John Bajkowski
is the president of AAII.
There are no changes to the Model Shadow Stock Portfolio after conducting the quarterly portfolio review at the beginning of September.
Participation in the market uptrend broadened in August, with smaller companies outpacing larger firms during the month. The S&P 500 index gained 2.0% during August, below the Model Shadow Stock Portfolio’s 12.2% gain. The S&P MidCap 400 index gained 3.4% during the month, while the S&P SmallCap 600 index rose 7.1%. Earnings, tariffs and growing expectations of a resumption in Federal Reserve interest rate cuts dominated financial news during the month.
Money rotated into smaller, value-oriented companies in August, but small companies continue to lag larger firms for the year. The S&P 500 has a total return of 10.8% year to date and is up 15.9% over the last year. The S&P SmallCap 600 is now up 3.2% year to date and up 3.5% over the last year. Meanwhile, the S&P MidCap 400 is up 5.3% year to date and up 6.9% over the last year.
In the large-cap segment, growth stocks were up 0.8% for the month, while value stocks were up 3.4%. Large-cap growth stocks are up 13.5% year to date, while large-cap value stocks are up 7.8%. Large-cap growth stocks are up 23.9% over the last year, compared to a return of 6.1% for large-cap value stocks.
Mid-cap growth stocks gained 2.3% during August, while mid-cap value stocks gained 4.6%. Mid-cap growth stocks are up 5.1% year to date, while mid-cap value stocks are up 5.5%. Looking back over the past year, mid-cap growth stocks are up 5.4%, compared to an 8.4% gain for mid-cap value stocks.
Small-cap growth stocks gained 5.5% during August and are now up 4.7% year to date. Small-cap value stocks gained 8.8% during the month and are up 1.8% year to date. Small-cap growth stocks are up 2.8% over the last year, while small-cap value stocks are up 4.1%.
Overall, August hinted at a possible early-stage shift toward value and smaller-cap companies, but the dominant story remains large-cap growth leadership over the last 12 months.
Market breadth strengthened during the month, especially with small-cap stocks. Within the S&P 500, there were 337 advancing issues, compared to 166 declining issues—a ratio of 2.03, up from 1.25 last month. Ten of the 11 S&P 500 sectors were up during August, an improvement from six out of 11 in July. Materials (up 5.8%) and health care (up 5.4%) were the strongest sectors within the S&P 500. Utilities was the only sector in the red for the month, down 1.6%. All 11 large-cap sectors are up for the year on a total return basis. The communication services sector is the strongest with its 17.9% gain, while the health care sector is the weakest, up 0.8% year to date.
Ten of the 11 sectors were up within the S&P MidCap 400 during August. There were 289 advancing issues, compared to 112 declining issues—a ratio of 2.58, up from 1.27 last month. The difference between the best-performing sector (communication services, up 18.1%) and worst-performing sector (consumer staples, down 2.0%) was 20.1 percentage points. Communications services is now the best-performing S&P MidCap 400 sector year to date, with a total return of 25.3%, while health care remains the weakest sector, down 5.8%. The communications services sector is also the best-performing S&P MidCap 400 sector over the last year, up 35.6%, while health care is also the weakest sector, down 12.2%.
All 11 sectors were up within the S&P SmallCap 600 during the month. The consumer discretionary sector was the leader, up 11.3%, while the consumer staples sector was the weakest with a 0.2% gain. The industrials sector is the strongest S&P SmallCap 600 sector year to date, up 10.6%. The energy sector is the weakest, down 12.7%. There were 470 advancing issues, compared to 131 declining issues during August—a ratio of 3.59, up from 0.93 last month.
Kimball Electronics Inc. 
(KE), which provides electronics, assemblies and contract manufacturing, was the best-performing holding in the Model Shadow Stock Portfolio during August, up 53.9%. Investors were impressed by the strong bottom-line results for its fiscal fourth-quarter 2025 ended June 30 that significantly surpassed analyst expectations. This was viewed as a strong outperformance in a challenging economic environment.
The weakest Model Shadow Stock Portfolio holding was DMC Global Inc. (BOOM), down 17.2% during the month. DMC Global provides various products and engineered solutions for the construction, energy, industrial processing and transportation markets worldwide. Second-quarter 2025 earnings surpassed the consensus estimate, but management indicated that market conditions were expected to remain challenging in the near term. The company noted continued softness in the U.S. onshore well completion market and ongoing tariff issues affecting its business. Even though DMC Global reported positive normalized earnings for the quarter, quarterly earnings were lower year over year, pushing the trailing 12-month normalized earnings into the red and placing the stock on earnings probation.
Additional news for the model portfolio holdings is presented at the end of the article.
