John Bajkowski
is the president of AAII.
AP
BSET
CMT
DFSCX
FRD
HURC
KTCC
LAKE
MG
NAESX
NC
NGS
PANL
PKOH
VFINX
VSEC
Stock market weakness continued through September, with the reality of the market and consumers adjusting to higher interest rates that may stay around longer than expected. While housing prices are largely holding up, demand and affordability are being hurt by mortgage rates not seen since 2000. There are also signs that consumer spending is turning more cautious, as consumers continue to deplete their excess cash buffers and increase their credit card balances.
Larger companies held up better than smaller companies during September, but the relative performance of growth versus value companies varied across market-capitalization segments. The Model Shadow Stock Portfolio lost 5.1% during September, lowering its year-to-date return to 7.8%. The S&P 500 index, as measured by the performance of the Vanguard 500 Index fund 
(VFINX), was down 4.8% during the month, reducing its 2023 return to 13.0%. The Vanguard Small Cap Index fund (NAESX) lost 5.6% during September, dropping its year-to-date return to 4.1%. The DFA U.S. Micro Cap fund (DFSCX) declined 5.0% during September and is now up 3.0% for the year.
In the large-cap segment, growth stocks were down 4.9% during September and are now up 18.1% for the year. Large-cap value stocks were down 4.6% during September, lowering their year-to-date return to 7.5%.
In the mid-cap segment, growth stocks declined 4.8% during September, reducing their year-to-date return to 6.8%. Mid-cap value stocks fell 5.8% during the month and are now up just 1.5% for the first nine months of the year.
Small-cap value stocks exhibited the greatest decline during September, dropping 6.3% and moving again into the red for the year with a return of –0.8% through September. Small-cap growth stocks lost 5.7% during September, reducing their year-to-date return to 2.5%.
Sector performance can vary widely across market-cap sizes, with stronger relative performance generally seen with larger companies.
The only sector up during the month of September was energy. The top-performing sectors during September within the large-cap segment were energy (+2.5%), health care (–3.1%), financials (–3.3%) and communication services (–3.3%). Within the S&P SmallCap 600 index, the best-performing sectors were energy (+2.0%), industrials (–4.0%) and financials (–5.0%).
The weakest sectors within the S&P 500 during September were real estate (–7.8%), information technology (–6.9%) and industrials (–6.1%). Within the S&P SmallCap 600, the weakest sectors during the month were health care (–9.2%), information technology (–8.9%) and real estate (–7.7%).
The theme seems to be that under the current uncertain economic environment, investors are more comfortable investing in larger companies.
We see that this preference for large-cap stocks is reflected in the relative valuation levels. The median price-to-book-value (P/B) ratio of the companies in the S&P SmallCap 600 is 1.61, about half of the 3.13 median ratio for the companies in the S&P 500. The S&P SmallCap 600 normally trades at a discounted multiple relative to the S&P 500. The discount has averaged 0.66 since 1998. The difference was smallest during 2006 when the discount was only 0.79 times (2.28 compared to 2.89) and has been around 0.50 since 2020. Toward the end of 2022 and at the start of 2023, small caps were outperforming large caps and the valuation gap tightened, but the regional banking crisis and excitement over artificial intelligence (AI) seems to have shifted investor preferences back toward larger companies.
Since its inception in 1993, the AAII Model Shadow Stock Portfolio has a compound annual average return of 13.5% versus the Vanguard 500 Index fund’s gain of 9.7% per year on average over the same period. Over the same period, the Vanguard Small Cap Index fund posted an average annual gain of 9.4%.
Within the Model Shadow Stock Portfolio, the best-performing stocks in September were Natural Gas Services Group Inc. (NGS), up 34.1%; NACCO Industries Inc. (NC), up 7.6%; and Lakeland Industries Inc. (LAKE), up 7.5%.
The weakest-performing stocks for the month were SigmaTron International Inc. (SGMA), down 56.3%; Lazydays Holdings Inc. (LAZY), down 35.5%; and Ampco-Pittsburgh Corp. (AP), down 18.3%.
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 news column of the Model Shadow Stock Portfolio tab of the Shadow Stock website.
