Small Caps Deflated in April After Big March

May AAII Model Portfolio Update is now available online.

Deflation seems to be all the rage these days, so it is probably appropriate that small-cap stocks took a breather in April after a big up month in March. Returns were mixed; the S&P 500 index’s total return was up 1.0%.

The Model Fund Portfolio was up for the month by 0.5%, while the Model Shadow Stock Portfolio, which invests in micro-cap value stocks, was down 0.8%.

The Model Shadow Stock Portfolio’s 0.8% decline for April, coming off of a big March, handily beat both of its comparison benchmarks: The Vanguard Small Cap Index fund (NAESX) lost 1.7% and the DFA US Micro Cap Index fund (DFSCX) lost 2.0% in April. Year to date, the Model Shadow Stock Portfolio has gained 4.7%, while the NAESX is up 3.0% and the DFSCX is up 1.1% over the same time period. Since its inception in 1993, the Model Shadow Stock Portfolio has a compound annual average return of 16.9%, while the Vanguard Total Stock Market Index fund (VTSMX) has gained 9.3% annually over the same period.

The Model Fund Portfolio’s 0.5% increase in April compared to a 0.4% increase for the Vanguard Total Stock Market Index fund. Since its inception in June of 2003, the Model Fund Portfolio has a compound annual average return of 9.3%, slightly trailing the Vanguard Total Stock Market Index fund over the same time period, which gained 9.4%.

May Updates

There are no changes to the Model Shadow Stock Portfolio this month. Eleven stocks passed the screen at the end of April.

Two stocks in the portfolio qualified for purchase at the end of April: SigmaTron International (SGMA) and Universal Stainless & Alloy (USAP). Qualified stocks are companies held within the Model Shadow Stock Portfolio that currently meet the purchase rules. (They are designated as “qualified” in the notes column of the Model Shadow Stock Portfolio table.)

Kimball International, Inc. (KBAL) is currently above the Model Shadow Stock Portfolio’s valuation limit, ending April with a price-to-book ratio of 2.70. Stocks are eligible for deletion if their price-to-book ratio exceeds 2.40. Kimball International may be eligible for deletion if its price-to-book ratio is above the limit at the portfolio’s next quarterly review at the end of May.

Three stocks in the portfolio are on earnings probation because their last 12 months of earnings from continuing operations are negative: Five Star Quality Care (FVE), International Shipholding Corp. (ISH), and Mitcham Industries (MIND). Stocks on probation are potential sell candidates at the next quarterly review.

Click here to see the current purchase and sell rules. The size and value rules of the Model Shadow Stock Portfolio are subject to revision depending on prevailing market conditions.

There were no changes to the Model Fund Portfolio this month. The portfolio’s quarterly review will appear in the August issue of the AAII Journal, which will be posted at AAII.com at the beginning of August.