John Bajkowski
is the president of AAII.
While the markets bounced back strongly recently, they trended down during October as geopolitical tensions, high interest rates, mixed earnings reports and uncertainty regarding the Federal Reserve’s stance on further tightening weighed on the minds of investors. The wall of worry was especially evident with the stock price performance of small- and mid-cap companies, which continued their recent underperformance.
The S&P 500 index was down 2.1% for month, reducing the year-to-date gain to 10.6% for the Vanguard 500 Index fund 
(VFINX). The Model Shadow Stock Portfolio lost 4.6% for the month and is now up just 2.9% through the end of October. The Vanguard Small Cap Index fund (NAESX) lost 5.8% during October, pushing its year-to-date return in the red. The fund is down 1.9% through the first 10 months of the year.
Since its inception in 1993, the AAII Model Shadow Stock Portfolio has a compound annual average return of 13.2%, versus the Vanguard 500 Index fund’s gain of 9.6% per year on average over the same period. Over the same period, the Vanguard Small Cap Index fund posted an average annual gain of 9.2%.
Smaller companies tend to be tied more closely with the performance of the domestic economy, and concerns that continued Fed tightening will push the economy into a recession was seen in the performance for the month. Except for the large-cap segment, value-oriented companies continued their underperformance during October.
In the large-cap segment, value stocks were down 1.7% for the month, trimming their year-to-date gain to 5.7% for 2023. Large-cap growth stocks remain stronger year to date with a 15.3% gain after losing 2.4% during October.
In the mid-cap segment, value stocks are now down 4.4% for the year, after losing 5.9% during October. Mid-cap growth stocks are still up 1.6% for the year, after losing 4.9% during the month.
Small-cap value stocks are down 7.1% year to date, while small-cap growth stocks are down 2.8%. During October, small-cap value stocks lost 6.3% and small-cap growth stocks lost 5.2%.
Almost all of the sectors posted losses during October, but the results varied widely by market-capitalization segment. Within the large-cap segment, the only sector up during the month of October was the utilities sector, up 1.2% for the month. In the mid-cap segment, the only sector to squeak out a gain was energy with a 0.1% increase during October. No sectors were up during October among small caps.
Overall, the top-performing sectors during October within the large-cap segment were utilities (+1.2%), information technology (–0.1%) and consumer staples (–1.4%). Within the S&P SmallCap 600 index, the best-performing sectors were utilities (–0.6%), communication services (–3.2%) and industrials (–4.7%).
Even with the market weakness last month, fewer companies passed the initial Shadow Stock screen this month. Twenty-seven stocks met the initial selection criteria for the Model Shadow Stock Portfolio as of November 13, down from 35 passing stocks last month. 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 27 qualifying companies as of November 13, 2023, seven are currently held in the Model Shadow Stock tracking portfolio: seven are currently held in the Model Shadow Stock Portfolio: Fonar Corp. (FONR), Friedman Industries Inc. (FRD), Hurco Companies Inc. (HURC), Lakeland Industries Inc. (LAKE), Natural Gas Services Group Inc. (NGS), Pangaea Logistics Solutions Ltd. (PANL) and Rocky Brands Inc. (RCKY). Qualifying companies are those held in the Model Shadow Stock Portfolio that currently meet the initial purchase 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.
Last month, nine stocks in the Model Shadow Stock Portfolio qualified, three stopped meeting the initial rules for qualification and one started to meet the qualifications rules again.
Key Tronic Corp. (KTCC) came off the qualifying list during the last month when stock price fell below the minimum price of $4 per share to pass the filter. Key Tronic had a price of $3.90 per share as of the close of November 13, 2023.
Mistras Group Inc. (MG) reported a GAAP quarterly loss of $0.339 per share during the month, but positive adjusted earnings of $0.014 per share. To initially qualify, companies cannot have negative quarterly earnings.
NACCO Industries Inc. (NC) reported a GAAP quarterly loss of $0.510 per share during the month, and an adjusted loss of $0.502 per share.
Rocky Brands made it back to the list of holdings that currently qualify.
