John Bajkowski
is the president of AAII.
AP
BSET
CLAR
CMT
ESCA
FRD
HOFT
HURC
KTCC
MG
PANL
PERI
RCKY
STRT
TITN
ULBI
The Model Shadow Stock Portfolio is reviewed quarterly to determine portfolio sales and additions, a practice put in place since the portfolio’s inception in 1993.
The quarterly review cycle of the Model Shadow Stock Portfolio is tied to the reporting cycle of most domestic publicly traded firms. After the reporting cycle is complete, holdings are examined for violating the size, valuation, earnings and age rules of the Model Shadow Stock Portfolio.
The review begins with an examination of the breakpoints for the smallest and cheapest deciles of domestically listed stocks. The primary Model Shadow Stock Portfolio selection criteria target the intersection of the smallest 10% of domestic stocks as measured by market capitalization, along with the “cheapest” 10% of domestic stocks as measured by the price-to-book-value (P/B) ratio. These decile breakpoints are determined by examining domestic companies that are listed on the New York Stock Exchange (NYSE) and then applying the size and value breakpoints for stocks listed on all domestic exchanges. Professor Kenneth R. French provides a historical review of the breakpoints on his Dartmouth faculty website. We also calculate these breakpoints using AAII’s Stock Investor Pro stock screening and analysis software program.
Value
The price-to-book cutoff has decreased slightly from 0.88 in September to 0.84. The current initial qualifying maximum price-to-book ratio is 0.90 and we are leaving it unchanged. Qualifying stocks must have a price-to-book ratio of 0.90 or lower when added to the model portfolio. Stocks in the model portfolio are sold for valuation if they exceed three times the initial maximum 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 December 9, 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 2.17 is 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.
Size
We then examined market-cap levels of the companies listed on the NYSE to determine the size cutoff for the lowest decile when adding stocks to the model portfolio. The decile market-cap level declined from $330 million in September to $300 million. We are reducing the maximum initial qualifying market-cap value from $350 million to $300 million for the quarterly review. The maximum market cap for inclusion in the Model Shadow Stock Portfolio is now $300 million, and holdings are sold if their market cap goes above three times the initial criterion at the time of the quarterly review: $900 million.
Perion Network also had the highest market cap in the portfolio, with a value of $1,168.8 billion as of December 9, 2022. Its market cap is well above the deletion level of $900 million, so it is being removed from the model portfolio.
Titan Machinery Inc. (TITN) was also bouncing against the size ceiling of the model portfolio. Titan Machinery owns and operates a network of full-service agricultural and construction equipment stores in the U.S. and Europe. At the time of our quarterly review, Titan Machinery did not exceed the market-cap maximum of $900 million, so it was not removed from the model portfolio.
Earnings
The other major factor that leads to portfolio turnover is tied to negative earnings. If a company has 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 press 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 this quarter, three portfolio holdings were on earnings probation.
Ampco-Pittsburgh Corp. (AP) reported positive quarterly earnings from continuing operations. While the figure was not strong enough to pull trailing 12-month earnings into positive territory, the stock will stay in the model portfolio, but remain on earnings probation.
Both Dixie Group Inc. (DXYN) and Ultralife Corp. (ULBI) reported quarterly losses while on earnings probation and therefore are being removed from the Model Shadow Stock Portfolio.
Age
We also examine the portfolio for stocks that have been held for at least four years and have not had strong price appreciation. We normally will eliminate holdings that have appreciated at least 10% annually and no longer qualify for purchase. With the bear market environment, we limited our examination to model portfolio holdings held longer than four years and that are down from their original purchase price. Delta Apparel Inc. (DLA) has been held for just over 5.25 years, is down from its purchase price and does not currently qualify. It is therefore being removed from the model portfolio.
After conducting the quarterly review of the Model Shadow Stock Portfolio, Delta Apparel, Dixie Group, Perion Network and Ultralife were removed from the tracking portfolio during regular trading hours on Monday, December 12. With the proceeds from the sales, as well as the cash held in the portfolio, there were enough funds to purchase six new holdings at a level roughly matching the average position—Clarus Corp. (CLAR), Core Molding Technologies Inc. (CMT), Escalade Inc. (ESCA), Friedman Industries Inc. (FRD), Lazydays Holdings Inc. (LAZY) and Mistras Group Inc. (MG).
Delta Apparel, Inc. (DLA)
Delta Apparel is a vertically integrated, international apparel company that designs, manufactures, sources and markets a diverse portfolio of core activewear and lifestyle apparel products under the primary brands of Salt Life, Soffe and Delta.
