June Model Shadow Stock Portfolio Update

While the S&P 500 index squeaked out a 0.2% gain during May, growing concerns over persistent inflationary pressure and need for tightening monetary policy weighed on investor sentiment, pushing the S&P 500 into a bear market during June.

Inflationary pressure has spread from a relatively narrow segment of goods tied to pandemic-related shortages to a wide array of goods, food, housing, energy and even services. Transitory inflation has turned persistent. Consumer purchasing patterns are changing. Supply constraints of goods and services continue. The war continues between Russia and Ukraine with human, political and economic impact. Even the coronavirus continues to mutate and disrupt the world.

The Federal Reserve’s policy has reversed from accommodating to tightening to rein in inflation and the economy. The stock market is forward-looking and one of the best predictors of the direction of the economy. Investor appetite for risk has decreased as concerns over the possibility of a recession have increased while also recognizing the headwinds that corporate profits face. We see the collective impact with weak stock market performance and bearish investor sentiment.

It is important to remember that bear markets turn into bull markets and normally the strongest gains come early in the bull market. It is best to follow a disciplined investment approach and not let your emotions (fear or greed) drive your actions.

Quarterly Review

We conducted our quarterly Model Shadow Stock Portfolio review with the background of a volatile and uncertain stock market. We let the model portfolio rules guide our actions. The quarterly portfolio review is tied to the quarterly earnings reporting cycle of domestic companies. Companies are normally sold from the model portfolio if earnings turn negative or if strong growth and positive expectations push up the size of the company and its valuation beyond our desired levels.

The review begins with an examination of the prevailing valuation segments of the marketplace. The Model Shadow Stock Portfolio selection criteria targets the “cheapest” 10% of domestic stocks as measured by the price-to-book-value (P/B) ratio. The decile breakpoint for value is determined by examining price-to-book levels of domestic companies listed on the New York Stock Exchange (NYSE) and then using the price-to-book breakpoint for stocks listed on all domestic exchanges.

We determined the maximum price-to-book value for the lowest decile (lowest 10%) value universe among NYSE-listed stocks using AAII’s Stock Investor Pro stock screening program. The price-to-book cutoff had decreased slightly from 0.90 in March to 0.89. With the current initial qualifying maximum price-to-book ratio at 0.90, we are leaving it unchanged. Qualifying stocks must have a price-to-book ratio of 0.90 or lower. Stocks in the model portfolio are sold for valuation if they exceed three times the minimum initial price-to-book ratio at the time of a quarterly portfolio review. In other words, for this quarter’s review we use a price-to-book cutoff of 0.90 to screen for stocks to add to the Model Shadow Stock Portfolio and 2.70 (0.90 × 3) as the maximum price-to-book ratio to keep stocks in the portfolio.

As of June 13, 2022, Perion Network Ltd. (PERI) had the highest price-to-book-value ratio in the Model Shadow Stock Portfolio. Perion Network is an Israel-based technology company that delivers online advertising solutions and search monetization to brands and publishers. Its price-to-book ratio of 1.55 is well below the 2.70 value used to remove stocks from the model portfolio. Therefore, no stocks are being sold this quarter for exceeding the valuation limit of the model portfolio.

We then examined market-capitalization levels of the companies listed on the NYSE to determine the size cutoff for the lowest decile. Here the market-cap level maximum was $383 million, compared to $429 million in March 2022. The decline was not significant enough to warrant a change to the portfolio rules. The maximum market cap for inclusion in the Model Shadow Stock Portfolio is $400 million, and holdings are sold if their market cap goes above three times the initial criterion at the time of the quarterly review: $1.2 billion.

Perion Network also had the highest market cap in the portfolio, with a value of $840.5 million as of June 13, 2022. Its market cap was well below the removal level of $1.2 billion, so no stocks are being removed this quarter for exceeding the size limit of the model portfolio.

The other major factor that leads to portfolio turnover is tied to negative earnings. If a company reports trailing 12-month earnings from continuing operations that are negative, the stock is placed on probation; if a subsequent quarter has negative earnings prior to trailing 12-month earnings becoming positive, the stock is sold. When available, adjusted (non-GAAP) earnings are used to put stocks on probation or sell them. These are earnings that have been adjusted to eliminate the impact of nonrecurring events such as markdown of inventory or goodwill. These are earnings reported in the media and firms reporting consensus estimates. The I/B/E/S adjusted earnings reported in Stock Investor Pro are used for Model Shadow Stock Portfolio decisions when they are available.