The Model Shadow Stock Portfolio looks for stocks with a market cap (share price times shares outstanding) less than $300 million. Shadow stocks with a market cap three times the initial market cap maximum—$900 million ($300 million × 3)—at the time of a quarterly review are sold from the model portfolio, assuming there is a suitable replacement. As of November 13, 2023, Beazer Homes USA Inc. (BZH) had market cap of $911.0 million and VSE Corp. (VSEC) had a market cap of $935.4 million. Our quarterly review will be performed early next month, and these stocks could be potential candidates for removal if their market caps remain elevated and there are no changes to the maximum market cap for inclusion.
As of November 13, 2023, Escalade Inc. (ESCA) had the highest price-to-book-value (P/B) ratio in the Model Shadow Stock Portfolio. Its ratio of 1.60 is well above the 0.90 maximum value used for initially qualifying a stock for inclusion to 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 (0.90 × 3). It may help you to think about values below 0.90 as being attractive, while those three times above the initial value are expensive. Allowing the price-to-book ratio to expand for stocks that you own allows your winners to run up a little, since the price-to-book ratio typically gets richer as the stock price goes up. The initial price-to-book level is adjusted over time to reflect the changing market conditions, and we are examining the valuation and size limits for the next quarterly portfolio review.
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.
Many companies in the Model Shadow Stock Portfolio have already reported quarterly earnings, as noted in the News section below. If a company in the tracking portfolio reports 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 media and firms reporting consensus estimates. The LSEG I/B/E/S adjusted earnings reported in AAII’s Stock Investor Pro are used for Model Shadow Stock Portfolio decisions when they are available.
Lazydays Holdings Inc. (LAZY) just went on went on earnings probation when it reported a quarterly loss of $0.48 per share, which pushed its trailing 12-month earnings per share into the red.
If there any changes to the model portfolio, they will be announced at the time with a special Model Shadow Stock Portfolio Update email (sign up at www.aaii.com/email).
FactSet tracks earnings projections and published an interesting observation that the market has especially punished companies reporting negative earnings surprises this quarter. It focused on the companies that make up the S&P 500. As of last week, 82% of the companies within the index have reported earnings above the consensus estimate, higher than the 77% average earnings beat observed over the past five years. The magnitude of the earnings beat, however, is 7.1%, which is below the five-year average of 8.5%. While more companies are topping earnings expectations, the positive surprises are smaller than average.
FactSet notes that reported positive earnings surprises this past quarter have seen an average price increase of 0.8% two days before the earnings release through two days after the announcement date. This is slightly below the 0.9% average observed over the past five years.
However, companies that have reported negative earnings surprises this past quarter have seen their stock prices decline 5.2% on average over the same surrounding four-day period. This percentage decline is much greater than the 2.3% average decline from negative surprises seen over the last five years. FactSet analyst John Butters indicates that the greater-than-average punishment of negative earnings surprises may be tied to greater-than-usual declines in forward earnings estimates.
The table here provides the earnings results of the Model Shadow Stock Portfolio holdings along with the price movement near the time of the earnings announcement. The price change columns in the table report on the price movement of the company’s stock two business days prior to the date of the earnings announcement to two business days after the announcement date. Since companies are reporting at different times, it can be difficult to understand the market environment around the time of the announcement. To help relate company performance to that of the market, we also calculated the price movement of the SPDR S&P 500 ETF (SPY) and the iShares S&P SmallCap 600 Value ETF (IJS) around the time of the announcement.
Note that many of the holdings are too small to have analyst coverage for earnings estimates. With light analyst coverage, earnings surprises are much more common among these micro-cap companies. Nevertheless, companies with large negative surprises generally underperformed the market around the time of the announcement, while positive surprises tend to be accompanied by positive price reaction.
Let us know if you find the table interesting and we can publish it on a quarterly basis.
Ampco-Pittsburgh Corporation (AP)
(11/14/2023)
Ampco-Pittsburgh reported third-quarter 2023 GAAP earnings per share of $0.04. Total revenue increased 2.6% from the prior-year quarter to $102.2 million. Air and liquid processing segment sales rose 18% compared to the prior-year quarter.
