Shadow Stock Portfolio Up 14.9% in 2010

The Model Shadow Stock Portfolio still has not reached its pre-2008 high but it has moved up 14.9% year to date (May 31, 2010). That is significantly better than the S&P 500, which is down 1.5% so far this year (as measured by the Vanguard 500 Index fund).

Volatility remains high with all the dramatic news in the eurozone and our own Gulf of Mexico oil disaster. As I write this in early June, the market has had several very weak days and it looks like volatility may remain high well into the summer.

The number of stocks passing the initial screen increased slightly to 16. Most of those passing were already in the portfolio and we made our final selection based on liquidity and lower price-to-book ratios.

One of the differences between a theoretical portfolio and a real one, in addition to transaction costs, is that in the real world investors make errors and I have made a number over the years. At the end of last March, MedCath (MDTH) should have been sold but I missed the negative earnings report on February 3. Now MDTH has reported positive earnings on May 5, so I am not going to sell it unless it violates probation again.

Portfolio Changes

We sold three stocks in our second-quarter review, all three for violating probation. The three are Avalon Holdings (AWX), Cascade Corporation (CASC), and Tufco Technologies (TFCO).

We made three purchases: Conn’s Inc. (CONN), Mitcham Industries (MIND), and PC Connection (PCCC). This keeps the portfolio at 26 holdings.

These actions are summarized at the Transaction History link.

Outlook

I am looking at the comments at the end of my April column and I could write exactly the same thing again. The bulls and bears are pretty well balanced, there are major concerns all around the world and as of this date there has not been much resolution to any of them, and many of the uncertainties are not under United States’ control. We have the “wall of worry,” but the stock market does not seem to be climbing it.

Perhaps the nature of the market’s concerns will be different when I report on the Model Shadow Stock Portfolio in the October AAII Journal. In the meantime, you can follow the portfolio here.