John Bajkowski
is the president of AAII.
With a 2.9% gain in December, the Model Shadow Stock Portfolio finished 2025 up 18.8%, surpassing the S&P 500 index, which posted a total return of 17.9% for the year after rising just 0.1% during the month. Among smaller-cap benchmarks, the S&P SmallCap 600 index slipped 0.1% in December and ended the year up 6.0%, while the S&P MidCap 400 index gained 0.1% for the month and finished 2025 up 7.5%.
Performance varied across style segments. Among large caps, growth stocks declined 0.2% in December, while value stocks advanced 0.4%. For full-year 2025, large-cap growth stocks rose 22.2%, significantly outperforming large-cap value stocks, which gained 13.2%.
Mid-cap growth stocks fell 0.2% during December, whereas mid-cap value stocks increased 0.3%. For 2025, mid-cap growth and value stocks delivered nearly identical returns of 7.5% and 7.6%, respectively.
Small-cap performance showed greater dispersion. Small-cap growth stocks declined 1.0% in December, trimming their 2025 gain to 5.4%. In contrast, small-cap value stocks rose 1.0% during the month and finished the year up 6.7%.
Market breadth weakened modestly in December. Within the S&P 500, 242 stocks advanced while 260 declined, producing an advance/decline ratio of 0.93, down sharply from 1.83 in November. Breadth also deteriorated among mid- and small-cap stocks. The advance/decline ratio for the S&P MidCap 400 fell from 2.20 in November to 0.91, while the S&P SmallCap 600’s ratio declined from 1.76 in the prior month to 0.96.
Over the full year, breadth was strongest among larger companies. The advance/decline ratio for S&P 500 constituents was 1.55, compared to 1.25 for the S&P MidCap 400 and just 0.73 for the S&P SmallCap 600. Ratios below 1.00 indicate that more stocks declined than advanced over the period.
The relative performance of small-cap stocks versus large-cap stocks often occurs in streaks. While small-company stocks have historically outperformed large-company stocks over the long term, they do not do so consistently each year. Instead, periods of sharp outperformance are frequently followed by stretches of underperformance. Although the Model Shadow Stock Portfolio outperformed the S&P 500 in 2025, most other small-cap indexes still lagged the S&P 500 for the year. Over its 33-year history, the Model Shadow Stock Portfolio has outperformed Vanguard 500 Index fund 
(VFINX) in 18 of the 33 calendar years, or 55% of the time.
Because calendar years rely on arbitrary start and end points, rolling periods are often used to reduce seasonality and provide a more consistent view of performance. Over the past 33 years, there have been 396 rolling 12-month periods. The Model Shadow Stock Portfolio outperformed Vanguard 500 Index in 51% of the one-year rolling periods.
Looking at longer horizons, the Model Shadow Stock Portfolio outperformed Vanguard 500 Index in 48% of rolling three-year periods, 58% of rolling five-year periods and 74% of rolling 10-year periods over the same 33-year span. By contrast, the S&P 500 outperformed the Model Shadow Stock Portfolio in just 18% of the 217 rolling 15-year periods and only 10% of the 157 rolling 20-year periods.
While historical patterns do not guarantee future results, longer holding periods generally increase the likelihood that stocks can realize their long-term return potential. A practical way to think about investment risk is to consider the probability that an investment will decline in value over a given holding period. As the holding period lengthens, the variability of expected returns typically declines, reducing the risk of unfavorable outcomes.
This table assumes an investment in either the Model Shadow Stock Portfolio or Vanguard 500 Index that remains fully invested for the holding period shown. It reports the percentage of time each portfolio experienced a loss from 1993 through 2025, along with the largest compound annual gains and losses observed across the various holding periods.
For example, over five-year holding periods, the Model Shadow Stock Portfolio experienced a loss in just 5% of the 337 rolling periods analyzed. The largest compound annual loss for a five-year period was 11.1%, occurring from April 2015 through March 2020, while the largest compound annual gain was 44.5% during the five-year period from March 2009 through February 2014.
