John Bajkowski
is the president of AAII.
For the third year in a row, the Model Shadow Stock Portfolio posted a negative return for the six-month period beginning in May and ending in October. “Sell in May and go away” is an old Wall Street adage rooted in the generally weaker relative performance of the market over the course of the summer and extending through October. Some also refer to it as the Halloween timing strategy, noting that the market’s strongest relative performance is normally between October 31 and the end of April. With the Halloween timing strategy, you are invested in the market for six months (November through April) and out of the market for six months (May through October).
We have observed that the weakest-performing months for the Model Shadow Stock Portfolio over its nearly 32-year history have been August (0.0% average return), September (0.3% average return) and May (0.5% average return). In contrast, the three best-performing months have been November (2.3% average return), July (2.0% average return) and January (1.9% average return).
Is the weak summer and early fall performance of the Model Shadow Stock Portfolio that we have observed over the last three years the normal pattern for the portfolio? Does the Halloween timing strategy apply to the Model Shadow Stock Portfolio? If you held the Model Shadow Stock Portfolio every November through April from 1993 through 2024, you would have realized an 8.7% average annual rate of return, meaningfully higher than the 4.1% annual rate of return observed for the 32 six-month holding periods from May through October. The November through April periods outperformed the preceding May through October periods in 20 of the 31 years.
We noticed a similar pattern with the Vanguard 500 Index fund (VFINX), with the May through October holding period underperforming the November through April holding period—3.2% versus 7.2%—and the November through April period outperforming the May through October period in 19 of the 31 years.
We are ignoring the transaction costs in this analysis, but the Halloween timing strategy correctly identifies the relatively stronger and weaker six-month holding periods of the stock market over the long term. But if you are a long-position-only investor, it is difficult to capitalize on the pattern. While the market return has been relatively weaker from May through October, it has been, on average, positive and much higher than the return you would have earned on Treasury bills (T-bills) while out of the market. While the Model Shadow Stock Portfolio has lost money over the summer and fall periods over the last three years, if you consider its full history, you still had an average return of 4.1% during the May through October periods, compared to a 1.3% return for T-bills over the same periods.
By including the Model Shadow Stock Portfolio’s 4.1% average compound rate of return from the May through October holding periods, we see the 8.7% return of the November through April time period expand to 13.1% annually for the full May 1993 to October 2024 time period studied. Adding the 1.3% average annual T-bills return for the May through October periods instead would only have increased your rate of return from 8.7% to 10.1% for the Model Shadow Stock Portfolio. Just in case you are wondering, 8.7% and 1.3% equals 10.1% because of the magic of compounding.
The same is true for the Vanguard 500 Index. Investors would have earned a 10.6% annual return by staying fully invested, compared to a 8.6% average annual return by being invested in the S&P 500 index from November through April and T-bills from May through October.
So, while the market tends to undergo its summer doldrums, it has still generally rewarded investors for staying fully invested during the entire year.
Economic and political uncertainty helped to push market values down during October, with the S&P 500 ending the month 2.7% below its closing high on October 18, 2024. The S&P MidCap 400 finished the month 3.1% below its all-time high, while the S&P SmallCap 600 was 5.6% below its all-time high set back on November 8, 2021. When investors turn risk adverse, smaller companies tend to fall more. The Model Shadow Stock Portfolio lost 9.0% during October, lowering its year-to-date return to –7.2%. By way of comparison, the S&P 500 lost 0.9% for the month and is up 21.0% for the year through October. The S&P MidCap 400 index lost 0.7% during October, lowering its year-to-date performance to 12.7%, while the S&P SmallCap 600 is up only 6.4% for the year after losing 2.6% during October.
In the large-cap segment, growth stocks were down 0.6% for the month, while value was down 1.3%. Year to date, large-cap growth stocks are up 27.4%, compared to a return of 13.9% for large-cap value stocks.
Mid-cap growth stocks lost 1.3% during October, while mid-cap value stocks were just below zero during the month. Mid-cap growth stocks are up 15.3% for the year, compared to a 10.0% gain for mid-cap value stocks over the same period.
Small-cap growth stocks lost 3.6% during October and are up 8.5% year to date, while small-cap value stocks lost 1.7% during the month and are up 4.2% this year.