CEO Brett McBrayer praised the company for producing another profitable quarter despite scheduled downtime for plant maintenance. The year-over-year improvement can be mainly attributed to stronger roll pricing, a decline in commodity prices and growth in the air and liquid processing segment.
Big 5 Sporting Goods Corporation (BGFV)
(10/31/2023)
Big 5 Sporting Goods reported third-quarter 2023 GAAP earnings per share of $0.08, missing the LSEG I/B/E/S consensus estimate of $0.160 per share by 50%. Third-quarter 2023 total revenue decreased 8.2% from the prior-year quarter to $239.9 million. Net income was $1.9 million. This compares to net income of $6.4 million, or $0.29 per diluted share in the prior-year quarter.
President, chairman and CEO Steven G. Miller said that the slightly lower-than-expected earnings performance reflected the increasing pressure on consumer discretionary spending over the course of the quarter, resulting from various macroeconomic headwinds and the challenging sales environment. On a more positive note, Miller praised the company’s execution in optimizing merchandise margins, controlling expenses and managing inventory.
For fourth-quarter 2023, the company expects same-store sales to decrease in the high-single-digit to low-double-digit range compared to the prior-year quarter. The company currently anticipates its cash balance at the end of fiscal 2023 to be in line with the end of the third quarter.
The company also declared a dividend of $0.125 per share, representing a 50% decrease from the prior declaration of $0.250 per share. The dividend is payable on December 15, to shareholders of record as of December 1. The stock will trade ex-dividend on Thursday, November 30. Big 5 Sporting Goods’ current dividend yield is 8.9%.
(11/07/2023)
Clarus reported third-quarter 2023 adjusted earnings per share of $0.16, missing the LSEG I/B/E/S consensus estimate of $0.28 per share. Total revenue decreased 13.5% from the prior-year quarter to $100.1 million. Adventure segment sales rose 9% to $20.2 million compared to the prior-year quarter, while outdoor segment sales and precision sport segment sales dropped 3% to $61.1 million and 45% to $18.8 million, respectively. The company reported a net loss of $1.3 million compared to $2.8 million during the prior-year quarter.
Core Molding Technologies, Inc. (CMT)
(11/07/2023)
Core Molding Technologies reported third-quarter 2023 non-GAAP earnings per share of $0.53, missing the LSEG I/B/E/S consensus estimate of $0.560 per share. Total revenue decreased 14.6% from the prior-year quarter to $86.73 million. The company reported net income of $4.4 million compared to $1.3 million during the prior-year quarter.
For the fourth quarter, Core Molding Technologies anticipates a sales decline of 15% to 20% from the fourth quarter of 2022. The company continues to target gross margins in the 17.5% to 18.5% range for fiscal-year 2023, and full-year revenues are projected to be down 5% to 10% compared to fiscal-year 2022.
Covenant Logistics Group, Inc. (CVLG)
(10/25/2023)
Covenant Logistics Group reported third-quarter 2023 non-GAAP earnings per share of $1.13, beating the LSEG I/B/E/S consensus estimate of $1.073 per share. Total revenue decreased 7.4% from the prior-year quarter to $288.72 million. This decrease may have been driven by the challenging freight market that has continued into the fourth quarter of 2023. Asset-based segments contributed approximately 67% of revenue, while the company’s asset-light segments contributed approximately 33%.
CEO and Chairman David R. Parker reflected upon the quarter with positive words despite the decline in revenue. He said that despite the market headwinds, including the challenging freight market today, the company’s business model has shown resilience.
(11/08/2023)
Ducommun reported third-quarter 2023 non-GAAP earnings per share of $0.70, beating the LSEG I/B/E/S consensus estimate of $0.605 per share. Total revenue increased 5.2% from the prior-year quarter to $196.3 million. The company reported net income of $3.2 million compared to $8.5 million during the prior-year quarter, reflecting higher selling, general and administrative (SG&A) expenses of $7.4 million, higher restructuring charges of $3.2 million and higher interest expenses of $2.4 million, partially offset by higher gross profit of $6.0 million.