Stock market returns can vary widely over short time horizons, but that variability tends to diminish as the holding period lengthens. The Model Shadow Stock Portfolio gained as much as 203.5% during a single 12-month period (April 2020 through March 2021), yet it also experienced a loss of 55.6% over another 12-month span (March 2008 through February 2009). While stocks offer greater long-term return potential than safer investments such as Treasury bills, realizing that potential generally requires a longer time horizon. As the holding period increases, return variability—and the risk of loss—typically declines.
This table displays the annual returns for the S&P 500 sectors, ranked by their 2025 performance. Each year’s returns are color coded so that the best-performing sectors are bright green while the weakest-performing sectors are vibrant red. The color scaling allows you to more easily see how the sectors’ fortunes have flipped from year to year.
Communications and information technology were once again top-performing sectors for the year, fueled by interest in artificial intelligence (AI). The S&P 500 industrials and utilities sectors surged in 2025 due to strong demand driven by the AI boom (powering data centers and automation), increased infrastructure spending, easing supply chain issues, and a cyclical rebound in aerospace and defense. The financials sector benefited from declining interest rates.
The real estate and consumer staples sectors underperformed in 2025 as a “risk-on” market favored growth-oriented areas over traditionally defensive sectors. Elevated interest rates weighed on real estate valuations, while shifting consumer behavior, including increased demand for healthier and fresher foods and the growing adoption of GLP-1 drugs, pressured consumer staples stocks. Inflation-related stresses on lower-income spending further contributed to weakness, even as overall market performance was buoyed by continued innovation in the information technology sector.
The Model Shadow Stock Portfolio uses a bottom-up quantitative approach to making stock additions and deletions. Financials and utilities stocks are excluded from consideration. Financials stocks are excluded because their balance sheet assets and liabilities are not well suited to analysis using the price-to-book-value (P/B) ratio. The sector makeup of the Model Shadow Stock Portfolio is not actively managed, yet it does impact the portfolio’s performance. The table below indicates the current sector composition of the portfolio. The portfolio is currently very heavily weighted toward the industrials, energy and information technology sectors.
Large-cap growth stocks maintained their dominance during 2025, though the story was one of continuous rotation rather than simple size dominance. The S&P 500 gained a solid 17.9%, well ahead of the 7.5% advance for mid-caps and the 6.0% rise for small caps. Large-company stocks have generally been the dominant segment over the last 10 years. As displayed in the table below, small-cap stocks were only leaders in 2016.
Since its inception in 1993, the AAII Model Shadow Stock Portfolio has a compound average annual return of 13.3%, versus Vanguard 500 Index’s compound average annual gain of 10.7% over the same period and the Vanguard Small Cap Index fund’s (NAESX) average annual gain of 9.9%.
Twenty-two stocks met the initial selection criteria for the Model Shadow Stock Portfolio as of January 14, 2026, compared to 19 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.
Of the 22 qualifying companies, seven are currently held in the Model Shadow Stock Portfolio: Alpha Pro Tech Ltd. (APT), Fonar Corp. (FONR), NACCO Industries Inc. (NC), NCS Multistage Holdings Inc. (NCSM), Park-Ohio Holdings Corp. (PKOH), Regis Corp. (RGS) and StealthGas Inc. (GASS).
Qualifying companies are those held in the Model Shadow Stock Portfolio that currently meet the initial addition rules. (They 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.)
As of January 14, Gilat Satellite Networks Ltd. (GILT) had the highest price-to-book ratio in the portfolio with a value of 3.03. The Model Shadow Stock Portfolio looks for stocks with a price-to-book ratio of 0.90 or below when adding stocks to the portfolio. Shadow stocks with a price-to-book value three times the initial maximum (0.90 × 3 = 2.70) at the time of a quarterly review are removed from the portfolio, assuming there is a suitable replacement.