It is interesting how growth stocks fared better than value stocks in the S&P 500, but the opposite was true for the mid- and small-cap stock indexes.
Declining issues managed to outpace advancing issues across all segments last month. Within the S&P 500, there were 198 advancing issues compared to 308 declining issues—a ratio of 0.65. The ratio was 0.76 for the S&P MidCap 400 and 0.57 in the S&P SmallCap 600. Looking back at the year, breadth was strongest with larger companies. The ratio of advancing issues to declining issues was 2.56 for S&P 500 constituents, but just above one (1.08) for S&P SmallCap 600 constituents.
Only three of 11 sectors in the S&P 500 were up during October, compared to eight out of 11 last month. The difference between the best- and worst-performing sector narrowed during October: 7.3 percentage points, compared to 9.8 percentage points in September. Financials (+2.6%), communication services (+1.8%) and energy (+0.7%) were the only sectors up in the S&P 500 during the month. Health care (–4.7%), materials (–3.6%) and real estate (–3.4%) were the weakest S&P 500 sectors during October. Consumer discretionary (–5.7%) was the weakest S&P MidCap 400 sector, reflecting concerns over consumer spending. The economically sensitive materials sector (–6.1%) was the weakest sector in the S&P SmallCap 600. Financials was the strongest sector across all three market-cap indexes.
Twenty-two companies passed the initial screen on November 13, up from 19 passing stocks last month. Of the 22 qualifying companies, seven are currently held in the Model Shadow Stock Portfolio: Amplify Energy Corp. (AMPY), Fonar Corp. (FONR), Friedman Industries Inc. (FRD), Pangaea Logistics Solutions Ltd. (PANL), Rocky Brands Inc. (RCKY), Saga Communications Inc. (SGA) and StealthGas Inc. (GASS).
Qualifying companies are those held in the Model Shadow Stock Portfolio that currently meet the initial addition rules. 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. Qualifying companies 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.
Castor Maritime Inc. (CTRM) stopped passing the qualifying list when high book value per share resulted in a nonmeaningful price-to-book-value (P/B) ratio. DMC Global Inc. (BOOM) had negative reported earnings.
The Model Shadow Stock Portfolio looks for stocks with a price-to-book ratio of less than 0.90. 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). As of November 13, 2024, Covenant Logistics Group Inc. (CVLG) had the highest price-to-book ratio in the Model Shadow Stock Portfolio of 1.97.
Shadow stocks with a market cap three times the initial market cap maximum—$900 million ($300 million × 3)—at the time of a quarterly review are removed from the model portfolio, assuming there is a suitable replacement. As of November 13, 2024, Covenant Logistics Group had the highest market cap of $795.8 million.
See the current addition and deletion rules for the portfolio.
The next quarterly review of the AAII Model Shadow Stock Portfolio will take place around the beginning of December 2024, after most of the holdings have announced their quarterly earnings.
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 for this email so you don’t miss it!
(11/06/2024)
Alpha Pro Tech reported third-quarter 2024 diluted earnings of $0.08 per share, down 33.3% year over year from $0.12 per share . Alpha Pro Tech does not have coverage by S&P Global. Net sales were $14.3 million, down 11.2% from $16.1 million in the prior-year quarter. The decrease was driven by a drop in building supply segment sales.
American Vanguard Corporation (AVD)
(11/11/2024)
American Vanguard announced a third-quarter 2024 diluted loss of $0.92 per share, down from the prior-year quarter loss of $0.01 per share. American Vanguard does not have coverage by S&P Global. Net sales were $118.3 million, down 20.9% year over year from $149.5 million. CEO Timothy Donnely cited unusually high sales in 2023 due to supply shortages as the reason for the difference. The non-crop sales segment performed best, up 17.0% from the prior-year quarter.
(11/06/2024)
Amplify Energy reported third-quarter 2024 diluted earnings of $0.54 per share, up over 200% year over year from $0.17 per share. Earnings beat the S&P Global consensus estimate of $0.27 per share by 100.0%. Total revenues were $69.9 million, down 12.1% year over year from $79.5 million. Net income was $22.7 million, up year over year from $7.1 million. Overall oil volume stayed stagnant at 19.0 thousand barrels of oil equivalent (BOE) per day, compared to 20.3 BOE per day in the prior-year period.