(10/26/2023)
Escalade reported third-quarter 2023 GAAP earnings per share of $0.31, in line with the LSEG I/B/E/S consensus estimate. Third-quarter 2023 total revenue decreased 2.0% from the prior-year quarter to $73.4 million. However, the company reported increases in gross margin, operating income, earnings before interest, taxes, depreciation and amortization (EBITDA) and net income compared to the prior-year quarter. Net income was $4.3 million compared to $3.0 million during the prior-year quarter.
President and CEO Walter P. Glazer Jr. said that Escalade’s strong performance was driven by the wholesale inventory destocking cycle than began earlier this year, which progressed favorably for many of the company’s segments. Furthermore, order activity also improved within the company’s mass merchant channel, which includes its big box and sporting goods retailers, driven by demand for basketball and pickleball products. Escalade has been focused on reducing fixed overhead expenses, continuing to reduce inventory levels and improving working capital efficiency.
(11/14/2023)
Fonar reported first-quarter 2024 GAAP earnings per share of $0.59. Total revenue increased 11.4% from the prior-year quarter to $25.84 million, while net income approximately doubled to $5.4 million. Revenues from managing diagnostic imaging centers rose 12% to $23.8 million, compared to the prior-year quarter and revenues from product sales, upgrades and service and repair fees for related and unrelated medical parties rose to $2.1 million.
Friedman Industries, Incorporated (FRD)
(11/14/2023)
Friedman Industries reported second-quarter 2024 GAAP earnings per share of $0.48. Total revenue decreased 12.7% from the prior-year quarter to $130.8 million, while net income increased to $3.5 million compared to $2.5 million in the prior-year quarter. Operating results for the quarter were significantly impacted by the market price of hot-rolled coil.
(11/09/2023)
Global Ship Lease reported third-quarter 2023 non-GAAP earnings per share of $2.33, beating the I/B/E/S consensus estimate of $2.148 per share. Total revenue increased 1.2% from the prior-year quarter to $174.5 million. The company reported net income of $82.7 million, compared to $89.6 million during the prior-year quarter.
(10/31/2023)
Key Tronic announced total revenues of $147.8 million for the first quarter of 2024, up 11.3% from the same period one year ago. Net income for the quarter was $355 million, down 109.8%, from one year ago. GAAP diluted earnings per share were $0.03, a decrease of 114.2% over the prior-year quarter.
In the upcoming second quarter of 2024, the company anticipates revenue of $135 million to $145 million, with expected earnings per diluted share ranging from $0.05 to $0.10.
Kimball Electronics, Inc. (KE)
(11/06/2023)
Kimball Electronics announced total revenues of $438 million for the third quarter of 2023, up 7.6% from the same period one year ago. Net income for the quarter was $10.8 million, up 12.3% from one year ago. Earnings per share were $0.43, up 12.3% over the prior year.
Lazydays Holdings, Inc. (GORV)
(11/13/2023)
Lazydays Holdings announced the cancellation of its previously announced rights offering of shares. Due to the current industry conditions and the decline in stock price from the date of the announcement, the decision was made to cancel the offering. As a result, the company will look for alternative financing options.
(11/03/2023)
Lazydays Holdings announced total revenues of $280.7 million for the third quarter of 2023, down 17.2% from the same period one year ago. The company reported a net loss of $5.5 million, down 237.4% from one year ago. The company reported a loss of $0.48 per share, a decrease of 27.0% over the prior year. This translates into a –594.8% earnings surprise compared to the LSEG I/B/E/S consensus estimate of $0.097 per share.
(11/02/2023)
Mistras Group announced total revenues of $179.4 million for the third quarter of 2023, up 0.5% from the same period one year ago. The company reported a net loss of $10.3 million, down 57.6% from one year ago. The company reported a GAAP diluted loss of $0.34 per share, a decrease of 83.3% over the prior-year quarter. This missed the LSEG I/B/E/S consensus estimate of $0.160 per share by 72%.
