New Additions to Model Shadow Stock Portfolio, Plus Value Leads

Micro-cap stocks, which had been lagging behind even small-cap stocks, finally began to recover strongly.

The Model Shadow Stock Portfolio is up 23.5% year-to-date as of November 30, 2016, compared to 9.7% for the S&P 500 index as represented by Vanguard 500 Index fund (VFINX). Value so far has led growth this year in all market-cap sizes, and this also has helped the portfolio. The Model Shadow Stock Portfolio is now back to its all-time high.

Portfolio Changes

Changes made this quarter:

• Marlin Business Services (MRLN) was sold because it is really in the finance business and does not qualify under the revised portfolio rules.
• With the proceeds from the sale of Marlin Business Services and existing cash holdings, two stocks were purchased: RCI Hospitality Holdings Inc. (RICK) and Roadrunner Transportation Systems (RRTS).

With the liquidity requirement for the average daily dollar volume to be at least 10 times the amount needed, eight stocks passed the screen. (Each investor will see a varying number of qualifying stocks.) One was a Chinese stock and three were already owned. Two home construction stocks were eliminated to avoid concentration in the portfolio, since two stocks in that industry were added to the portfolio last quarter. The remaining two stocks were bought.

Special Note on GLPW

A number of members have asked why Global Power Equipment (GLPW) continues to be held in the Model Shadow Stock Portfolio since it has been delisted. The company missed the deadline for providing revised financial reports, prompting its delisting. Revised filings have been promised by year-end 2016. Since the company has not violated any of the formal Model Shadow Stock Portfolio rules and already has taken a reduction in price, it seems reasonable to hold on until the new figures are released.

While a delisted stock would never be bought or recommended for the Model Shadow Stock Portfolio, it often makes sense to continue to hold if new information is anticipated. Often, it is clear that the delisting is the beginning of the end for a company, in which case selling would be indicated.

This situation, like a buyout offer, is an area where some judgement is required.

Looking Ahead

The presidential uncertainty, or at least a part of it, is settled. The removal of that uncertainty has helped the market.

In the long term, less restrictions on business, particularly small business, should be a positive. Other impacts will play out over the next year.

In general, the first year of a new president is a weak year in the market: only 8.0% versus 12.5% for the overall average since 1935. So many things are different this time, however, that I hesitate to even guess. But since the Model Shadow Stock Portfolio is a long-term fully invested approach, estimates of what will happen don’t influence decisions. It should be an interesting year.

More to come on the Model Shadow Stock Portfolio in the April AAII Journal. In the meantime, follow the portfolio here.