Gilat Satellite also had the highest market capitalization in the portfolio, with a value of $1.225 billion as of January 14. The Model Shadow Stock Portfolio looks for stocks with a market cap (share price times shares outstanding) greater than $30 million but less than $400 million when adding stocks to the portfolio. Shadow stocks with a market cap three times the initial market-cap maximum ($400 million × 3 = $1.2 billion) at the time of a quarterly review are removed from the portfolio, assuming there is a suitable replacement.
As shown in the table below, Gilat Satellite was the top-performing holding in 2025. Gilat Satellite is an Israel-based global provider of satellite broadband and communications solutions serving commercial, government and defense customers worldwide. The company designs and manufactures ground-based satellite equipment—including terminals, modems, amplifiers and antennas—and delivers integrated satellite, terrestrial (fiber and wireless) and managed network services. Its solutions support applications ranging from enterprise and consumer connectivity to mission-critical defense, mobility and broadcast communications across its satellite networks, integrated solutions, and network infrastructure and services segments.
Gilat Satellite’s shares surged in 2025 following a wave of large new orders for its advanced SkyEdge IV platform, robust growth in its defense-focused DataPath business driven by heightened geopolitical demand and successful expansion in in-flight connectivity through Stellar Blu’s Sidewinder technology. Strong revenue growth, upward revisions to financial guidance, and a strategic shift toward recurring revenue models and AI-enabled solutions further reinforced investor confidence and the company’s long-term growth outlook.
Click here to see the current addition and deletion rules for the portfolio.
The final table below shows the performance of all the holdings within the Model Shadow Stock Portfolio during 2025. The return on investment (ROI) considers the impact of cash dividend distributions during the year.
The Model Shadow Stock Portfolio ended 2025 with 28 holdings, but it held 34 stocks over the course of the year. The portfolio turnover ratio was 9% in 2025, which translates to an average holding period of 10.6 years. The turnover ratio was lower than the long-term average of 24%, which equates to a 4.1-year average holding period. Note that the turnover ratio is calculated by the dollar value of additions and deletions and how they relate to the average portfolio value.
In case you missed it, we held a webinar on Monday, January 5, where we delved into the Model Shadow Stock Portfolio strategy and management. We also discussed market trends in 2025 and answered attendee’s questions. To watch a recording of the webinar and access additional resources, go to our Webinars page at AAII.com.
The next quarterly review of the AAII Model Shadow Stock Portfolio will take place around the beginning of March, after most of the holdings have announced their quarterly earnings. If there are any changes to the model portfolio, they will be announced in the Model Shadow Stock Portfolio Update email. Sign up for this email so you don’t miss it!
(12/16/2025)
Escalade announced that it is acquiring the assets of AllCornhole, a well-known supplier of cornhole bags and equipment and recognized for its tournament-quality products. This acquisition is part of a strategic effort to strengthen and expand Escalade’s presence in the rapidly growing cornhole market. It is intended to complement Escalade’s existing Victory Tailgate brand and its partnership with the American Cornhole League, enabling the company to offer a broader range of cornhole products for players from casual backyard participants to competitive athletes. According to Escalade leadership, this move supports the company’s goal of participating in the evolution of cornhole as it grows toward national sport status.
Natural Gas Services Group, Inc. (NGS)
(01/13/2026)
Raymond James downgraded its rating of Natural Gas Services from strong buy to outperform, but raised its price target from $34 to $42 per share, implying nearly 25% upside from then-current levels. The firm cited a healthy outlook for the natural gas compression sector, supported by growing U.S. liquified natural gas (LNG) export capacity and rising energy demand. Natural Gas Services closed at $34.62 per share on Thursday, January 22, 2026.
Saga Communications, Inc. (SGA)
(12/15/2025)
Saga Communications announced the completion of a privately negotiated repurchase of 184,215 of its shares for approximately $2.1 million, or about $11.50 per share, representing roughly 2.8% of its outstanding shares. The company stated that the transaction underscores its commitment to delivering value to shareholders, reflects confidence in its long-term strategy and financial strength, and provides greater flexibility in managing its capital structure.
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