VFINX
The strong 7.8% gain of the AAII Model Shadow Stock Portfolio in August helped to push year-to-date performance of the portfolio into positive territory, with a 5.7% gain for 2018.
The S&P 500 index as measured through the Vanguard 500 Index fund 
(VFINX) gained 3.3% during August and is now up 9.8% for the year. Small-cap stocks have started to show stronger performance than large-cap issues, although much of the strength is focused on the growth-oriented segment. However, small-cap performance often comes in streaks, so let’s hope that this latest strength continues.
The Model Shadow Stock portfolio has been reviewed quarterly to determine stock sales and additions since its inception dating back to 1993. In a world of 24/7 communications and interaction, the notion of waiting quarterly to determine major portfolio changes feels somewhat old-fashioned. Yet the primary reason for the careful and periodic review remains sound.
The purchase and sale of less actively traded stocks involves practical decisions that can have a great impact on profitability, and so rules for portfolio management are important. It is very costly to trade micro-cap stocks. The cost is not the commission cost paid directly to the broker, but rather the larger spread between the bid and ask prices typically observed with the small-company stocks of the Shadow Stock approach. The current portfolio purchase and sales rules, stock order guidance rules and management rules presented here have evolved over time in an attempt to turn compelling academic research into a simple approach that any disciplined individual investor could follow.
After conducting the most recent quarterly review of the Model Shadow Stock Portfolio, one stock was sold from the model portfolio: Roadrunner Transportation Systems Inc. (RRTS).
As we have discussed previously, shortly after Roadrunner Transportation was added to the Model Shadow Stock Portfolio back in late 2016, the company alerted the public that it was made aware of “various potential accounting discrepancies” and the company would need to restate certain financial statements and delay the release of quarterly and annual filings. Roadrunner recently filed its 10-K for the period ended December 31, 2017. This, along with its 2016 10-K report, shows that the company generated annual losses from continuing operations of $9.40 and $2.57 per share for 2016 and 2017, respectively. As a result, the company triggered the Model Shadow Stock Portfolio earnings sell rule.
The proceeds of the Roadrunner sale were not significant enough to warrant a new addition to the portfolio, so a new stock will not be added to the Model Shadow Stock Portfolio at this time.
The Model Shadow Stock Portfolio has only had a handful of situations with financial statements where major revisions were necessary over the portfolio’s long history of operation; however, the portfolio is once again impacted with this situation.
Amira Nature Foods Ltd. (ANFI) announced that it will be late in providing its audited financial statements and is in violation of NYSE listing requirements. The company notes that the delay is the result of its independent auditors requiring additional time to complete its audit due to delays in receiving confirmations and documents from third parties. Amira has six months to comply with the NYSE listing standard. Amira is a foreign company founded in 1915 with its headquarters in Dubai, United Arab Emirates. It is a global manufacturer, marketer and distributor of rice and other related food products.
When screening for new companies for the Model Shadow Stock Portfolio, any company is eliminated that has that has failed to file a 10-Q (quarterly) report in the last six months. As a foreign company listed on the NYSE, Amira files annual 20-F reports, while interim reports are filed through 6-K disclosures. Interim reports for Amira range from quarterly to semiannually. Some foreign companies report on a semiannual basis, although Amira has a mix of six-month and three-month interim reporting periods. Amira last filed an interim report this past January.
When companies delay financial filings, the rule is to wait for revised financials. The approach will be reviewed to see if it makes investment sense to act on the initial announcement in the future.
The next quarterly review of the AAII Model Shadow Stock Portfolio will take place at the end of November. In the meantime, you can follow the portfolio in the Model Portfolios area on AAII.com. To receive monthly email updates along with alerts to any changes made to the portfolio, please sign up at www.aaii.com/email.
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