August Model Shadow Stock Portfolio Update

Only 28 stocks met the initial selection criteria for the Model Shadow Stock Portfolio in early August, down from 38 passing stocks last month. This is a reversal of trend that we have witnessed this year and reflects the strong market rebound during July. 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 new Shadow Stock Ideas is updated daily—Tuesday through Saturday.

Of the 28 qualifying companies as of August 10, 2022, eight are currently held in the Model Shadow Stock tracking portfolio: Container Store Group Inc. (TCS), Delta Apparel Inc. (DLA), Fonar Corp. (FONR), Hooker Furnishings Corp. (HOFT), Hurco Companies Inc. (HURC), Key Tronic Corp. (KTCC), SigmaTron International Inc. (SGMA) 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 while its quarterly earnings data awaits further processing by Refinitiv, AAII’s fundamental data source. The qualifying stocks filter requires positive fully diluted continuing earnings for the last quarter and the trailing 12 months. Pangaea Logistics reported positive quarterly earnings per share of $0.56 on August 9, 2022, but the quarterly data had not been fully input by Refinitiv as of August 10, 2022.

Delta Apparel and SigmaTron International started to pass the initial list of qualifying companies again. Recent stock price weakness in Delta Apparel pushed its price-to-book-value (P/B) ratio down to 0.83, below the 0.90 initial maximum. Delta Apparel reported earnings per share of $0.86 on August 4, 2022, $0.31 per share below the consensus estimate. Delta Apparel last passed the initial Model Shadow Stock Portfolio qualifying rules on April 13, 2022. SigmaTron’s quarterly earnings turned positive in its latest reported period, allowing it to return to the qualifying list after coming off of it in March 2022.

As of August 10, 2022, Perion Network Ltd. (PERI) had the highest price-to-book-value ratio in the Model Shadow Stock Portfolio. Its ratio of 1.92 is well 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 ratio rises to three times the initial maximum value—2.70 (0.90 × 3 = 2.70). It may help you to think about values below 0.90 as being attractive, while those three times above the initial value 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 we are examining the valuation and size limits for the next quarterly portfolio review.

The Model Shadow Stock Portfolio looks for stocks with a market capitalization (share price times shares outstanding) less than $400 million. Shadow stocks with a market cap three times the initial market cap maximum ($400 million × 3 = $1.2 billion) at the time of a quarterly review are sold from the model portfolio, assuming there is a suitable replacement. Perion Network also has the greatest market cap in the tracking portfolio. Perion Network had a market cap of $906 million as of August 10, 2022.

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.

Many of the companies in the Model Shadow Stock Portfolio have already reported earnings, as noted in the news section below. If a company in the tracking portfolio 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 AAII’s Stock Investor Pro are used for Model Shadow Stock Portfolio decisions when they are available.

Early this year, Ampco-Pittsburgh Corp. (AP) went on earnings probation when it reported a loss of $0.65 per share for its 2021 fourth quarter. It has since reported positive quarterly earnings for the first and second quarter of 2022, but they have not been strong enough to push its trailing 12-month earnings into positive territory. Ultralife Corp. (ULBI) went on earnings probation after the first quarter of 2022. On July 28, 2022, the company announced positive earnings of $0.03 per share, $0.02 better than the consensus estimate, but also not strong enough to raise its trailing 12-month earnings into positive territory. Therefore, both Ampco-Pittsburgh and Ultralife remain on earnings probation.

Dixie Group Inc. (DXYN) just reported a loss of $0.29 per share for its 2022 second quarter, compared to a gain of $0.21 per share for the same period one year ago. Dixie Group is a marketer and manufacturer of carpet and rugs to high-end residential customers through the brands Fabrica International, Masland Residential and Dixie Home. The quarterly loss moves its trailing 12-month earnings into the red and places the firm on earnings probation.

If there any changes to the model portfolio they will be announced at the time with a special Model Shadow Stock Portfolio Update email (sign up at www.aaii.com/email).