Coming into the quarter, only Ampco-Pittsburgh Corp. (AP) was on earnings probation. Ampco-Pittsburgh manufactures and sells metal products and customized equipment globally. The company operates through two segments—forged and cast engineered products, and air and liquid processing. The company reported positive fully diluted earnings of $0.084 per share for the quarter ending March 31, 2022. While the results were not strong enough to raise the trailing earnings per share figure into positive territory, the company does not meet the earnings sell rule.

During the quarter both Mesa Air Group (MESA) and Vishay Precision Group Inc. (VPG) reported losses great enough to push their trailing 12-month earnings into negative territory. Mesa Airlines operates as a regional air carrier. Mesa Airlines operates all of its flights on behalf of partners as either American Eagle, United Express or DHL Express flights. Vishay Precision Group is a global company focused on precision measurement sensing technologies, including specialized sensors, weighing solutions and measurement systems. The firms are now on earnings probation.

A stock can also be sold if it has been held for over four years if it also no longer meets the initial rules for qualifying and has not gained at least 10% annually from its purchase price and there is a new qualifying stock to replace it. The four-year rule is normally enforced during the year-end review.

No stocks violated the portfolio sell rules during the quarterly review, so we are leaving the portfolio unchanged.

Running the numbers, 28 stocks met the initial selection criteria for the Model Shadow Stock Portfolio as of June 13, 2022, unchanged from 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 28 qualifying companies, seven are currently held in the Model Shadow Stock tracking portfolio: Big 5 Sporting Goods Corp. (BGFV), Container Store Group Inc. (TCS), Fonar Corp. (FONR), Hooker Furnishings Corp. (HOFT), Hurco Companies Inc. (HURC), Key Tronic Corp. (KTCC) and Strattec Security Corp. (STRT). 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.)

Pangaea Logistics Solutions Ltd. (PANL) came off the qualifying list over the course of the month when its price-to-book level went above 0.90 to 0.95. Four stocks started to pass the initial list of qualifying companies again—Big 5 Sporting Goods, Hooker Furnishings, Key Tronic and Strattec Security.

Performance Update

The Model Shadow Stock Portfolio lost 2.0% during May, lowering its year-to-date performance to a negative 15.9%. The S&P 500 as measured through the Vanguard 500 Index fund (VFINX) was up 0.2% in May and is down 12.8% year to date, while the Vanguard Small Cap Index fund (NAESX) was unchanged during May and is down 13.6% for the year. The DFA U.S. Micro Cap fund (DFSCX) was up 1.7% during May and is down 10.6% during the first five months of the year.

Value segments performed better than growth-oriented stocks. In the large-cap segment, growth stocks were down 1.4% for the month and are now down 21.1% for the year. Large-cap value stocks were up 1.6% during May and are now down 3.5% year to date.

In the mid-cap segment, value stocks are down 5.2% for the year, after gaining 2.1% during May. Mid-cap growth stocks are down 16.6% for the year, after losing 0.8% during the month.

Small-cap value stocks are down 8.3% year to date, while small-cap growth stocks are down 24.8% for the year. Small-cap value stocks gained 1.9% during May, while small-cap growth stocks lost 1.9% during the month.

Since its inception in 1993, the AAII Model Shadow Stock Portfolio has a compound annual average return of 14.0% versus the Vanguard 500 Index fund’s gain of 9.9% per year on average over the same period. The Vanguard Small Cap Index also had an average annual total return gain of 9.9% over the same period.

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

The next quarterly review of the AAII Model Shadow Stock Portfolio will take place around the beginning of September 2022, after most of the 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).

Model Shadow Stock Portfolio News

Pangaea Logistics Solutions Ltd. (PANL) was the highest-performing stock in the portfolio during May, increasing 40.4%. During the month, Pangaea Logistics reported quarterly earnings. Read more about the results below.