The Model Shadow Stock Portfolio is reviewed quarterly to determine portfolio deletions and additions. The quarterly review cycle is tied to the reporting cycle of most firms and limits costly portfolio turnover. AAII’s stock analysis and screening service Stock Investor Pro, with data as of September 12, 2025, was used to determine the value and size break points for the quarterly review.
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.
The price-to-book cutoff has increased from 0.79 at the beginning of June to 0.92. The current initial qualifying maximum price-to-book ratio is 0.90 and we left 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 removed for valuation if they exceed three times the initial maximum price-to-book ratio at the time of a quarterly portfolio review—2.70.
Smith Douglas Homes Corp. (SDHC) has the highest price-to-book ratio in the model portfolio at 2.17. No stocks in the model portfolio exceeded the maximum price-to-book ratio at the time of review.
We examined the market-cap levels of domestic companies listed on the New York Stock Exchange (NYSE) to determine the size cutoff for the lowest decile when adding stocks to the model portfolio. The lowest decile market-cap level increased from $347 million in June to $362 million using data in Stock Investor Pro as of September 12, 2025. We maintained the maximum initial qualifying market-cap value at $400 million. Holdings are removed if their market cap goes above three times the initial criterion at the time of the quarterly review.
Kimball Electronics had the highest market cap in the portfolio at $740.8 million, but this did not exceed the $1.2 billion market-cap maximum at the time of review.
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 deleted. When available, normalized (non-GAAP) earnings are used to put stocks on probation or remove them.
Lakeland Industries Inc. (LAKE) was the only holding on earnings probation at the start of the quarterly reporting season, and it reported positive normalized earnings during the quarter that were strong enough to take the company off earnings probation.
There are no changes to the Model Shadow Stock Portfolio this quarter.
As of September 12, 25 stocks met the initial selection criteria for the Model Shadow Stock Portfolio, unchanged from one month ago. 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 those held in the Model Shadow Stock Portfolio that currently meet the initial portfolio addition rules. (They are designated as “currently qualifies” in the Notes column of the Model Shadow Stock Portfolio table on AAII.com.)
Of the 25 companies passing the initial selection criteria, 10 are currently held in the Model Shadow Stock Portfolio, down from 12 last month. Strong price increases for Friedman Industries Inc. (FRD) and NCS Multistage Holdings Inc. (NCSM) lifted their price-to-book ratios above 0.90. The qualifying companies at the time of the review were Alpha Pro Tech Ltd. (APT), Fonar Corp. (FONR), NACCO Industries Inc. (NC), Oil States International Inc. (OIS), Olympic Steel Inc. (ZEUS), Park-Ohio Holdings Corp. (PKOH), Regis Corp. (RGS), Rocky Brands Inc. (RCKY), Saga Communications Inc. (SGA) and StealthGas Inc. (GASS).
The next quarterly review of the Model Shadow Stock Portfolio will take place following the release of third-quarter 2025 earnings results at the beginning of December. If there are 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!
(09/11/2025)
Fonar reported diluted earnings of $1.23 per share for its fiscal-year 2025 ended in June, down 20.0% year over year. Fonar does not have earnings coverage by S&P Global. Total revenues were $104.4 million, up 1.5% year over year. Income from operations was $11.6 million, down from $16.5 million in the prior year.
Lakeland Industries, Inc. (LAKE)
(09/09/2025)
Lakeland Industries reported adjusted diluted earnings of $0.453 per share for its fiscal second-quarter 2026 ended July 31, 2025, up from a loss of $0.19 per share in the prior-year quarter. Earnings were 654.7% higher than the S&P Global consensus estimate of $0.06 per share. Net sales were $52.2 million, up 36.4% year over year from $38.5 million. Gross profit was $18.8 million, up from $15.2 million in the prior-year quarter.
(09/03/2025)
Regis reported adjusted diluted earnings of $0.74 per share for its fiscal fourth-quarter 2025 ended June 30, up from a loss of $0.84 per share in the prior-year quarter. Regis does not have earnings coverage by S&P Global. Consolidated revenue was $60.4 million, up 22.3% year over year from $49.4 million. Operating income was $7.3 million, up from $4.6 million over the same period.
(08/25/2025)
StealthGas reported second-quarter 2025 adjusted earnings of $0.59 per share, down 21.3% from $0.75 per share in the prior-year quarter. StealthGas does not have earnings coverage by S&P Global. Revenues were $47.2 million, up 13.0% year over year from $41.8 million. Income from operations was $19.7 million, up from $16.1 million in the prior-year quarter.
During the quarter, the company returned $338,176 to shareholders through share repurchases.
Get updates about the portfolio that has outperformed the market by 211.9%
since inception!