U.S. Stocks Post Strong Gains in March, Capping Off Wild First Quarter
During the first quarter of 2016, U.S. stocks took investors on a roller-coaster ride. After all the dips and turns, however, those that held on were rewarded with year-to-date gains as of the end of March, which corresponded with the seventh anniversary of the current bull market. Once again we are reminded that markets can be incredibly volatile in the short term, and they can also turn on a dime. This underscores the necessity for a long-term mindset and a well-diversified investment portfolio.
As we mentioned last month, the S&P 500 index was down 11% year-to-date as of February 11, as fears of the U.S. economy sliding into recession, falling oil prices and a slowing Chinese economy had the bulls in full retreat. We also discussed a spike in the correlation between U.S. stocks and the price of oil. Therefore, any rebound in equity prices would more than likely correspond with rising oil prices.
That is exactly what happened from mid-February through the end of March. Over that period, U.S. equities rallied 14% to 18%, depending on the index you are looking at. In March, West Texas Intermediate Crude gained 13.6%, even after retreating nearly 9% from its March 22 high of $42 a barrel. The S&P energy sector was the strongest sector in March, posting a 9.3% gain.
Moves by the People’s Bank of China and the European Central Bank also spurred stocks worldwide. At home, dovish comments by Federal Reserve chair Janet Yellen also soothed investors’ nerves as she confirmed that the Fed will continue “proceeding cautiously in removing policy accommodation.”
U.S. economic data also pointed toward overblown worries of a U.S. recession. Manufacturing and factory orders came in better than expected at the beginning of March, and the February jobs report highlighted steady employment gains.
Also in March, we saw a reversal in the U.S. dollar. In mid-March, the Bloomberg U.S. Dollar Index fell more than 1% on consecutive days, the first time that had occurred since December 2008, according to Marks Group Wealth Management. For March, the dollar finished nearly 5% weaker compared to the euro. If this trend continues, the U.S. dollar may become a tailwind for global corporations instead of the headwind it has generated over the last several quarters.
As we enter the first-quarter earnings season, one potential dark cloud on the horizon is corporate earnings momentum. Corporate earnings for the first quarter have been revised down, from a 0.8% gain to an 8.6% decline as of March 31, according to FactSet. Encouragingly, 13 of the 15 S&P 500 companies reporting first-quarter earnings before March 31 beat analyst expectations. Furthermore, over the past four years, on average, actual earnings reported by S&P 500 companies have exceeded estimated earnings by 4%. As a result, from the end of the quarter through the end of earnings season, the earnings growth rate for S&P 500 companies has typically increased by 2.8 percentage points, on average, over the last four years. If earnings decline in the first quarter, however, this will be the first back-to-back-to-back decline since 2009. The markets will undoubtedly be watching forward guidance through earnings season to see if this downward trend in earnings will continue.
The gains in U.S. stocks were broad and strong in March. As of March 31, the S&P 500 was in positive territory for the first time this year. The market-cap-weighted S&P 500 Index fund (VFINX) tacked on 6.8% in March, while the Guggenheim S&P 500 Equal Weight ETF (RSP) added 7.9%.
Once again, smaller stocks enjoyed bigger gains in March. The S&P MidCap 400 index gained 8.5% on a total return basis in March, while the S&P SmallCap 600 index added 8.2% in total return. The Vanguard Small Cap Index Fund (NAESX) posted an 8.4% gain for March.
The AAII Model Shadow Stock Portfolio, which is a real-money collection of micro-cap stocks, also posted a strong month, adding 6.2% in March. Twenty-two of the 30 stocks that were in the Model Shadow Stock Portfolio at the end of February were up in March, including 10 that were up more than 10% for the month and three with more than a 25% gain in March. These high-performing stocks helped offset the two shadow stocks that fell more than 20% for the month. Overall, the portfolio slightly lagged the performance of the DFA U.S. Micro Cap Fund (DFSCX), which was up 7.1% in March.
Year to date, the AAII Model Shadow Stock Portfolio is in the black with a 1.8% gain, compared to the S&P 500, as represented by the Vanguard S&P 500 index fund (VFINX), which is up 1.3%. Since its inception in 1993, the AAII Model Shadow Stock Portfolio has a compound annual average return of 15.4% versus the Vanguard S&P 500 Index Fund (VFINX), which has gained 8.9% a year, on average, over the same period.
Here are some news highlights from March for the current holdings in the actual AAII Model Shadow Stock Portfolio:
- Alamo Group (ALG) reported fourth-quarter earnings of $0.95 per share, versus the I/B/E/S consensus estimate of $0.913 per share. According to the company “...it was a complicated year as we worked on integrating recent acquisitions, began a restructuring of one of our operations in France and continued to manage through the effects of the strong U.S. dollar and the weak worldwide agricultural market.” The company added that “we do not see a lot of strengthening in areas such as the agricultural sector, but we do not foresee further declines like those that impacted the market in 2015.”
- CDI Corp. (CDI) reported a fourth-quarter loss of $0.06 per share, which exceeded the single analyst estimate of a $0.18 per share loss. Revenues fell 11.3% from a year ago, to $236.6 million.