Titan Machinery Inc. (TITN) was the second-best-performing stock in the portfolio for the month of May, up 12.0%. During the month, the company reported first-quarter 2023 results. Read more about Titan Machinery’s earnings below.

Dixie Group Inc. (DXYN) was the worst-performing stock in the portfolio for May, down 27.5%. During the month, the company reported first-quarter 2022 results. Read more about the earnings below.

Ampco-Pittsburg Corp. (AP) was the second-worst-performing stock in the portfolio for May, down 23.5%. During the month, the company reported first-quarter 2022 results. Read more about the earnings below.

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

Advanced Emissions Solutions Inc. (ADES) reported first-quarter 2022 financial results. The company had an earnings loss per share of $0.165, a decrease from positive earnings of $0.75 per share reported in the comparable period of 2021. Net sales for the quarter totaled $26.4 million, a 16.8% increase over the first quarter of 2021.

Net loss for the quarter was $3.03 million, a $21 million decrease from 2021. Gross income was $4.9 million, a 43% decrease year over year. Operating loss was reported at $3.3 million, down $3 million from 2021.

The company did not provide an outlook for the remainder of 2022.

Ampco-Pittsburgh Corp. (AP) reported first-quarter 2022 earnings of $0.08 per share, which compares to earnings of $0.01 per share in the same quarter last year. The company reported sales of $74.7 million, reflecting an 8.8% increase from the same quarter last year.

In the first quarter, the company reported operating income of $1.2 million compared to $0.9 million in the prior-year quarter. Gross income totaled $15.6 million, a $1.6 million decrease from a year ago. Net income for the quarter was $1.6 million, increasing from $0.2 million in the first quarter of 2021.

Beazer Homes USA Inc. (BZH) announced a new share repurchase program for up to $50 million of its common shares. The new authorization replaces a prior share repurchase authorization under which $12 million was remaining. The company also reiterated its expectation to achieve a net debt to net capitalization ratio below 50% and its commitment to bring total debt below $1 billion by the end of fiscal 2022.

Big 5 Sporting Goods Corp. (BGFV) reported first-quarter 2022 earnings of $0.41 per share, which compares to earnings of $0.90 per share in the same period last year. Earnings beat the I/B/E/S consensus estimate of $0.37 per share by 10.8%.

The company reported quarterly sales of $242 million, which represents an 11.3% decrease from the same quarter last year based mainly on a tough comparison year over year. Compared to pre-pandemic quarterly figures, sales were flat.

Big 5 Sporting Goods decreased guidance for second-quarter 2022 same-store sales by the high teens. Fiscal-2022 second-quarter earnings are expected to be in the range of $0.40 to $0.50 per diluted share, which compares to record second-quarter earnings per diluted share of $1.63 in the second quarter of fiscal 2021.

Container Store Group Inc. (TCS) reported 2021 fourth-quarter earnings of $0.46 per share, which compares to earnings of $0.71 per share in the same period last year. Earnings beat the I/B/E/S consensus estimate of $0.26 per share by 76.9%.

The company reported quarterly sales of $305.55 million, which beat the analyst consensus estimate of $279.82 million by 9.19%. This is a 2.9% decrease compared to sales of $314.68 million the same period last year. Online sales decreased 25% compared to the fourth quarter of fiscal 2020 and increased 29.1% compared to the fourth quarter of fiscal 2019.

The company’s margin fell year over year primarily due to increased freight and commodity costs, partially offset by less promotional activity and decreased shipping costs from a lower mix of online sales in the fourth quarter of fiscal 2021.

Looking to 2022, Container Store said it will return to store growth with planned openings of 74 new stores through 2027.

Covenant Logistics Group Inc. (CVLG) announced a new share repurchase program for up to $75 million of its common shares. The plan commenced in May 2022 and will expire in June 2023.

Delta Apparel Inc. (DLA) reported second-quarter 2022 earnings of $1.44 per share, compared to earnings of $0.62 per share in the same period last year. Earnings beat the I/B/E/S consensus estimate of $0.76 per share by 89.5%.

The company reported quarterly sales of $131.70 million, which beat the analyst consensus estimate of $121.70 million by 8.22%. This is a 21.2% increase over sales of $108.63 million in the same period last year.