The company revised its guidance for full-year 2023, with revenue projected to fall between $695 million and $705 million, down from the previous range of $700 million to $720 million. Adjusted EBITDA is expected to be in the range of $65 million to $68 million.
Looking ahead to 2024, the company anticipates modest single-digit growth in revenue and a substantial expansion in adjusted EBITDA.
(11/01/2023)
NACCO Industries announced total revenues of $18.7 million for the third quarter of 2023, down 19.1% from the same period one year ago. The company reported a net loss of $10.3 million, down 376.5%, from one year ago. The company reported a GAAP diluted loss of $0.51 per share, a decrease of 184.3% over the prior-year quarter.
Natural Gas Services Group, Inc. (NGS)
(11/14/2023)
Natural Gas Services reported third-quarter 2023 earnings per share of $0.18, above the LSEG I/B/E/S consensus estimate of $0.075 per share. Total revenue was $31.4 million, a 42.3% increase over the same period of 2022. Rental revenue increased 48.7% to $27.7 million, from $18.6 million in prior-year quarter. Operating income was $4.9 million compared to an operating loss of $294,000 for the comparable period of 2022. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) increased 53.1% to $11.8 million, from $7.7 million for the same period in 2022. This increase was primarily attributable to higher revenues and adjusted gross margins.
Pangaea Logistics Solutions Ltd. (PANL)
(11/08/2023)
Pangaea Logistics Solutions announced total revenues of $135.6 million for the third quarter of 2023, down 30.5% from the same period one year ago. Net income for the quarter was $20.1 million, up 2.1% from one year ago. Earnings per share were $0.42, in line with the prior-year quarter. This translates to a 174.5% earnings surprise compared to the LSEG I/B/E/S consensus estimate of $0.153 per share.
Park-Ohio Holdings Corp. (PKOH)
(11/02/2023)
Park Ohio Holdings announced total revenues of $419 million for the third quarter of 2023, down 19.1% from the same period one year ago. Net income was $11.1 million, up 121.7% from one year ago. Non-GAAP diluted earnings per share were $0.99, an increase of 52.2% over the prior-year quarter. This beat the LSEG I/B/E/S consensus estimate of $0.80 per share by 21.2%.
(11/01/2023)
Rocky Brands announced total revenues of $125.6 million for the third quarter of 2023, down 16.0% from the same period one year ago. GAAP net income was $8.0 million, up 38.4%, and non-GAAP net income for the quarter was $6.8 million, up 18.1%, from one year ago. GAAP diluted earnings per share were $1.09, an increase of 38.2% over the prior-year quarter. Non-GAAP diluted earnings per share were $0.93, an increase of 18.8% over the prior-year quarter. This beat the LSEG I/B/E/S consensus estimate of $0.560 per share by 64.2%.
Vishay Precision Group, Inc. (VPG)
(11/07/2023)
Vishay Precision Group announced total revenues of $85.9 million for the third quarter of 2023, up 4.8% from the same period one year ago. Net income was $10.8 million, down 45.9% from one year ago. Earnings per share were $0.46, a decrease of 46.6% over the prior year. This translates to a 16.1% earnings miss compared to the LSEG I/B/E/S consensus estimate of $0.560 per share.
(11/14/2023)
VSE Corp. announced that its aviation segment was awarded six new distribution agreements with several manufacturers for a combined value of approximately $750 million. The agreements are expected to begin in the first quarter of 2024, with contract terms ranging between one year and 15 years in duration. The aviation segment also announced plans to open a 45,000 square foot distribution facility in Hamburg, Germany. This new facility will open in the first quarter of 2024 and serve as the distribution supporting Europe, the Middle East and Africa.
(11/02/2023)
VSE Corp. announced total revenues of $231.4 million for the third quarter of 2023, up 32.1 % from the same period one year ago. Net income was $9.6 million, up 1.5% from one year ago. Non-GAAP diluted earnings per share were $0.92, an increase of 39.0% over the prior-year quarter. This translates to a 19.0% earnings surprise compared to the LSEG I/B/E/S consensus estimate of $0.760 per share.
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