstanding balance of $78 million under its current agreement.
Covenant Transportation Group (CVTI) announced a temporary suspension for its share repurchase program due to the coronavirus pandemic. In a filing with the SEC, the company said that it has exposure to the economic slowdown caused by the coronavirus pandemic but is unsure exactly what the impact will be.
CPI Aerostructures Inc. (CVU) stated that it will need additional time to amend and restate filings with the SEC for fiscal 2018 and fiscal 2019. Despite the delay, CEO Douglas McCrosson said the company does not expect that the error in its accounting will have an impact on reported operating cash flows in the affected periods or going forward. CPI Aerostructures will continue to deliver products for its contracts. The coronavirus pandemic has led to additional delays as CPI Aerostructures works with its independent accounting firm.
Separately, CPI Aerostructures said that its operations have been deemed essential due to its national defense contracts. Production will continue as normal for the time being, except for increased employee safety guidelines
Cumulus Media Inc. (CMLS) announced a new revolving credit facility of up to $100 million set to mature in March 2025. This new agreement replaces the company’s previous revolving credit facility for up to $50 million.
Delta Apparel Inc. (DLA) announced that it temporarily closed all of its retail stores in the U.S. for three weeks, in addition to suspending operations at its manufacturing facilities in Honduras and El Salvador in response to the coronavirus pandemic. The company will continue to serve its customers through its digital platforms.
Ducommun Incorporated (DCO) announced that its lightning diversion systems (LDS) business—a global leader in the design and manufacture of segmented lightning diverter strips and protection devices for aerospace and defense markets—signed an exclusive licensing agreement with Wichita State University (WSU) for advanced lightning strike protection technology to be used on wind turbines.
Ducommun officials said LDS will further develop and commercialize the technology, originally developed at WSU’s National Institute for Aviation Research, and offer it to targeted wind turbine original equipment manufacturers (OEMs) and operators in the U.S. and select international markets.
Ennis Inc. (EBF) declared a regular quarterly dividend of $0.225 per share, in line with the previous declaration. The dividend is payable on May 4 to shareholders of record as of April 13.
Flexsteel Industries Inc. (FLXS) declared a regular quarterly dividend of $0.22 per share, in line with the previous declaration. The dividend was payable on April 6 to shareholders of record as of March 20.
Separately, Flexsteel announced the termination of its CFO and principal financial and accounting officer effective March 20. Replacing him will be Derek Schmidt as CFO and chief operating officer, beginning April 6. Schmidt most recently served as the senior vice president and CFO for Crescent Electric Supply Co., one of the nation’s largest electrical distributors.
Hallador Energy Co. (HNRG) reported net loss per share of $1.95 for the fourth quarter of 2019. Earnings were impacted by impairment charges totaling $77.9 million, which when adjusted reduced the quarter’s loss per share to $0.05. Two million tons of coal were shipped in the quarter, compared to the 8.1 million tons sold in all of 2019.
The company’s permanent closing of its Carlisle mine in Indiana accounted for most of the total impairment charges at $65.7 million. However, the company also impaired its Bulldog reserve by $9.2 million and its Hourglass Sands project by $2.9 million.
The decision to close the Carlisle mine came after operating it with negative free cash flow over the preceding 18 months. Cash totaling $50 million from the reduction in expenditures for mines will be used for debt reduction. Capital expenditures are being reduced by $20 million. The company’s coal shipments for 2020 will total less tonnage year over year. However, the retention of only profitable operations is expected to enhance the company’s financials going forward.
Hibbett Sports Inc. (HIBB) reported net earnings per share of $0.34 for the fourth quarter of 2020, compared with net earnings per share of $0.36 for the period one year ago. On an adjusted basis, net earnings per share of $0.51 compared year over year to $0.57 per share. Before the earnings release, the I/B/E/S consensus estimate called for earnings per share of $0.617.
Net sales increased by 2.3% to $313.0 million year over year. Results for the quarter were the first to include sales from acquired City Gear stores. Comparable-store sales increased by 4%. The increase in net sales was primarily attributable to the 37% increase in e-commerce sales, which accounted for about 14% of total sales, compared to last year. Sales were driven by strong results in footwear and connected apparel.
Due to the current uncertainty about the overall impact of the coronavirus pandemic on its businesses, Hibbett Sports is not providing a full-year outlook for fiscal 2021. The company hopes to provide full-year guidance in May when it releases first-quarter earnings for 2021.
Separately, Hibbett Sports announced the appointment of Robert Volke as its new CFO beginning April 13. Current interim CFO Scott Humphrey will remain with Hibbett Sports to facilitate the transition. Volke has previously worked for Fleet Farm LLC and Tractor Supply Co. (TSCO) before that.
Hooker Furniture Corp. (HOFT) declared a regular quarterly dividend of $0.16 per share, in line with the previous declaration. The dividend was paid on March 31 to shareholders of record as of March 17.
Hurco Companies Inc. (HURC) reported net loss of $0.13 per diluted share for the first quarter of 2020, compared to net income of $0.97 per share in the same period one year ago. Sales and services fees for the quarter were down 41% year over year to $43.7 million.
The company said that several recently developing market and industry factors combined to soften global demand and increase pricing pressure, despite the company’s last four fiscal years representing its highest annual revenue periods in history. Since the beginning of fiscal 2020, operating results have faced the ongoing economic slowdown in Germany, trade tensions between the U.S. and China, political friction in the U.S., U.K. Brexit activities and, most recently, the coronavirus pandemic.