It is the policy of the Model Shadow Stock Portfolio to sell a stock held over four years if it does not currently qualify, its stock price has not gained at least 10% annually since purchase and there are qualifying stocks available to replace it.
Delta Apparel was added to the Model Shadow Stock Portfolio on August 31, 2017, at a purchase price of $20.01 per share. It hit a high of $35.26 during April 2021 but saw its share price come under pressure this year as the firm responded to labor shortages, inflationary pressures and supply chain disruptions. It was sold on December 12, 2022, at $11.20 per share, for a loss of 44.0%.
Dixie Group Inc. (DXYN)
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.
On November 3, 2022, Dixie Group reported a quarterly loss of $0.55 per share for its third quarter, while it was on earnings probation. The company went on earnings probation after reporting 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.
It is the policy of the Model Shadow Stock Portfolio to sell a stock once its trailing 12-month adjusted earnings go negative and the company reports a quarterly loss in a subsequent quarter while trailing earnings are still negative.
Dixie Group was purchased for the Model Shadow Stock Portfolio on September 9, 2021, at a purchase price of $4.50. It was sold on December 12, 2022, for $1.06 per share, for a loss of 76.4%.
Perion Network Ltd. (PERI)
At the time of our quarterly review, Perion Network exceeded the market-cap sell cutoff of $900 million with a market cap of $1.155 billion. It is the policy of the Model Shadow Stock Portfolio to sell a stock once its market cap reaches three times the initial purchase limit, which is now $300 million.
Perion Network is an Israel-based technology company that delivers online advertising solutions and search monetization to brands and publishers.
Perion Network was purchased for the Model Shadow Stock Portfolio on December 13, 2019, at a purchase price of $5.36. It was sold on December 12, 2022, for $25.385 per share, for a gain of 373.5%.
Ultralife Corp. (ULBI)
Ultralife designs and manufactures power and communications systems, including rechargeable and non-rechargeable batteries, charging systems, communications and electronics systems and accessories, as well as custom engineered systems for communications and electronics systems.
Ultralife went on earnings probation after the first quarter of 2022. The company reported positive quarterly earnings for the second quarter but a loss of $0.01 per share during the third quarter.
It is the policy of the Model Shadow Stock Portfolio to sell a stock once its trailing 12-month adjusted earnings go negative and the company reports a quarterly loss in a subsequent quarter while trailing earnings are still negative.
Ultralife was purchased for the Model Shadow Stock Portfolio on March 8, 2021, at a purchase price of $6.76. It was sold on December 12, 2022, for $4.31 per share, for a loss of 36.2%.
As of December 12, 30 stocks met the initial selection criteria for the Model Shadow Stock Portfolio. This is down from 33 passing companies last month, although we did tighten the maximum market-cap level from $350 million to $300 million. Thirty-four stocks passed using the old criteria. 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.
Ten stocks already in the Model Shadow Stock Portfolio passed the updated criteria at the time of the review: Bassett Furniture Industries Inc. (BSET), 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), Pangaea Logistics Solutions Ltd. (PANL), Rocky Brands Inc. (RCKY) and Strattec Security Corp. (STRT).
The remaining 20 stocks were examined to ensure adequate liquidity, timely financial filings and appropriate industry and foreign considerations. Two securities were eliminated because they were limited partnerships or had ties to China. Several stocks were also excluded from consideration because their average daily dollar trading volume was too low, indicating that they might be difficult to purchase without severely impacting the share price.
The Shadow Stock Portfolio Rules on AAII.com provides guidance on factors to consider when selecting stocks for your portfolio.
With the proceeds from the sales, as well as the cash held in the portfolio, there were enough funds to take positions in six companies at roughly the average position size for the existing holdings in the tracking portfolio. The portfolio additions are: Clarus, Core Molding Technologies, Escalade, Friedman Industries, Lazydays Holdings and Mistras Group.
Clarus Corp. (CLAR)
Clarus is a leading developer, manufacturer and distributor of best-in-class outdoor equipment and lifestyle products focused on the climb, ski, mountain and sport markets. Clarus’ portfolio of brands includes Black Diamond, Sierra, Barnes, PIEPS, SKINourishment and Rhino-Rack sold through specialty and online retailers, distributors and original equipment manufacturers (OEMs) throughout the U.S. and internationally.
