July Model Shadow Stock Portfolio Update

Next Wednesday, July 22, at 7:30 p.m. CDT, AAII president John Bajkowski will host a webinar on the Model Shadow Stock Portfolio. To register, click here.

Eleven stocks met the initial selection criteria for the Model Shadow Stock Portfolio as of July 13, 2020, up from eight passing stocks one month ago. 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 Shadow Stock Ideas is updated daily—Tuesday through Saturday.

Of the 11 qualifying companies, two are currently held in the Model Shadow Stock tracking portfolio: Hooker Furniture Corp. (HOFT) and Penn Virginia Corp. (PVAC). Strattec Security Corp. (STRT) came off the list of qualifying companies over the course of the last month, while Hooker Furniture was added. Qualifying companies are those held in the Model Shadow Stock Portfolio that currently meet the initial purchase rules. (They are designated as “currently 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 discussed here since the notes on the website table are dynamically updated daily.)

As of July 13, 2020, Ennis Inc. (EBF) had the highest price-to-book-value ratio in the Model Shadow Stock Portfolio. Its ratio of 1.45 is above the 0.90 maximum value used for initially qualifying a stock for inclusion to the portfolio. However, stocks are not removed from the portfolio until their price-to-book-value ratio rises to three times the initial maximum value (2.70).

As we have noted, it may help you to think about values below 0.90 as being attractive, while values three times above the initial maximum are expensive. Allowing the price-to-book ratio to expand for stocks that you own allows your winners to run up a little, since the price-to-book ratio typically gets larger as the stock price goes up. The initial price-to-book level is adjusted over time to reflect the changing market conditions, and valuation and size requirements are being examined for the next quarterly portfolio review.

The Model Shadow Stock Portfolio looks for stocks with a market capitalization (share price times shares outstanding) greater than $30 million but less than $300 million when adding stocks to the portfolio. Shadow Stocks with a market cap three times the initial market cap maximum ($300 million × 3 = $900 million) at the time of a quarterly review are removed from the portfolio, assuming there is a suitable replacement. Ennis also has the highest market cap in the portfolio, with a value of $431.8 million as of July 13, 2020.

Click here to see the current purchase and sell rules for the portfolio.

Performance Update

Investors continued to bid up stock prices during June even as the economic restart is threatened by the dark clouds of the coronavirus pandemic. The technology sector continues to lead the market, with the S&P 500 technology sector gaining 7.1% during June, boosting its performance to 15.0% for the first half of the year. The only other sector to show a gain for the year is the consumer discretionary sector, which is up 7.2% for the year after gaining 5.0% during June. The utility sector was the weakest S&P 500 sector during June, shedding 4.7% and contributing to a loss of 11.1% year to date. Energy was the weakest sector during the first six months of the year, down 35.3%, after losing 1.3% during June.

The S&P 500 index gained 2.0% during June, resulting in a 20.5% gain during the second quarter and a year-to-date loss of 3.1%. The S&P 500 equally weighted index gained 1.6% during the month and is down 10.8% year to date. The small-cap Russell 2000 index is down 13.0% for the first half of the year after gaining 3.5% during June and 25.4% in the second quarter of 2020. The Model Shadow Stock Portfolio gained 5.7% during June but remains down 34.1% for the year after gaining 28.0% in the second quarter of 2020.

The performance of growth- versus value-oriented stocks continues to be slanted toward growth stocks.

In the large-cap segment, growth stocks were up 4.1% for the month, giving them a positive 7.9% gain year to date for 2020. Large-cap value stocks were down 1.0% during June and are now down 15.5% year to date.

In the mid-cap segment, growth stocks are down 5.2% for the year, after gaining 1.4% during June. Mid-cap value stocks are down 21.0% for the year, after gaining 1.1% during the month.

Small-cap growth stocks are down 3.1% year to date, after gaining 3.8% during the month. Small-cap value stocks are down 23.5% for the year after gaining 2.9% during June.

Since its inception in 1993, the AAII Model Shadow Stock Portfolio has a compound annual average return of 12.3% versus the Vanguard 500 Index fund’s (VFINX) gain of 9.4% per year on average over the same period, which now matches the Vanguard Small Cap Index (NAESX) average annual gain of 9.4%.