Dixie Group Inc. (DXYN) reported a first-quarter 2022 loss of $0.22 per share, compared to a loss of $0.14 per share in the same quarter last year. The company reported sales of $77.6 million, reflecting a 6.6% increase from the same quarter last year.

In the first quarter, the company reported an operating loss of $2.2 million compared to $1.0 million operating income in the prior-year quarter. Gross income totaled $15.2 million, a $1.7 million decrease from a year ago. The company reported a net loss for the quarter of $3.4 million, decreasing from a loss of $2.0 million in the first quarter of 2021.

The company said its decline in gross margins for the quarter was primarily due to the negative impact of unprecedented price increases from its primary raw material supplier, who exited the business. Dixie Group is working to replace that lost supply volume. Freight costs were the other primary negative impact on gross margins.

Ducommun Incorporated (DCO) reported first-quarter 2022 earnings of $0.66 per share, compared to earnings of $0.55 per share in the same quarter last year. Earnings beat the I/B/E/S consensus estimate of $0.525 per share by 25.7%. The company reported sales of $163.5 million, reflecting a 4.0% increase from the same quarter last year.

In the first quarter, the company reported operating income of $9.1 million compared to $10.7 million in the prior-year quarter. Gross income totaled $32.5 million, a $0.6 million decrease from a year ago. Net income for the quarter was $8.1 million, increasing from $6.7 million in the first quarter of 2021.

Fonar Corp. (FONR) reported third-quarter 2022 earnings of $0.32 per share. The company reported sales of $24.6 million, reflecting a 6.4% increase from the same quarter last year.

In the first quarter, the company reported operating income of $5.6 million compared to $4.1 million in the prior-year quarter. Net income for the quarter was $3.3 million, decreasing from $4.3 million in the first quarter of 2021.

The company said its business is returning toward normal cyclicality following the worst of the impacts on its business from the coronavirus pandemic.

Global Ship Lease Inc. (GSL) reported first-quarter 2022 earnings of $1.93 per share, which compared to earnings of $0.13 per share in the same quarter last year. Earnings per share were in line with the I/B/E/S consensus estimate. The company reported sales of $153.6 million, reflecting a 110.0% increase from the same quarter last year.

In the first quarter, the company reported operating income of $86.1 million compared to $30.3 million in the prior-year quarter. Gross income totaled $109.8 million, a $62.9 million increase from a year ago. Net income for the quarter was $70.2 million, increasing from $4.2 million in the first quarter of 2021.

Hooker Furnishings Corp. (HOFT) reported first-quarter 2023 earnings of $0.26 per share, compared to earnings of $0.78 per share in the same quarter last year. Earnings missed the I/B/E/S consensus estimate of $0.28 per share by 3.6%. The company reported sales of $147.3 million, reflecting a 9.5% decrease from the same quarter last year.

In the first quarter, the company reported operating income of $3.9 million compared to $12.2 million in the prior-year quarter. Gross income totaled $29.5 million, a $4.1 million decrease from a year ago. Net income for the quarter was $3.2 million, decreasing from $9.4 million in the first quarter of 2022.

Key Tronic Corp. (KTCC) reported third-quarter 2022 earnings of $0.09 per share, up from $0.08 per share in the same period last year. The company reported $138.4 million in sales this quarter. This is a 2.82% increase over sales of $134.6 million in the same period last year.

During the third quarter of fiscal-year 2022, the company’s facilities in Shanghai, China, were closed by a mandated coronavirus shutdown, although operations are expected to resume shortly. Despite these headwinds, the company slightly improved its margins when compared to the previous year. For the third quarter of fiscal-year 2022, the company’s gross margin was 8.3% and operating margin was 2.0%, compared to a gross margin of 8.2% and an operating margin of 1.9% in the same period of fiscal year 2021.

Kimball Electronics Inc. (KE) reported third-quarter earnings of $0.54 per share, which beat the I/B/E/S consensus estimate of $0.48 per share by 12.5%. This is a 38.46% increase over earnings of $0.39 per share from the same period last year.

The company reported quarterly sales of $368.06 million, which missed the analyst consensus estimate of $380.20 million by 3.19%. Sales increased by 18.60% over sales of $310.33 million in the same period last year.