Clarus has a book value per share of $9.72 as of September 30. If you wish to stay within the 0.90 price-to-book-value maximum, you should pay no more than $8.75 per share ($9.72 × 0.90). However, if the stock price has moved up after being added to the portfolio, you can still purchase the stock unless the price-to-book ratio goes above 1.00, which equates to a price of $9.72 per share. To calculate the maximum purchase price based on the maximum desired price-to-book ratio, multiply the current book value per share ($9.72 for Clarus) by the maximum price-to-book ratio to be considered for the Model Shadow Stock Portfolio (currently 0.90, or 1.00 for loosened consideration).
Core Molding Technologies, Inc. (CMT)
Core Molding Technologies operates in the engineered materials market as a molder of thermoplastic and thermoset structural products. The company produces and sells molded products for varied markets, including medium and heavy-duty trucks, automobiles, power sports, construction and agriculture, building products and other commercial markets. Core Molding Technologies is headquartered in Columbus, Ohio, and operates six production facilities in three countries: U.S., Canada and Mexico.
Core Molding Technologies has a book value per share of $12.92 as of September 30. If you wish to stay within the 0.90 price-to-book-value maximum, you should pay no more than $11.63 per share ($12.92 × 0.90). However, if the stock price has moved up after being added to the portfolio, you can still purchase the stock unless the price-to-book ratio goes above 1.00, which equates to a price of $12.92 per share.
Escalade Inc. (ESCA)
Escalade designs, manufactures and sells sporting goods, fitness and indoor/outdoor recreation equipment. Escalade manufactures, imports and distributes sporting goods brands in basketball goals, archery, indoor and outdoor game recreation and fitness products through sporting goods retailers, specialty dealers, key online retailers, traditional department stores and mass merchants. Some of Escalade’s brands include Bear Archery, Goalrilla, Lifeline Fitness, Accudart, Onix, Brunswick Billiards and Ping-Pong.
Escalade has a book value per share of $11.57 as of October 1. If you wish to stay within the 0.90 price-to-book-value maximum, you should pay no more than $10.41 per share ($11.57 × 0.90). However, if the stock price has moved up after being added to the portfolio, you can still purchase the stock unless the price-to-book ratio goes above 1.00, which equates to a price of $11.57 per share.
Friedman Industries Inc. (FRD)
Friedman Industries is a manufacturer and processor of steel products with operating plants in Hickman, Arkansas; Decatur, Alabama; East Chicago, Indiana; Granite City, Illinois; Sinton, Texas; and Lone Star, Texas. The company has two reportable segments: coil products and tubular products.
Friedman Industries has a book value per share of $14.73 as of September 30. If you wish to stay within the 0.90 price-to-book-value maximum, you should pay no more than $13.26 per share ($14.73 × 0.90). However, if the stock price has moved up after being added to the portfolio, you can still purchase the stock unless the price-to-book ratio goes above 1.00, which equates to a price of $14.73 per share.
Lazydays Holdings Inc. (LAZY)
Lazydays Holdings operates recreational vehicle (RV) dealerships and offers a portfolio of products and services for RV owners and outdoor enthusiasts. Lazydays Holdings provides a spectrum of RV products: new and pre-owned RV sales, RV parts and service, financing and insurance products, third-party protection plans, aftermarket parts and accessories and RV camping facilities.
Lazydays Holdings has a book value per share of $20.85 as of September 30. If you wish to stay within the 0.90 price-to-book-value maximum, you should pay no more than $18.77 per share ($20.85 × 0.90). However, if the stock price has moved up after being added to the portfolio, you can still purchase the stock unless the price-to-book ratio goes above 1.00, which equates to a price of $20.85 per share.
Mistras Group Inc. (MG)
Mistras Group is a multinational provider of integrated technology-enabled asset protection solutions, helping to maximize the safety and operational uptime for critical industrial and civil assets. Mistras Group leads clients in the oil and gas, aerospace and defense, renewable and nonrenewable power, civil infrastructure and manufacturing industries toward achieving operational and environmental excellence.
Mistras Group has a book value per share of $6.23 as of September 30. If you wish to stay within the 0.90 price-to-book-value maximum, you should pay no more than $5.61 per share ($6.23 × 0.90). However, if the stock price has moved up after being added to the portfolio, you can still purchase the stock unless the price-to-book ratio goes above 1.00, which equates to a price of $6.23 per share.
The next quarterly review of the Model Shadow Stock Portfolio will take place following the end of February 2022. Any changes to the portfolio will be announced at the time they are made in our Model Shadow Stock Portfolio Update emails (sign up at www.aaii.com/email).
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