John Bajkowski
is the president of AAII.
Investor sentiment turned bullish during June, with broad stock market participation as investors digested better-than-expected economic reports along with a pause in interest rate hikes by the Federal Reserve. The S&P 500 index gained 6.6% during June, while the S&P MidCap 400 index gained 9.2% and the S&P SmallCap 600 index was up 8.2% for the month. It was reassuring to see gains spread beyond the narrow segment of technology and communication stocks that have largely propelled the S&P 500 this year.
The S&P 500 as measured through the Vanguard 500 Index fund 
(VFINX) was up 6.6% in June and is up 16.8% year to date, while the Vanguard Small Cap Index fund (NAESX) was up 8.7% during June and is up 9.2% for the year. The DFA U.S. Micro Cap fund (DFSCX) was up 8.4% during June and is now up 6.6% during for the year. The Model Shadow Stock Portfolio gained 14.6% during June, improving its year-to-date performance to a gain of 13.7%.
Headlines during the month noted that the S&P 500 entered a bull market phase after it closed over 20% above its most recent low observed during October 2022. I find it interesting that 20% is used as the threshold to define both bear and bull market periods. After all, it takes a 25% increase to get back to your starting point after a 20% decline. If you start off with a $100 investment and lose 20% on your investment, you are left with $80 [$100 × (1 – 0.20)]. The increase from $80 to $100 is actually 25%: [$80 × (1 + 0.25)].
Drawdown is commonly used to measure the severity of declines along with the time it takes to get back to breakeven. We normally use monthly total returns for the Model Shadow Stock Portfolio and common benchmarks to measure long-term performance and trends. At the end of June, the S&P 500 remained down 4.5% from its month-end high level observed at the end of 2021, even when considering the reinvestment of dividends. Examining monthly total return figures, the S&P 500 has been in a down market for 18 months and had its deepest drawdown, or cumulative total-return decline, of 24.0% at the end of September 2022. The bear market for the Model Shadow Stock Portfolio started even sooner. The Model Shadow Stock Portfolio peaked in May 2021 and was down as much as 36.5% at the end of September. The current drawdown for the Model Shadow Stock Portfolio is 17.3% and requires a gain of 21.0% to get back to even for its current bear market decline.
In the first 20 years of its existence, the Model Shadow Stock Portfolio tended to have deeper bear markets, but they were significantly shorter in duration than for the S&P 500. Over the last 10 years, however, the Model Shadow Stock Portfolio’s downturns have been more frequent, deeper and have taken longer to get back to even.
The deepest drawdown for the Model Shadow Stock Portfolio was during the financial crisis of 2007–2008. The Model Shadow Stock Portfolio declined 63.4%, but it broke even in 3.4 years. In contrast, the S&P 500 had a total-return decline of 51.0% during the financial crisis, but it took 4.8 years to make up the drawdown. The longest drawdown period for the S&P 500 over the last 30.5 years occurred with the bursting of the dot-com bubble in 2000. It took 6.2 years for the S&P 500 to recover from its 44.8% decline.
As shown in the chart below, the downturns for the micro-cap Model Shadow Stock Portfolio do not always match up with those of the large-cap S&P 500 index. The downturns are more frequent for the Model Shadow Stock Portfolio and often start ahead of the large-cap index declines. That difference in movement adds diversification to your portfolio over the long term while still allowing investment in stocks.
Value stocks performed slightly better than growth-oriented stocks during the month but are still lagging growth stocks for the year. In the large-cap segment, growth stocks were up 6.4% for the month and are now up 21.2% for the year. Large-cap value stocks were up 6.9% during June and are now up 12.1% year to date.
In the mid-cap segment, value stocks are up 7.1% for the year, after gaining 9.6% during June. Mid-cap growth stocks are up 10.4% for the year, after gaining 8.7% during the month.
Small-cap value stocks are now up 5.1% year to date, while small-cap growth stocks are up 7.0% for the year. Small-cap value stocks gained 8.5% during June, while small-cap growth stocks gained 8.0% during the month.
Almost all of the sectors were up during June, with the exception of utilities in the mid- and small-cap market segments. The top-performing sectors during June within the large-cap segment were consumer discretionary (+12.0%), industrials (+11.2%) and materials (+10.8%) as investor appetite for economically sensitive companies grew. Within the S&P SmallCap 600, energy was the best-performing sector during June, up 14.0%. The other sectors with double-digit gains included industrials (+12.7%), materials (+11.6%) and consumer discretionary (+11.1%).
