October Model Shadow Stock Portfolio Update

Slowing economic growth, political discord regarding items such as the debt ceiling and proposed fiscal and tax plans, uncertainty over the Federal Reserve’s tapering plans, continued global supply constraints and coronavirus delta variant concerns combined to help push down stock prices across the board during September.

The S&P 500 index snapped a seven-month winning streak. The S&P 500, as measured by the Vanguard S&P 500 Index fund (VFINX), was down 4.7% during September, but is up 15.8% for the year. The Model Shadow Stock Portfolio lost 6.1% during September, lowering its year-to-date return to 35.5%. The Vanguard Small-Cap Index fund (NAESX) gave up 3.1% during the month and is posting a 13.3% gain during 2021, while the DFA U.S. Micro-Cap fund (DFSCX) lost 1.5% during September and is up 24.4% for the year.

Energy was the only sector to post a gain during September, up 9.0%. Oil and natural gas prices are spiking as demand for energy continues to grow, yet the major oil producers continue to show constraint in increasing supply. Defensive sectors fell the least during the month. Financials were down 1.9%, consumer discretionary lost 2.1% and consumer staples were down 4.2% during September. Materials was the weakest sector, losing 7.2% during September, followed by real estate (down 6.2%) and communication services (down 6.2%). The energy sector is the strongest-performing sector during 2021 with a 42.2% gain during the first nine months of the year. Financials are the second-strongest sector for the year with a 29.1% gain, and real estate is in third place with a gain of 24.4% year to date. Consumer staples is the weakest sector for the year, up 4.0% year to date, followed by utilities (up 4.2%) and materials (up 10.5%).

Value held up better than growth during September across all market-cap groups.

In the large-cap segment, large-cap value stocks were down 3.3% during September yet are up 15.3% year to date. Growth stocks were down 5.8% during September, giving them a 16.4% gain year to date for 2021.

In the mid-cap segment, value stocks are up 21.0% for the year, after declining 3.7% during the month. Mid-cap growth stocks are up 10.1% for the year, after declining 4.3% during September.

Small-cap value stocks are up 22.9% for the year, while small-cap growth stocks are up 2.8%. Small-cap value stocks declined by 2.0% during September, while small-cap growth stocks lost 3.8% during the month.

Since its inception in 1993, the AAII Model Shadow Stock Portfolio has a compound annual average return of 15.0% versus the Vanguard 500 Index fund’s gain of 10.3% per year on average over the same period. Over the same period, the Vanguard Small-Cap Index fund posted an average annual gain of 10.5%.

Monthly Observations

Thirty stocks met the initial selection criteria for the Model Shadow Stock Portfolio as of October 12, 2021, up from 27 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 30 qualifying companies, nine were held in the Model Shadow Stock tracking portfolio at the time: Ampco-Pittsburgh Corp. (AP), Hurco Companies Inc. (HURC), Key Tronic Corp. (KTCC), Mesa Air Group (MESA), Pangaea Logistics Solutions Ltd. (PANL), SIFCO Industries Inc. (SIF), Strattec Security Corp. (STRT), Ultralife Corp. (ULBI) and VOXX International Corp. (VOXX). Pangaea Logistics was the single new addition to the list of currently qualifying portfolio holdings since last month.

Three stocks came off the passing group over since last month. Dixie Group Inc.’s (DXYN) price to book value moved to 1.12, just above the 1.10 qualifying maximum. Rayonier Advanced Materials Inc. (RYAM) fell off the currently qualifying list when its market capitalization of $510.5 million crossed above the $500 million initial qualifying maximum. Orion Group Holdings Inc. (ORN) came off the currently qualifying list when its earnings estimate for the current quarter turned negative. The consensus earnings estimate for Orion Group Holdings’ current quarter dropped from a profit of $0.07 per share to loss of $0.06 per share. The company is expected to announce quarterly results after market close on October 27. Orion Group Holdings is a specialty construction company with a focus on providing construction and dredging services relating to marine transportation facility construction, marine pipeline construction, marine environmental structures and dredging of waterways, channels and ports. Orion Group Holdings also has a concrete segment that provides concrete construction across the light commercial, structural and other associated business areas.