We will conduct the next quarterly review of the portfolio toward the end of August. 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).

Model Shadow Stock Portfolio News

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

Container Store Group Inc. (TCS) said in a filing with the U.S. Securities and Exchange Commission (SEC) that it plans to file its finalized financial report for the fourth quarter of 2019 and fiscal-year 2019 on or before July 11, or no later than July 26, the latter date representing the end of the extended 45-day window granted by the SEC for late filing due to the coronavirus pandemic. Container Store’s original deadline was June 11. The company reported preliminary financial figures in May.

CPI Aerostructures Inc. (CVU) received purchase orders with an aggregate value of about $43.1 million from Northrop Grumman Corp. (NOC) for outer-wing panel kits used in the manufacture of the E-2D Hawkeye, the American carrier-capable tactical turboprop aircraft. In February 2019, CPI Aerostructures received an $8.1 million order for the first year of a multi-year contract with an expected total value of up to $47.5 million. With the addition of these new orders, the total value of firm orders under the multi-year contract is about $51 million, with deliveries scheduled through 2023.

Later in the month, CPI Aerostructures announced additional purchase orders from Northrop Grumman to supply outer-wing panel structural components and kits for the E-2D Hawkeye for a total contract value of about $20 million. This brings CPI Aerostructures’ total multi-year contract with Northrop Grumman from $51 million to about $70 million.

Separately, CPI Aerostructures announced that it has received an add-on order from Lockheed Martin Corp. (LMT) for additional structural assemblies for the latter’s production of F-16 Block 70/72 aircraft, the newest and most advanced F-16 production configuration. The specific value of the additional orders was not disclosed. However, the total value of the contract with Lockheed Martin, announced in February 2019, has now grown to $8.7 million.

Cumulus Media Inc. (CMLS) sold a 75-acre parcel of land in Bethesda, Maryland, to Toll Brothers Inc. (TOL) for expected net proceeds of $71.3 million. The sale is part of Cumulus Media’s long-term effort to reduce its net leverage, which is especially significant amid the liquidity pressure of the coronavirus pandemic. Cumulus Media anticipates achieving minor expense savings from the elimination of real estate taxes after the closing and does not expect any tax liability as it relates to the transaction.

Delta Apparel Inc. (DLA) is expanding its digital print business with a new integrated digital print and distribution facility, which will open in August. Delta Apparel said the new facility will allow it to reach about 60% of the U.S. with one-day shipping. The company’s digital print business reported year-over-year growth of 25% in April and 32% in May.

Ennis Inc. (EBF) reported that earnings for the first quarter of 2020 decreased by 56.8% year over year to $0.16 per share, which beat the single analyst estimate recorded by I/B/E/S for earnings per share of $0.12. Revenue fell by 17.6% to $89 million over the same period.

As a printer of business products, Ennis said its results reflect the impact of the economic slowdown stemming from the coronavirus pandemic but were within expectations. Certain sectors of the economy did not experience a downturn, which led to the company’s specialty products segment reporting flat sales results year over year that helped flatten the downward curve of its total sales for the quarter.

“To address our cost structure, we have furloughed 320 people and several facilities, and we have exited some of our leased facilities,” said CEO Keith Walters. “We will continue to monitor the incoming order volume so that we can proactively adjust our costs accordingly. All of these actions to reduce variable and fixed costs are ongoing as we evaluate our projected sales and cost structure.”

Also, Ennis declared a regular quarterly dividend of $0.225 per share, in line with the previous declaration. The dividend is payable on August 10 to shareholders of record as of July 10.

Hooker Furniture Corp. (HOFT) reported preliminary results for the first quarter of 2021, delaying a final filing under the SEC’s pandemic allowance till the end of July. Net sales decreased by 22.8% year over year to $104.6 million. Hooker Furniture reported a net loss for the quarter of $0.09 per share compared to earnings per share of $0.17 in the first quarter of 2019. The net loss per share missed the estimate from a single analyst recorded by I/B/E/S for earnings per share of $0.02.