Performance Update

The market bounced back strongly during July, with the Model Shadow Stock Portfolio gaining 7.1% for the month. It was the first positive monthly return for the current calendar year. The Model Shadow Stock Portfolio is now down 16.8% through July. The S&P 500 index reported an even stronger gain during July, up 9.2% for month, trimming the year-to-date loss to 12.7% for the Vanguard 500 Index fund (VFINX).

The prices of technology stocks were particularly strong performers during the month, with the Nasdaq 100 index gaining 12.6% during July. The Nasdaq 100 is now down 20.3% for the year. The S&P MidCap 400 index was up 10.9% during July and is now down 10.8% for the year, while the Russell 2000 index gained 10.4% during the month and is down 15.5% year to date. The Vanguard Small-Cap Index fund (NAESX) was up 10.6% during the month and has a year-to-date performance of negative 13.4%, while the DFA U.S. Micro Cap fund (DFSCX) was up 9.8% during July and is down 9.7% for this year through the end of July.

The performance of growth- versus value-oriented stocks was slanted toward growth stocks during the month.

In the large-cap segment, value stocks were up 5.9% for the month, trimming their year-to-date loss to 6.2% for 2022. Large-cap growth stocks remain weaker year to date with an 18.3% loss but were up 12.8% during July.

In the mid-cap segment, value stocks are down 6.1% for the year, after gaining 9.2% during July. Mid-cap growth stocks are down 15.4% for the year, after gaining 12.7% during the month.

Small-cap value stocks are down 9.3% year to date, while small-cap growth stocks are down 21.6%. Small-cap value stocks gained 9.7% during July, while small-cap growth stocks gained 11.2% during the month.

Stocks in the energy (+44.7%) and utilities (+4.9%) sectors are not in the red for the year. Sectors that are lagging this year include communication services (–27.6%), consumer discretionary (–20.1%) and information technology (–17.0%). All of the sectors posted gains during July, with consumer discretionary (+18.9%) and information technology (+13.5%) posting the biggest monthly gains.

Since its inception in 1993, the AAII Model Shadow Stock Portfolio has a compound annual average return of 13.9% versus the Vanguard 500 Index fund’s gain of 9.9% per year on average over the same period. Over the same period, the Vanguard Small-Cap Index fund posted an average annual gain of 9.8%.

Model Shadow Stock Portfolio News

Covenant Logistics Group Inc. (CVLG) was the top-performing stock in the portfolio for July, up 33.4% during the month. In July, the company reported second-quarter 2022 financial results. Read more about the results below.

Bassett Furniture Industries Inc. (BSET) was the second-best-performing stock in July, up 26.7%. During the month, the company declared a regular cash dividend. Read more about the dividend below.

Delta Apparel Inc. (DLA) was the worst-performing stock in the portfolio for July, down 17.6%. There was no company-specific news for the month.

Strattec Security Corp. (STRT) was the second-worst-performing stock in the portfolio for July, down 8.2%. There was no company-specific news for the month.

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

Bassett Furniture Industries Inc. (BSET) declared a regular quarterly dividend of $0.16 per share, an increase of 14% over the previous declaration. The dividend is payable on August 26 to shareholders of record as of August 12.

Beazer Homes USA Inc. (BZH) reported diluted third-quarter 2022 earnings per share of $1.76, beating the I/B/E/S consensus estimate by $0.34 per share, or 24.2%. Revenue for the quarter totaled $526.7 million, down 7.8% from the comparable period of 2021. The company had operating income of $67.5 million and an operating profit margin of 12.8%, greater than $49 million and 8.5%, respectively, in the same period of 2021. Net income generated for the quarter was $53.3 million, an increase over $37.1 million in 2021.

The company also guided for full-year 2022 earnings per share of $6.50. This compares to the I/B/E/S consensus estimate of $6.48 per share for full-year 2022.

Covenant Logistics Group Inc. (CVLG) reported second-quarter 2022 adjusted earnings per diluted share of $1.63, beating the I/B/E/S consensus estimate of $1.31 per share by 24.6%. Total revenue of $317.4 million for the second quarter increased 23.8% over the same period of 2021. Operating income increased 46.6% year over year, representing an operating profit margin of 8.5% compared to 7.2% in second-quarter 2021. Adjusted net income was $25.6 million, a 57.8% increase over $16.3 million in the same period of 2021. The company expects cost inflation and softening of the freight market to continue in the second half of the year.