As of October 12, Penn Virginia Corp. (PVAC) had the highest price-to-book ratio in the Model Shadow Stock Portfolio. Its price-to-book ratio of 3.29 is now just below the threshold for removing a stock. Shadow stocks with a price-to-book ratio three times the initial maximum (1.10 × 3 = 3.30) at the time of a quarterly review are removed from the portfolio, assuming there is a suitable replacement. Penn Virginia is an independent oil and gas company engaged in the onshore exploration, development and production of oil, natural gas liquids (NGLs) and natural gas. As noted in the news section below, it was the top-performing stock in the portfolio during September with a gain of 28.8% for the month.

Global Ship Lease Inc. (GSL) has the highest market cap value of $779.4 million as of October 12. Global Ship Lease owns and charters a fleet of mid-sized and smaller containerships. The Model Shadow Stock Portfolio looks for stocks with a market cap (share price times shares outstanding) greater than $30 million but less than $500 million when adding stocks to the portfolio. Shadow stocks with a market cap three times the initial market cap maximum ($500 million × 3 = $1,500 million) at the time of a quarterly review are sold from the portfolio, assuming there is a suitable replacement.

The initial market cap and price-to-book levels are adjusted over time to reflect the changing market conditions. 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).

Next Portfolio Review

The next quarterly review of the Model Shadow Stock Portfolio will take place following the end of November 2021. Any changes to the portfolio will be announced at the time they are made in our Model Shadow Stock Portfolio Update emails (sign up at www.aaii.com/email).

Model Shadow Stock Portfolio News

Penn Virginia Corp. (PVAC) was the top-performing stock for September, up 28.8%. There was no company-specific news for the month. However, prices for oil have rebounded from 2020 lows and the prices for natural gas have also increased ahead of seasonal demand, translating into bullish sentiment for Penn Virginia as a member of the oil and gas exploration and production industry.

Dixie Group Inc. (DXYN) was the second-best-performing stock for September, up 18.5%. There was no company news tied to its price movement for the month. Trade volume significantly increased on bullish sentiment after its second-quarter earnings announcement in August, with the stock featuring momentum of this sentiment in September.

Container Store Group Inc. (TCS) was the worst-performing stock for September, down 17.9%. There was no company-specific news tied to its movement for the month. Another consumer cyclicals stock, Bed Bath & Beyond, reported a sizable earnings miss toward the end of the month, which may have influenced sentiment for Container Store.

Perion Network Ltd. (PERI) was the second-worst-performing stock for September, down 17.8%. There was no company-specific news for the month. The company has seen its stock price move with investor sentiment tied to the pandemic’s effect on the economy as a provider of digital marketing software, which is tied to consumer demand.

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

Bassett Furniture Industries Inc. (BSET) reported third-quarter 2021 earnings per share of $0.31, in line with the I/B/E/S consensus estimate. Year over year, earnings per share increased by 41%. Revenue for the quarter was $118.9 million, growing by 30% year over year.

Operating income for the quarter was $4.5 million, growing by 63% year over year. Bassett Furniture’s wholesale revenue section experienced significant growth, growing by 32% year over year. The company’s logistical services segment reported a year-over-year loss of $500,000 for the quarter compared to last year’s profit of $1 million due primarily to a labor shortage driving up wages and transportation costs across the industry.

CEO Robert Spilman Jr. said disruptions caused by the pandemic specific to the furniture industry remain. “‘Business as usual’ this year means raw material shortages, escalating labor and commodity costs, severely compromised logistics capabilities and an unyielding global virus stubbornly persisting at home and in the industry’s manufacturing centers in Asia,” said Spilman. “We are persevering through these challenges and are squarely focused on working with our vendors to schedule adequate production to reduce our large wholesale backlog and offer higher levels of service in the near term.”

Dixie Group Inc. (DXYN) announced the sale of its commercial business AtlasMasland to Mannington Mills. Dixie Group received $20.5 million in cash and gained control of cash deposits, receivables and inventory with an aggregate value of about $7 million. The transaction’s total value is $27.5 million.

Ennis Inc. (EBF) reported second-quarter 2021 earnings per share of $0.29, in line with the I/B/E/S consensus estimate. Year over year, earnings per share increased by 16%. Revenue for the quarter was $100.5 million, growing by 16% year over year.