(11/07/2024)
Castor Maritime reported third-quarter 2024 diluted earnings of $0.14 per share, up from a net loss of $0.60 per share in the prior-year period. Castor Maritime does not have coverage by S&P Global. Total vessel revenues was $13.4 million, down 37.4% year over year from $21.4 million. Net income was $2.8 million, up from a net loss of $5.4 million in the prior-year quarter.
During the quarter, the company paid $1.8 million in dividends on preferred shares.
(11/07/2024)
Clarus reported third-quarter 2024 diluted earnings of $0.05 per share, up from a net loss of $0.03 per share in the prior-year quarter. Total sales were $67.1 million, down 17.4% from $81.3 million, driven by softness across outdoor and adventure selling channels.
(11/06/2024)
Clarus declared a regular quarterly cash dividend of $0.025 per share, in line with the prior declaration. The dividend is payable on November 27, to shareholders of record as of November 18. The stock will trade ex-dividend on Monday, November 18.
Core Molding Technologies, Inc. (CMT)
(11/05/2024)
Core Molding Technologies reported third-quarter 2024 diluted earnings of $0.36 per share, down 26.5% from $0.49 per share in the prior-year quarter. Earnings beat the S&P Global consensus estimate of $0.23 per share by 56.5%. Total net sales were $73.0 million, down 15.8% year over year from $86.7 million. The tooling segment incurred the largest percentage decrease in revenue of 70.3%, compared to 11.9% for the products segment.
Covenant Logistics Group, Inc. (CVLG)
(10/23/2024)
Covenant Logistics reported third-quarter 2024 adjusted diluted earnings of $1.09 per share, down 3.5% year over year. This beat the S&P Global consensus estimate of $1.063 per share by 2.5%. Total revenue was $287.9 million, down from $288.7 million in the prior-year quarter. Operating income was $16.2 million, up 7.2% from $15.1 million in the prior-year quarter.
(11/13/2024)
DMC Global announced that Michael Kuta will retire as the company’s president and CEO and as a member of the board, effective November 29, 2024. Executive chairman James O’Leary will assume the role of interim president and CEO upon Kuta’s retirement.
(11/04/2024)
DMC Global reported a third-quarter 2024 adjusted diluted earnings loss of $0.49 per share, down almost 200% year over year. This significantly missed the S&P Global consensus estimate of $0.02 per share. Net sales were $152.4 million, down 11.0% from $172.1 million in the prior-year period, driven by persistent high interest rates. DMC Global reported a total net loss of $159.4 million due to a noncash goodwill impairment charge.
(10/24/2024)
Escalade reported third-quarter 2024 diluted earnings of $0.40 per share, up 29.0% year over year from $0.31 per share. Net sales were $67.7 million, down 7.7% from $73.4 million in the prior-year period. Operating income was $8.0 million, up 23.7% year over year from $6.4 million.
(11/12/2024)
Fonar reported diluted earnings of $0.46 per share for its fiscal first-quarter 2025 ended September 30, down 22% from $0.60 per share in the prior-year quarter. Fonar does not have coverage by S&P Global. Net total revenue decreased from $25.8 million to $25.0 million, with a 14% decrease in patient fee revenue cited as the main contributor. Book value increased year over year from $23.88 to $25.32 per share.
Friedman Industries, Incorporated (FRD)
(11/12/2024)
Friedman Industries reported a diluted loss of $0.10 per share for its fiscal second-quarter 2024 ended September 30, a decrease compared to earnings of $0.48 per share in the prior-year quarter. Friedman Industries does not have coverage by S&P Global. Net sales were $106.8 million, down 18.3% from $130.7 million in the prior-year quarter. The company reduced outstanding debt by 21.6% year over year.
(11/05/2024)
Key Tronic reported third-quarter 2024 diluted earnings of $0.10 per share, up over 200% from $0.03 per share in the prior-year quarter. Key Tronic does not have coverage S&P Global. Net sales were $131.6 million, down 12.4% year over year from $150.1 million. Gross profit was $13.3 million, up 22.5% year over year from $10.9 million.