“In addition to another record earnings quarter, we are also pleased to report the completion of our $30 million stock repurchase plan initiated in the first quarter of 2022 and the addition of a $75 million stock repurchase plan initiated in the second quarter of 2022,” said chairman and CEO David Parker. “We purchased approximately 1.3 million shares in the second quarter and, through July 22, 2022, have purchased a total of 2.4 million shares during 2022.”

The company did not provide outlook for the remainder of 2022, but the I/B/E/S consensus estimate is for diluted earnings per share of $5.48 for full-year 2022.

Rocky Brands Inc. (RCKY) reported second-quarter 2022 earnings per share of $0.34, which decreased from $0.99 per share in the same period a year prior. Earnings per share missed the I/B/E/S consensus estimate by $0.46 per share. The company reported second-quarter revenue of $162 million, which is up 23.1% from the same period a year prior. The company said it continued to experience solid demand for its portfolio of leading footwear and apparel brands during the quarter.

SigmaTron International Inc. (SGMA) reported earnings per share of $0.10, down year over year from earnings per share of $0.36. The company reported revenue of $99.22 million, which is up 30.5% from the same period a year prior. Fiscal-year 2022 revenues increased $101.1 million to $378.9 million, up from $277.7 million in fiscal-year 2021.

The company noted that during the fourth quarter it absorbed the operating costs of its Wagz acquisition for the entire quarter. An emerging growth company, Wagz was an expected loss and dragged down earnings.

Titan Machinery Inc. (TITN) announced its plan to acquire Heartland Ag Systems, Heartland Solutions and related affiliates, the largest Case IH Application Equipment distributorship in North America, providing application-focused solutions for commercial applicators, for an aggregate $110 million. The consideration amount comprised primarily cash. The deal is expected to close in August 2022.

The company updated its fiscal-2023 modeling assumptions with agriculture revenue up 37% to 42%, construction revenue down 10% to 15% and international revenue down 0% to 5%. The company expects 2023 earnings of $2.90 to $3.20 per share (up from the prior guidance of $2.85 to $3.15 per share) compared to the I/B/E/S consensus estimate of $3.12 per share.

Ultralife Corp. (ULBI) reported second-quarter earnings per share of $0.03, which beat the I/B/E/S consensus estimate by $0.02 per share. The company reported second-quarter revenue of $32.1 million, up 19.9% from the same period a year prior.

“Driven by the Excell acquisition and strong shipments to core commercial end-markets, for the second quarter we delivered a 20% year-over-year sales increase and returned to total company profitability,” said president and CEO Michael Popielec.

Vishay Precision Group Inc. (VPG) reported second-quarter earnings per share of $0.68, beating the I/B/E/S consensus estimate by $0.13 per share. The company reported second-quarter revenue of $88.6 million, up 17.6% from the same period a year prior. The company expects net revenues to grow sequentially and be in the range of $90 million to $100 million for the third fiscal quarter of 2022, while the I/B/E/S consensus estimate is for revenues of $89.14 million.

“We ended the quarter with record-level backlog of $171.4 million, which positions us well for the second half of the year,” said CEO Ziv Shoshani. “We achieved these results despite the headwind of unfavorable foreign exchange rates.”

Vishay Precision also announced a stock repurchase plan of up to 600,000 shares through August 2023. The company expects to fund repurchases through cash on hand and cash from its operations and/or borrowings under the revolving portion of its credit facility.

VOXX International Corp. (VOXX) reported a first-quarter 2023 loss per share of $0.27, missing the I/B/E/S consensus estimate by $0.37 per share. The company reported revenue of $128.73 million, down 6.1% from the same period a year prior.

VSE Corp. (VSEC) reported adjusted earnings per share of $0.75, a 25% increase from the same period a year prior. The company reported revenue of $241.7 million, a 38% increase from the same period a year prior.

VSE Corp. also declared regular dividend of $0.10 per share, in line with its previous declaration. The dividend is payable on November 16 to shareholders of record as of November 2.