Results for the quarter were driven by the pandemic and its related lockdown and economic slowdown, which influenced orders to fall year over year by 70% in March and 65% in April—the last two months of the quarter. Cancellations of stock orders by large customers and deferred orders from retailers who closed their stores during the shutdown partially drove the steep declines. However, orders turned positive by 7% year over year in May and the trend has continued in June. The temporary shutdown of production at five of Hooker Furniture’s six domestic upholstery plants also contributed to the quarter’s negative results.

In addition, Hooker Furniture declared a dividend of $0.16 per share, in line with the previous declaration. The dividend was paid on June 30 to shareholders of record as of June 16.

Separately, Hooker Furniture announced that CEO Paul Toms will retire on January 31, 2021, and that Jeremy Hoff, president of Hooker Legacy Brands, will take over the CEO role. Hoff, who has been with the company since 2017, will be the first nonmember of the original founding family to head the company in its 96-year history.

Hurco Companies Inc. (HURC) reported a net loss per share of $0.58 for the second quarter of 2020, compared to net earnings per share of $0.76 in the same period one year ago. Sales and service fees for the quarter fell by 47% year over year to $37.1 million.

Hurco CEO Michael Doar said that the company was able to operate its facilities as an essential supplier of critical infrastructure industries but that many of its customers experienced significant disruptions in their operations and normal purchasing cycles. For the second quarter, sales in the Americas decreased by 30% year over year, European sales decreased by 61% year over year and Asian Pacific sales decreased by 35% year over year. Sales in North America, South America and Europe accounted for 86% of sales for the quarter.

Doar said that the company’s strategy accounts for the cyclical nature of its market, so Hurco already maintained a strong balance sheet that will help it weather the uncertainty of the coronavirus pandemic’s effect on the economy.

Hurco declared a regular quarterly dividend of $0.13 per share, in line with the previous declaration. The dividend was paid on July 13 to shareholders of record as of June 29.

Mesa Air Group (MESA) reported a 69% drop in operating hours for May 2020 compared year over year, due to reduced schedules in response to the coronavirus pandemic. Mesa Air’s controllable completion factor for both American Airlines Group Inc. (AAL) and United Airlines Holdings Inc. (UAL) was 100% for the month.

RCI Hospitality Holdings (RICK) reopened several locations based on the easing of local and state coronavirus-related regulations, while also scaling back their operations at several locations in new pandemic hot spots. Clubs in Illinois, Minnesota and North Carolina opened during June with limited capacities ranging from 25% to 50%, and locations in New York are set to open in July as New York City enters a new regulatory phase of reopening. Nine clubs in Texas were closed in response to new state regulations, though BYOB locations remain open at 50% capacity. Ten Bombshells locations have reduced their indoor capacity from 75% to 50% in Texas as well.

CEO Eric Langan said that revenues have grown for eight consecutive weeks from $500,000 in May to $2.4 million in mid-June. Looking ahead, RCI Hospitality expects possible temporary closings at locations based on regional responses to the pandemic. However, the company believes it is geographically diversified enough to see progress with reopening overall.

In addition, RCI Hospitality declared a regular quarterly dividend of $0.03 per share, which represents a decrease from its second-quarter dividend of $0.04 but is in line with the company’s first-quarter dividend. The dividend was paid on June 29 to shareholders of record as of June 18.

Townsquare Media Inc. (TSQ) reported that adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) decreased by 19.2% year over year to $15.5 million for the first quarter of 2020. The adjusted loss per share for the quarter of $0.02 missed the I/B/E/S consensus estimate for earnings per share of $0.10. Net revenue over the same period was about flat at $93.4 million.

Townsquare Media said that the first two months of the quarter started strong before the coronavirus pandemic began to impact the company’s advertising and live events segments in March, offsetting momentum carried over from 2019. The downturn in broadcast advertising spending is expected to continue through the second quarter, though Townsquare Media said it has seen sequential improvement in May and June.

Digital revenue growth was a bright spot for the quarter, exceeding 40% of revenue compared to 35% in 2019. Despite growth from the company’s digital advertising business, Townsquare is forecasting for a drop in total net revenue for the second quarter of about 36%. The company is actively cutting costs to accommodate decreasing revenue.

Due to the economic circumstances and uncertainty created by the pandemic, Townsquare Media’s board of directors has decided to cease paying quarterly dividends moving forward and did not declare a dividend for this quarter.