- Ducommun Inc. (DCO) reported a fourth-quarter loss of $5.74 per share, including multiple items. On a normalized basis, the company broke even for the quarter compared to the consensus estimate for a $0.362 per share gain. Revenues fell 16.5%, to $156.6 million. The net loss for the quarter was $63.6 million, compared to net income of $5.2 million a year ago. The net loss was primarily the result of an approximate $57.2 million non-cash goodwill impairment charge in the structural systems segment, a $32.9 million non-cash charge related to the impairment of the indefinite-lived trade name in the electronic systems segment, and an approximate $5.7 million attributable to lower manufacturing volume. The difference in the results was also impacted by a 2014 nonrecurring reversal of an approximate $3.4 million forward loss reserve related to a customer settlement.
- Global Power Equipment (GLPW) was delisted by the NYSE and its common stock is now trading on the marketplace operated by the OTC Markets Group Inc. under its existing trading symbol “GLPW.” As previously announced on November 12, 2015, the company had received a four-month extension for continued listing and trading on the New York Stock Exchange (NYSE) through March 31, 2016, to become current in its SEC-reporting obligations. The company has confirmed that it was not current in its SEC-reporting obligations by March 31, 2016, because it was not able to complete the audit of all of its financial statements by that date. Although the company requested an extension, it could not commit to becoming current with its SEC-reporting obligations within 12 months after its initial SEC filing delinquency following the announcement in May 2015 that the company would need to restate its 2014 financial statements. Therefore, the request was not granted.
- LMI Aerospace (LMIA) reported a GAAP loss for the fourth quarter of $0.09 per share, compared to the consensus gain from two analysis of $0.18 per share. Revenues rose 0.7% from a year ago, to $96.55 million. The company also issued revenue guidance for fiscal 2016 of $365 million to $380 million, which was below the consensus estimate of $401.22 million.
- Renewable Energy Group (REGI) reported a fourth-quarter loss of $2.18 per share. However, on a pro-forma basis, the gain was $1.81 per share, compared to the I/B/E/S consensus estimate of a $0.84 per share gain. Revenues rose 14.9% from a year ago, to $387.8 million. The increase in revenue was driven by volume growth of 33% and an increase in the amount recognized from reinstatement of the federal biodiesel mixture excise tax credit (BTC), offset by lower biomass-based diesel prices. The company sold 98.9 million total gallons of fuel, an increase of 33% from a year ago.
- REX American Resources (REX) reported fourth-quarter earnings of $0.54 per share, compared to the I/B/E/S consensus estimate of $0.67 per share. Revenues fell 16% from a year ago, to $107.2 million.
- Salem Media Group (SALM) reported adjusted fourth-quarter earnings per share of $0.18 per share, compared to the $0.02 per share single analyst estimate.
- Shoe Carnival (SCVL) reported fourth-quarter earnings of $0.21 per share, compared to the I/B/E/S consensus estimate of $0.144 per share. Revenues rose 2.7% from a year ago, to $233.67 million. Comparable store sales increased 1.8% in the fourth quarter. The company also issued guidance for fiscal 2017, forecasting earnings per share of $1.59 to $1.65 compared to the I/B/E/S consensus estimate of $1.60 per share. The company expects comparable store sales to increase in the range of 1.0% to 3.0%.
- TravelCenters of America (TA) reported a fourth-quarter loss of $0.04 per share, compared to the consensus estimate of a $0.017 gain for the quarter. Revenues fell 21.7% from a year ago, to $1.35 billion. Fuel revenue declined by $429.8 million, or 32.4%, due to significantly lower market prices for fuel compared to the fourth quarter of 2014. Fuel gross margin declined $35.4 million, or $0.088 per gallon, to $103.3 million, or $0.190 per gallon, primarily due to a favorable purchasing environment in the 2014 fourth quarter that did not recur in 2015.
The AAII Model Fund Portfolio surged 8.2% in March and is now up 1.5% year to date. All nine of the funds in the portfolio posted gains in March, with three rising more than 10%. The portfolio, which was started in June 2003, has a compound annual average return of 8.1%, which matches that of the VFINX over the same time period.
April Portfolio Updates
Following the April quarterly review, no changes were made to the AAII Model Fund Portfolio. You will be able to read AAII chairman James Cloonan’s latest quarterly model portfolio commentary in the May issue of the AAII Journal. The next quarterly review of the Model Fund Portfolio will take place in July.
Click here to learn about how the mutual funds and exchange-traded funds (ETFs) in the AAII Model Fund Portfolio are chosen.
There are no changes to the Model Shadow Stock Portfolio this month. The portfolio underwent its quarterly review at the end of February and we discussed the changes last month.
Thirty-one stocks passed the screen at the end of March, down from 38 at the end of February. Six of stocks in the actual portfolio qualified for purchase at the end of December, down from seven at the end of February: CSS Industries (CSS), Key Tronic Corp. (KTCC), L S Starrett (SCX), Rocky Brands (RCKY), Salem Media Group (SALM), and Willis Lease Finance Corp. (WLFC). Qualified stocks are companies held within the AAII Model Shadow Stock Portfolio that currently meet the initial purchase rules. (They are designated as “qualified” in the notes column of the Model Shadow Stock Portfolio table.)
The next quarterly review of the AAII Model Shadow Stock Portfolio will take place in June. Any changes to the portfolio will be highlighted in the June AAII Model Portfolio Update email and in the Model Portfolios column in the July issue of the AAII Journal.
Click here to see the current purchase and sell rules. The size and value rules are subject to revision depending on prevailing market conditions.