The Model Shadow Stock Portfolio is up 2.0% since our April column and up 4.7% for the year as of the end of May.
This lags the S&P 500 as represented by the Vanguard 500 Index fund 
(VFINX), which is up 7.8% year-to-date. It appears small-cap stocks are taking a breather after a very strong run, but they are still positive.
As I write this in early June, the entire market is dropping on unemployment figures and negative economic forecasts throughout the world. Next quarter’s earnings reports will soon be in the mix, and it won’t be long before political commentary ramps up for the primaries and the election. Despite the bad economic news and the growing civil unrest abroad, the stock market is still positive, but it is well behind the 20% return of a typical pre-election year.
Two stocks were dropped from the portfolio; both changes were forced on us. Kendle International (KNDL) announced board approval of a buyout at $15.25 and Jackson Hewitt Tax Service (JTX; now JHTXQ) agreed to a bankruptcy filing with its creditors in which the current common stock shareholders would receive nothing. This is the first time in 18 years we have had a bankruptcy in the portfolio, since companies generally get sold because of negative earnings long before they go bankrupt.
In both cases, we sold the shares when the actions had board approval. We sold Kendle for a bit less than the buyout price, and we received a few cents for Jackson Hewitt even though the shares seem worthless (some arbitrage funds take positions in these kinds of situations).
My general rule is to sell at the first selling period after general agreement of the company’s board and any other parties involved. Another of my principles came up this month when I made a purchase error: that is, to immediately reverse a mistake, even though it may cost a commission and a bid/ask spread. Holding on to an unwanted position in the hopes of overcoming the commission and spread distracts your attention, and if the position gets worse you have no rules for what to do next.
There were 18 stocks that passed the initial screen this quarter. Eight of these companies were Chinese, and I eliminated them as I have done previously because I don’t know whether or not to believe the figures. I am sure some of these China-based stocks are excellent opportunities, but there are many cases of manipulation and I don’t have the resources to check extensively.
We made two purchases: Addus HomeCare Corp. (ADUS) and Gilat Satellite Networks Ltd. (GILT).
Portfolio transactions for the second quarter are summarized on the Transaction History page.
I still have a slightly bullish bias, mostly because everything looks so bleak. However, I continue to advocate long-term allocations. I hope that by my October column, we will have extended the national debt limit and avoided bond default. In the meantime, you can follow the portfolio here.
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