The weakest sectors within the S&P 500 during June were utilities (+1.5%), communication services (+2.6%) and consumer staples (2.9%). Within the S&P SmallCap 600, the weakest sectors during the month were utilities (–3.3%), consumer staples (3.0%) and health care (+3.5%).
Since its inception in 1993, the AAII Model Shadow Stock Portfolio has a compound annual average return of 13.8% versus the Vanguard 500 Index fund’s gain of 9.9% per year on average over the same period. Over the same period, the Vanguard Small Cap Index fund posted an average annual gain of 9.7%.
Twenty-four stocks met the initial selection criteria for the Model Shadow Stock Portfolio as of July 11, 2023, up from 23 passing stocks 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 Shadow Stock Ideas is updated daily, Tuesday through Saturday.
Of the 24 qualifying companies, seven were held in the Model Shadow Stock tracking portfolio at the time: Bassett Furniture Industries Inc. (BSET), Big 5 Sporting Goods Corp. (BGFV), Fonar Corp. (FONR), Friedman Industries Inc. (FRD), Hurco Companies Inc. (HURC), Key Tronic Corp. (KTCC) and NACCO Industries Inc. (NC).
Big 5 Sporting Goods (last qualified April 2023) was the only recent addition to the list of currently qualifying portfolio holdings since last month.
One stock came off the passing list since last month. Lakeland Industries Inc.’s (LAKE) price-to-book-value (P/B) ratio of 0.92 moved just above the 0.90 initial qualifying maximum ratio.
As of July 11, Ennis Inc. (EBF) had the highest price-to-book ratio in the Model Shadow Stock Portfolio. Its price-to-book ratio of 1.55 remains well below the threshold for removing a stock. Shadow stocks with a price-to-book ratio 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.
Beazer Homes USA Inc. (BZH) had the highest market capitalization value of $882.7 million as of July 11. The Model Shadow Stock Portfolio looks for stocks with a market cap (share price times shares outstanding) greater than $30 million but less than $300 million when adding stocks to the portfolio. Shadow stocks with a market cap three times the initial market cap maximum ($300 million × 3 = $900 million) at the time of a quarterly review are removed from the portfolio, assuming there is a suitable replacement. Beazer Homes is approaching the portfolio’s size limit, but has not yet surpassed the maximum level.
Click here to see the current addition and deletion rules for the portfolio.
Within the Model Shadow Stock Portfolio, the best-performing stocks in June were Beazer Homes, up 39.6%; Lakeland Industries, up 31.4%; Friedman Industries, up 31.0%; and VOXX International Corp. (VOXX) up 28.9%.
The weakest-performing stocks for the month were Strattec Security Corp. (STRT), down 4.4%; Lazydays Holdings Inc. (LAZY), down 3.7%; SigmaTron International Inc. (SGMA), down 2.1%; and Fonar, down 0.1%.
Any noteworthy news on the Model Shadow Stock Portfolio holdings is below. We are archiving news items on the holdings. The archives can be accessed from the news column of the Model Shadow Stock Portfolio tab of the Shadow Stock website.
The next quarterly review of the AAII Model Shadow Stock Portfolio will take place around the beginning of September 2023, after most of the holdings have announced their quarterly earnings. Any changes to the portfolio will be announced at the time they are made in a special Model Shadow Stock Portfolio Update email (sign up at www.aaii.com/email).
Bassett Furniture Industries, Incorporated (BSET)
(07/12/2023)
Bassett Furniture Industries declared a regular quarterly dividend of $0.18 per common stock, a 12.5% increase over its previous declaration. The dividend is payable August 25 to shareholders of record August 11. The stock will trade ex-dividend on Thursday, August 10.
(06/29/2023)
Bassett Furniture Industries reported second-quarter GAAP earnings per share of $0.24 and consolidated revenue of $100.5 million. Non-GAAP adjusted earnings per share were $0.12, 300% above the I/B/E/S consensus estimate of $0.03 per share. Consolidated revenue declined by 22% compared to last year but was 4.9% greater than the comparable period in 2019. Wholesale orders declined by 18% on a year-over-year basis. Operating cash flow of $5.8 million was fueled by an 11% reduction in total inventory. Operating income of $2.5 million included a $1.0 million valuation adjustment associated with contingent consideration as part of last year’s acquisition of e-commerce retailer Noa Home.