Sales particularly declined in its primary markets for higher-priced machines in Europe and the Americas. Global machine tool competitors have priced their excess inventories more aggressively to realign inventory levels with current demand.
Also, Hurco Companies declared a regular quarterly dividend of $0.13 per share. The dividend is payable on April 13 to shareholders of record as of March 30. In the same announcement, Hurco Companies announced a share repurchase program of up to $7 million in common stock, valid through March 2022.
Kimball Electronics Inc. (KE) said that its global operations are being disrupted to different degrees due to the coronavirus pandemic. While the company’s facilities in China have returned to normal operations, those in Poland, Romania, Thailand, Vietnam, Japan, India and Mexico are all affected by regional government restrictions to movement.
The effect on operations in the U.S. also varies based on local, state and federal guidelines. Plants in Indiana and Florida remain open to normal operations due to their essential business status for their ties to the production of medical supplies. While Kimball Electronics’ sales are expected to decline in certain product categories, the company is experiencing increasing demand for other products, such as medical supplies.
Mesa Air Group (MESA) reported a 6.2% year-over-year increase to operating block hours in February, on controllable completion factors of 99.98% and 99.96% for American Airlines Group Inc. (AAL) and United Airlines Holdings Inc. (UAL), respectively.
Separately, Mesa Air withdrew the financial guidance for 2020 and 2021 that it provided in February with its quarterly earnings report. The company expects to provide additional updates on its next earnings call in May 2020.
RCI Hospitality Holdings (RICK) said that it is temporarily closing a number of nightclubs or limiting their occupancy based on varying local, state and federal social-distancing restrictions and arranging for many of its Bombshells locations to provide takeout service, as the company responds to the coronavirus pandemic. CEO Eric Langan said the company has the financial resources and plans in place to weather the situation. Furthermore, he said that sales were strong in the second fiscal quarter through the second week of March before many of the social-distancing restrictions went into place. The company will provide a further update to its situation amid the pandemic in April with second-quarter sales.
REX American Resources Corp. (REX) reported earnings per share of $0.70 for the fourth quarter of 2020, compared to earnings per share of $0.17 in the same period one year ago. The I/B/E/S consensus estimate called for earnings per share of $0.19. Ethanol and byproducts gross profit increased year over year by 50% due to higher ethanol pricing.
Revenue for the quarter rose by 6.7% year over year, which was also attributed to the rise in ethanol pricing. Ethanol gallons sold decreased by 9.2% over the same period, despite the increase in revenue. The company said that it continued to have supply issues at its NuGen Energy facility in South Dakota related to corn plantings.
Commenting on the current quarter, executive chairman of the board Stuart Rose said the entire ethanol segment is operating at a loss. Losses for the segment are expected for the first and second quarters of 2020. The bad corn harvest in part of the country, low prices for oil and ethanol and the drop in demand due to the coronavirus pandemic were named as causes. Also, the company’s refined coal plant is idled due to low natural gas prices and lower-than-expected demand.
Rose went on to say that the situation is “probably as bad as I’ve ever seen in the ethanol business.” However, he said the company has a strong liquidity position with $205 million in consolidated cash on hand. The company is actively looking at potentially introducing share buybacks under its remaining authorization of about 350,000 shares, as it believes its stock is attractively underpriced due to the current economic situation.
Rocky Brands Inc. (RCKY) announced a new share repurchase program for up to $7.5 million of the company’s outstanding common stock. This repurchase program replaces the previous program that expired at the end of February.
Separately, Rocky Brands has drawn on $20 million of its revolving credit agreement—which provides for a total line of credit of $75 million—as the company responds to the coronavirus pandemic. The agreement allows Rocky Brands to increase its line of credit by up to $25 million if needed.
Rocky Brands also announced that its distribution center in Logan, Ohio, would remain open as an essential operation in the state. Rocky Brands’ manufacturing facilities in Puerto Rico and the Dominican Republic are under government orders not to operate for the next 14 days. These plants produce approximately half of the company’s products, with the remainder being produced by contract manufacturers in other countries—primarily China—where manufacturing resumed at the end of February.
Townsquare Media Inc. (TSQ) reported that net revenue for the fourth quarter of 2019 increased year over year by 2.9%, and by 6.9% excluding political revenue, to $112.1 million. Compared to the same period last year, advertising net revenue increased by 0.9% to $93.9 million, digital marketing solutions net revenue increased by 19.5% to $16.1 million and live events net revenue decreased 15.7% to $2.0 million.
Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for the quarter decreased by 2.8% year over year to $24.1 million. However, adjusted EBITDA excluding political revenue increased by 13.5% to $22.6 million over the same period. Townsquare Media said it will release net income results when it is done with its annual audit, which may or may not include material impairment charges.
The company said it does not yet know the full impact from the coronavirus pandemic on its business; though it does expect eventually to see some negative effect, its scale unknown. All live events under that segment of the company have been canceled through March and many more are expected to be canceled in the second quarter of 2020. The company will have six months to file its full statements with the SEC before being removed from the New York Stock Exchange.
Many clients that promote live events, as well as sporting events and other related businesses, canceled or paused their advertising campaigns. However, Townsquare Media said this impact seemed less severe than to its live events segment.
Townsquare Media also declared a quarterly cash dividend of $0.075 per share. The dividend is payable on May 15 to shareholders of record as of April 2.
Vishay Precision Group Inc. (VPG) revised its revolving credit facility agreement to extend the maturity date of the same principal amount to March 2025. Under the agreement, Vishay Precision may draw on up to $75 million and may increase this limit by $25 million if needed.
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