According to Ennis, the company is facing a tight paper market due to recovered demand from last year and general supply chain issues. The company has made slight price adjustments and expects to make more to keep its gross profit margin in line with its historical level.

Chairman, president and CEO Keith Walters said the company was pleased overall with its results for the quarter. “As the recovery from the COVID-19 pandemic continues, some of our customers are seeing sales return to normalized levels,” said Walters. “While our gross profit margin percentage for the quarter slightly decreased from 29.0% to 28.8% due primarily to higher inflationary factors, our EBITDA [earnings before interest, taxes, depreciation and amortization] margin was consistent in the low to mid 15% range.”

Also, Ennis declared a regular quarterly dividend of $0.25 per share, in line with the previous declaration. The dividend is payable on November 5 to shareholders of record as of October 8.

Global Ship Lease Inc. (GSL) announced the repurchase of 521,650 shares by chairman George Youroukos from the company B. Riley Financial. Before this transaction, B. Riley Financial purchased three million shares of Global Ship Lease common stock from Kelso & Company. Youroukos’ holding in Global Ship Lease has increased from 4.9% to 6.4%.

Hooker Furniture Corp. (HOFT) reported second-quarter fiscal-2022 earnings per share of $0.62, missing the I/B/E/S consensus estimate of $0.65 per share by 4.7%. Year over year, earnings per share increased by 29%. Revenue for the quarter was $162.5 million, growing by 25% year over year.

Each of the company’s segments—Hooker Branded, Home Meridian and domestic upholstery—achieved sales gains of 29%, 23% and 29%, respectively. Consolidated operating income for the second quarter of fiscal 2022 was $9.7 million compared to $7.5 million in the previous year. Operating margin improved moderately despite higher freight and raw material costs and ongoing shortages of ocean vessel and trucking capacity.

“While we expected improvements compared to the early months of the pandemic a year ago, we continue to surpass our goal to return to our pre-pandemic growth track,” said CEO Jeremy Hoff. “Consumer and retail demand remained historically strong with consolidated backlogs doubled compared to last year and incoming orders up 27% over last year and the six-month period.”

In addition, Hooker Furniture declared a regular quarterly dividend of $0.18 per share, in line with the previous declaration. The dividend was payable on September 30 to shareholders of record as of September 16.

Hurco Companies Inc. (HURC) reported third-quarter 2021 earnings per share of $0.23, down year over year by 28%. Revenue for the quarter was $54.2 million, up year over year by 19%.

During the nine months of fiscal 2021, sales increased year over year in all regions as countries began to lift the government-mandated pandemic stay-at-home orders or other similar operating restrictions. Sales increased in the company’s two largest regions by revenue, Europe and the Americas, by 45% and 7%, respectively, while decreasing in its smallest region, Asia Pacific, by 17%.

“Hurco’s order levels continue an upward trend. At $66.7 million, global orders increased for the fourth consecutive quarter and represented the second consecutive quarter of orders exceeding $65.0 million, and more in line with pre-pandemic levels,” said CEO Greg Volovic. Hurco’s orders outpaced sales in all geographic regions, a trend we typically see during periods of growing global machine tool growth.”

In addition, Hurco Companies declared a regular quarterly dividend of $0.14 per share, in line with the previous declaration. The dividend is payable on October 11 to shareholders of record as of September 27.

Orion Group Holdings Inc. (ORN) announced multiple contracts of business during the month of September nearing $300 million in aggregate value.

Rayonier Advanced Materials Inc. (RYAM) announced its plans to redeem $25 million of notes at 103% of the principal amount. The company also announced that during its current fiscal quarter it has repurchased approximately $126.5 million of its 5.5% notes due 2024 via open market operations. The company is currently focused on debt reduction as its primary use of cash.

VOXX International Corp. (VOXX) announced the acquisition of certain assets of Onkyo Home Entertainment Corp. Premium Audio Company LLC (PAC), a fully owned VOXX subsidiary, and Sharp Corp. jointly agreed to enter into the purchase agreement with Onkyo to acquire its audio/video assets. The total purchase price is $30.8 million, plus certain liabilities and future commission payments to Onkyo on certain product sales. Premium Audio owns 77% of the deal, and Sharp owns 23%.