“While our operating results were challenged by industrywide soft demand, we successfully managed our balance sheet and maintained profitability during the second quarter. We are uncertain as to when the current sales environment will markedly improve, but we believe that our dedicated distribution strategy, domestic manufacturing platform, forthcoming e-commerce enhancements and strong financial position will enable us to steadily grow revenue and shareholder returns as time goes on,” said chairman and CEO Robert H. Spilman Jr.
(06/19/2023)
Ennis reported first-quarter 2023 earnings per diluted share of $0.45, beating the I/B/E/S consensus estimate of $0.36 per share by 20%. The company had first-quarter revenues of $111.3 million, compared to $107.7 million in the prior-year quarter. Operating income declined slightly, from $16.2 million one year ago to $15.7 million. Net income was flat at $11.64 million compared to $11.62 million in the first quarter of 2022.
Friedman Industries, Incorporated (FRD)
(06/29/2023)
Friedman Industries reported fourth-quarter GAAP earnings per share of $0.86 and revenue of $124.19 million, representing a 65.4% increase from that of the prior-year period. Sales volume in their steel products increased from approximately 200,000 tons for fiscal 2022 to approximately 467,000 tons for fiscal 2023. The facilities acquired from Plateplus Inc., along with a new facility in Sinton, Texas, accounted for approximately 234,000 tons of the volume growth in fiscal 2023.
“Strong fourth-quarter results put an exclamation mark on a monumental fiscal year for Friedman. In April 2022, we made our first acquisition in the company’s history, acquiring two steel processing facilities in East Chicago, Indiana, and Granite City, Illinois. This was followed up by our newly constructed facility in Sinton, Texas, which commenced operations in October 2022. These strategic investments contributed to our most profitable year in company history, and we believe they will have a profound impact on the future of Friedman. We expect strong performance for our first quarter of fiscal 2024, providing a good foundation as we aim to deliver record earnings for three years in a row,” said president and CEO Michael J. Taylor.
Friedman Industries expects sales volume for its fiscal first quarter of 2024 to be approximately in line with the fiscal fourth quarter of 2023. It expects margin improvement for the first quarter compared to the fourth quarter due to the rising hot-rolled coil prices entering the first quarter. Overall, the company expects the first quarter to be one of the more profitable quarters in the company’s history.
(06/20/2023)
Freidman Industries declared a cash dividend of $0.02 per share, payable on August 11, to shareholders of record as of July 21. The stock will trade ex-dividend on Thursday, July 20.
(06/20/2023)
Global Ship Lease’s credit rating has been increased to Ba3 from B1, with a stable outlook from Moody’s. The credit increase came with some analysis, citing the company’s low ratio of debt to earnings before interest, taxes, depreciation and amortization (EBITDA), significant revenue visibility due to multiyear time charter agreements secured at attractive rates in 2021 and 2022 and anticipated significant cash flow generation from charters already fixed through virtually all of 2023 and approximately 80% of 2024.
(06/22/2023)
Mistras Group is set to join the Russell 3000 index during the annual index reconstruction. The Russell indexes are rebalanced every year on the fourth Friday of June. Mistras is expected to join the Russell 3000 effective after the market opens on June 26.
VOXX International Corporation (VOXX)
(07/10/2023)
VOXX International reported a loss of $0.45 per share for its fiscal-2024 first-quarter, missing the I/B/ES consensus estimate of a loss of $0.22 per share by over 100%. First-quarter 2024 total revenue decreased 13.1% to $111.9 million from $128.7 million in the prior-year period. The company recorded a net loss of $10.7 million, a decrease from the net loss of $6.5 million in the corresponding period of fiscal 2023. Gross margin in the first quarter of fiscal 2024 was 24.6%, compared to gross margin of 25.8% in the same quarter of 2023. VOXX International reported an operating loss of $11.4 million, versus the operating loss of $6.7 million in the comparable period of 2023.
“We anticipate continued global softness and are in the process of realigning our operations, reducing our workforce and bringing down overhead to be profitable on lower sales volumes,” stated CEO Pat Lavelle.
(07/03/2023)
VSE Corp. completed its acquisition of Desser Holding Co. LLC. VSE Corp. acquired the company for total cash considerations of $124 million. In a separate transaction, it concurrently sold Desser Aerospace’s Proprietary Solutions businesses—including Seginus Aerospace, AOG Aviation Spares and DAC Engineered Products—to Loar Group Inc. for a total cash consideration of $30 million. The total net cash outlay for the assets VSE Corp. acquired is $94 million.
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