(10/30/2024)
Mistras Group reported third-quarter 2024 diluted earnings of $0.20 per share, up from a loss of $0.34 in the prior-year quarter. Earnings missed the S&P Global consensus estimate of $0.27 per share by 24.5%. Revenue was $182.7 million, up 1.9% year over year from $179.4 million. The company reported net income of $6.4 million, up from a net loss of $10.3 million.
(10/30/2024)
NACCO Industries reported third-quarter 2024 diluted earnings of $2.14 per share, up from a loss of $0.51 per share in the prior-year quarter. NACCO Industries’ earnings estimate does not have coverage by S&P Global. Revenue was $17.7 million, down 5.1% from $18.7 million. The company reported net income of $15.6 million, up from a net loss of $3.8 million in the prior-year quarter.
According to NACCO Industries’ earnings report, the “substantial increase” in ’third-quarter 2024 operating profit and net income was primarily due to $13.6 million of pretax income related to business interruption insurance recoveries at Mississippi Lignite Mining Co. and “significantly improved operating results” in the coal mining and minerals management segments. These improvements were partly offset by lower North American mining segment results.”
Natural Gas Services Group, Inc. (NGS)
(11/14/2024)
Natural Gas Services reported third-quarter 2024 diluted earnings of $0.40 per share, up 122.2% year over year from $0.18 per share. Earnings beat the S&P Global consensus estimate of $0.235 per share by 70.2%. Total revenue was $40.7 million, up 27.1% from $31.3 million in the prior-year quarter, due to a 34.8% increase in rental revenues. The company has kept its target return on invested capital (ROIC) for full-year 2024 at 20.0%.
Nortech Systems Incorporated (NSYS)
(11/07/2024)
Nortech Systems reported third-quarter 2024 diluted earnings of $0.10 per share, up from $0.44 per share in the prior-year quarter. Nortech Systems does not have coverage by S&P Global. Net sales were $31.4 million, down 5.9% year over year from $33.4 million. The company reported a net loss of $739,000, down from net income of $1.2 million in the prior-year quarter.
Pangaea Logistics Solutions Ltd. (PANL)
(11/12/2024)
Pangaea Logistics Solutions reported third-quarter 2024 adjusted diluted earnings of $0.26 per share, down 18.8% year over year from $0.32 per share. Earnings missed the S&P Global consensus estimate of $0.27 per share by 6.8%. Total revenues were $153.1 million, up 12.9% from $135.6 million in the prior-year quarter.
During the quarter, Pangaea Logistics Solutions returned $13.9 million in dividends to shareholders.
Park-Ohio Holdings Corp. (PKOH)
(11/06/2024)
Park Ohio Holdings announced third-quarter 2024 adjusted diluted earnings of $1.07 per share, up 21.6% from $0.88 per share in the prior-year quarter. Earnings beat the S&P Global consensus estimate of $0.89 per share by 20.2%. Net sales were $417.6 million, flat year over year from $418.8 million.
During the quarter, the company returned $1.7 million in dividends to shareholders.
(10/30/2024)
Rocky Brands reported third-quarter 2024 adjusted diluted earnings of $0.77 per share, down 29.4% from $1.09 per share in the prior-year quarter. Earnings missed the S&P Global consensus estimate of $0.96 per share by 21.8%. Net sales were $114.6 million, down 8.8% year over year from $125.6 million. Gross margin stayed stagnant year over year, increasing from 37.0% to 38.0%.
Saga Communications, Inc. (SGA)
(11/07/2024)
Saga Communications reported third-quarter 2024 diluted earnings of $0.20 per share, down 55.6% year over year from $0.45 per share. Saga Communications does not have coverage by S&P Global. Net operating revenue was $28.1 million, down 3.5% from $29.1 million in the prior-year quarter.
During the quarter, the company paid $1.6 million in quarterly dividends to shareholders.
Vishay Precision Group, Inc. (VPG)
(11/05/2024)
Vishay Precision Group reported third-quarter 2024 diluted earnings of $0.19 per share, down from $0.46 per share in the prior-year quarter. Vishay Precision Group included a loss of $2.9 million from foreign currency effects in per-share results. Earnings were in line with the S&P Global consensus estimate. Net revenues were $75.7 million, down 11.9% from $85.9 million in the prior-year quarter.
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