Thirty-five stocks met the initial selection criteria for the Model Shadow Stock Portfolio as of October 13, 2023, up from 27 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 new Shadow Stock Ideas is updated daily—Tuesday through Saturday.
Of the 35 qualifying companies, nine are currently held in the Model Shadow Stock Portfolio: Fonar Corp. (FONR), Friedman Industries Inc. (FRD), Hurco Companies Inc. (HURC), Key Tronic Corp. (KTCC), Lakeland Industries, Mistras Group Inc. (MG), NACCO Industries, Natural Gas Services and Pangaea Logistics Solutions Ltd. (PANL).
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.)
Bassett Furniture Industries Inc. (BSET) came off the qualifying list when its consensus earnings estimate for the current quarter turned negative. Qualifying companies must have positive historical earnings for the most recent quarter and trailing 12 months. If they have consensus earnings estimates, they must be positive for the current quarter and fiscal year.
Park Ohio Holdings Corp. (PKOH) came off the qualifying list when its price-to-book ratio went above 0.90.
As of October 13, Core Molding Technologies Inc. (CMT) had the highest price-to-book ratio in the Model Shadow Stock Portfolio. Its ratio of 1.78 is above the 0.90 maximum value used for initially qualifying a stock for inclusion in the portfolio. However, stocks are not removed from the portfolio until their price-to-book ratio rises to three times the initial maximum value (2.70) during a quarterly review.
VSE Corp. (VSEC) had the highest market cap in the portfolio, with a value of $859.1 million as of October 13. 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.
Click here to 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 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)
(09/28/2023)
Bassett Furniture Industries reported a third-quarter GAAP loss per share of $0.30, beating the I/B/E/S consensus estimate for a loss of $0.59 per share by 48.7%. Total revenue decreased 26.1% from the prior-year quarter to $87.2 million. The company reported an operating loss of $3.8 million, compared to operating income of $10.7 million in the comparable period of 2022.
CEO Robert H. Spilman Jr. stated that although the firm continues to see increased business around the important holiday events, day-to-day store traffic and wholesale order writing between the big events remain very challenging. However, he hopes that the recent debut of the firm’s website will enhance both e-commerce and store conversion over time.
(09/18/2023)
Ennis reported second-quarter 2023 earnings per diluted share of $0.42, beating the I/B/E/S consensus estimate of $0.40 per share. Revenue totaled $106.8 million, down 4% from $111.2 million in the same period of 2022. Operating income also decreased by 15% from $17.3 million to $14.7 million year over year. Net income was $10.9 million, down 10.5% from $12.1 million in the second quarter of 2022.
“Our profitability and strong financial condition will allow us to continue operations and fund acquisitions without incurring debt. Given those strengths, we also anticipate timely access to credit should larger acquisition opportunities materialize. We continue to focus on delivering profitability and returns to our shareholders” said CEO Keith Walter.
Lazydays Holdings, Inc. (GORV)
(10/05/2023)
Lazydays Holdings submitted an amendment to the registration statement pertaining to its previously disclosed rights offering. According to the filing, the company intends to generate gross proceeds of up to $100 million through the sale of its common stock, with a par value of $0.0001 per share.
(10/09/2023)
Mistras Group announced the departure of CEO Dennis M. Bertolotti. Sotirios J. Vahaviolos will assume the chairman emeritus position. Manuel N. Stamatakis will take on the dual responsibilities of chairman of the board and interim CEO. James J. Forese will be lead director and chair of the corporate governance committee.
Natural Gas Services Group, Inc. (NGS)
(10/09/2023)
Natural Gas Services announced that industry veteran Brian L. Tucker will be president and chief operating officer (COO) of the company. Stephen C. Taylor, who was serving as interim president and CEO, has resigned from the role of president.
(10/04/2023)
VSE Corp. announced an agreement with Honeywell involving an asset purchase and perpetual license arrangement. In this partnership, VSE Corp. will exclusively handle the manufacturing and support responsibilities for specific fuel control systems across four crucial engine platforms. The acquisition of this perpetual license and assets was completed for a sum of $105 million. VSE Corp. also anticipates a remarkable growth trajectory in its aviation unit for full-year 2023, with revenue expected to increase by 30% to 35% compared to the prior year.
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