Mesa Air Group (MESA) reported a second-quarter loss of $0.29 per share, which beat the analyst consensus estimate of a loss of $0.31 per share by 6.45%. This is a 226.09% decrease over earnings of $0.23 per share from the same period last year.

The company reported quarterly sales of $123.20 million, which missed the analyst consensus estimate of $124.61 million by 1.1%. This is a 26.64% increase over sales of $97.28 million in the same period last year.

Pangaea Logistics Solutions Ltd. (PANL) reported quarterly earnings of $0.35 per share. This is a 288.9% increase over earnings of $0.09 per share from the same period last year. Earnings per share for the quarter beat the I/B/E/S consensus estimate of $0.32 per share by 40.6%. The company reported $192 million in sales this quarter. This is a 53.4% increase over sales of $125 million in the same period last year.

Rocky Brands Inc. (RCKY) reported quarterly earnings of $1.10 per share, which beat the I/B/E/S consensus estimate of $1.07 per share by 2.8%. This is a 7.6% decrease over earnings of $1.19 per share from the same period last year. The company reported quarterly sales of $167 million, beating the analyst consensus estimate of $137 million by 22.3%. This is a 90.5% increase over sales of $88 million in the same period last year.

Operating expenses were $49.6 million, or 29.7% of net sales, for the first quarter of 2022 compared to $28.6 million, or 32.6% of net sales, for the same period a year ago. The increase in operating expenses was driven primarily by the expenses associated with the acquired brands and higher logistics and fulfillment costs including temporary spending associated with the opening of the new distribution facility in Reno, Nevada.

SigmaTron International Inc. (SGMA) reported a quarterly loss of $0.58 per share, a 1,066.7% decrease over earnings of $0.06 per share in the same period last year. Sales came in at $94 million this quarter, a 31.0% increase over sales of $72 million in the same period last year.

SigmaTron International closed its merger agreement with Wagz Inc. on December 31, 2021. As per the U.S. generally accepted accounting principles (GAAP), the company’s equity interest of Wagz common stock was remeasured to fair value of $6.3 million, resulting in a noncash impairment charge of $6.3 million.

Titan Machinery Inc. (TITN) reported fiscal-2023 first-quarter diluted earnings per share of $0.79, beating the I/B/E/S consensus estimate of $0.53 per share by 48.2%. Total revenues tallied $461 million for the quarter, a 23.7% increase over the comparable quarter of fiscal 2022.

The company reported net income of $17.3 million, a 66.3% increase year over year. Gross income for the quarter was $88.7 million, compared to $71 million reported in the first quarter of 2022.

The company did not disclose any outlook for the rest of 2021, but I/B/E/S currently estimates the company to have diluted earnings per share of $3.12 for fiscal 2023.

Vishay Precision Group Inc. (VPG) reported first-quarter 2022 adjusted diluted earnings per share of $0.49,beating the I/B/E/S consensus estimate of $0.43 per share by 14%. Net sales of $87.7 million increased 24.2% over the same quarter of 2021.

The company reported net income of $6.4 million, a 28% increase over $5 million in the first quarter of 2021. Gross income for the quarter was $35.3 million, a 24.2% increase over $28.6 million in the comparable quarter of 2021.

The company said its record backlog of $170.6 million reflects favorable market conditions. The company expects to grow quarter over quarter, projecting revenues in the range of $88 million to $96 million for the second fiscal quarter of 2022.

VOXX International Corp. (VOXX) reported fiscal fourth-quarter 2022 earnings of $0.15 per share, beating the I/B/E/S consensus estimate of $0.125 per share by $0.025 per share. The company reported earnings of $0.39 per share in the comparable period of fiscal 2021.

VOXX International had net sales of $163.9 million for the quarter, up 0.9% from the same quarter of 2021. The company reported gross income of $43.9 million, up 3.8% from the fourth quarter of 2021. Net income for the quarter was $2.8 million, down $6.6 million over comparable quarters.

The company did not give any outlook for the rest of fiscal-year 2022. Current I/B/E/S estimates project the company to earn $0.79 per share for fiscal-year 2023.

VSE Corp. (VSEC) declared a regular cash quarterly dividend of $0.10 per share. The dividend is payable on July 27 to shareholders of record as of July 13.