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Kuby’s Commentary

Bear Down

Nov 26, 2018

Last Week:

In Chicago and on Wall Street, it was a very good week for the Bears. For the former, there were wins on Sunday versus the Vikings and Thursday versus the Lions. For the latter, there were steep declines on Monday and Tuesday which resulted in a 3.8% loss in the S&P 500, which wiped out the remaining gains for 2018. Whereas just two months ago the primary concern was an overheating economy, now recession anxieties are on the rise. The Tech and Oil sectors are cases in point, as slowing growth expectations have given the FAANG stocks a toothache, while crude continued its recent plunge, now off 34% from its October high.

Perhaps the greed/fear has swung too far? With consumer confidence near an all-time high, unemployment at its lowest level in 50 years, interest rates low (the Ten-Year Treasury rate slipped 2 basis points to 3.05% last week), corporate profits surging, and historically reasonable equity valuations, one could argue that the glass is half-full. Additionally, the twin headwinds of the “Loco Fed” and the “Trade War” could both abate with the combination of the G20 meeting at the end of this month and the December Fed meeting. The base case scenario would be some conciliatory language coming out of the G20 as well as a less hawkish tone from the Fed, which likely would at least tame the Bears as we enter the usually bullish holiday season.

This Week:

Fed Chair Jay Powell will address the Economic Club of New York on Wednesday, and the minutes from the November FOMC meeting will be released on Thursday. Given the recent volatility and signs of global economic weakness, perhaps a pause to refresh is in order? The Fed’s favored inflation measure, the PCE deflator, will be released on Monday, which could set the tone prior to those other events. The core measure is expected to slow to 1.9%. Pre-game tweets from Trump and Xi’s responses prior to next weekend’s G20 summit will influence trading, as the high-stakes game of “deal or no deal” reaches a climax.

Stocks on the Move:

Apple, Inc. (AAPL) -11%: $200 billion of market cap has now evaporated in the last three weeks since the Company gave disappointing guidance for the holiday quarter. Apple designs, manufactures and markets mobile communication and media devices and personal computers, and sells a variety of related software, services, accessories, networking solutions and third-party digital content and applications. AAPL is a 1.98% holding in the North Star Opportunity Fund.

Brooks Automation, Inc. (BRKS) -10.9%: Non-GAAP EPS was $0.40 in the quarter, representing 15% growth year over year. The EPS growth were driven by 14% revenue growth and operating margin expansion through leverage of operating expense. The positive operating margin improvement was largely offset by interest expense on new debt in the year. “Our 2018 fiscal year was strong from start to finish and has charted a new path with transformative M&A agreements that are reshaping the company,” commented Steve Schwartz, CEO of Brooks Automation. “The acquisition of GENEWIZ, which we completed last week, is expanding our reach in sample services to thousands of additional customers, supported by a highly talented global team. Further, we signed an agreement in August to sell our Semiconductor Cryogenics business and expect to complete the sale during our second fiscal quarter of 2019. We believe these transactions strengthen our growth portfolio and extend our position as the leading provider of life science sample services. Meanwhile we continued our strong operating performance in the semiconductor business and delivered yet another consecutive growth quarter in life sciences, yielding a 20% top-line growth for the year.” Brooks Automation is a provider of automation and cryogenic solutions for multiple applications and markets. The company serves the semiconductor capital equipment market and sample management market for life sciences. BRKS is a 1.55% holding in the North Star Dividend Fund.

Daktronics, Inc. (DAKT) +15.4%: Reported fiscal 2019 second quarter net sales of $172.7 million, operating income of $9.0 million, and net income of $8.6 million, or $0.19 per diluted share, compared to net sales of $169.3 million, operating income of $9.4 million, and net income of $7.1 million, or $0.16 per diluted share, for the second quarter of fiscal 2018. Fiscal 2019 second quarter orders were $151.4 million, compared to $142.3 million for the second quarter of fiscal 2018. Reece Kurtenbach, chairman, president and chief executive officer stated, “The diversity of our end-markets and competitive solution portfolio enabled us to increase orders for the first half of the year. Strong market demand continued for larger sized spectacular projects, larger sports systems in high schools, after-sale service offerings, and signage for transportation infrastructure. Daktronics along with its subsidiaries is engaged in the design, manufacture and sale of electronic display systems and related products for Commercial, Live Events, Schools and Theatres, and Transportation. DAKT is a 2.58% holding in the North Star Dividend Fund.

Target Corp (TGT) -15.5%: Target reported a 5.3% increase in comparable traffic, 5.1% growth in same-store sales, and 49% digital sales growth. Heading into the all-important holiday season, Target announced new “skip-the-line” mobile checkout technology and free two-day shipping on virtually any purchase among its shopping perks for customers. Unfortunately, as a result of the extra technology spending, gross margins declined during the quarter. Chief Financial Officer Cathy Smith commented, “While we are seeing some pressure on our operating income and gross margin rates from the brisk pace of digital growth and the investments we’re making to transform our business, we’re on track with our long range plans,” she said. “By using our stores as hubs for delivery and pickup, we deliver faster to guests while reducing costs for fulfillment and last mile. We’re just now moving to scale and Q3 was a huge step in that direction.” Target is one of the largest department store retailers in North America. It is engaged in operating general merchandise discount stores. TGT is a 1.81% holding in the North Star Opportunity Fund.

The information provided in this commentary is not an offer to sell or the solicitation of an offer to purchase any security, product, or brokerage service. The information is not intended to be used as the basis for investment decisions, nor should the information be construed as advice designed to meet the particular needs of any investor. This commentary is presented to illustrate examples of the securities that North Star Investment Management Corporation and/or its affiliates (“North Star”) may have bought for client accounts and the diversity of markets in which North Star Investments may invest, and may not be representative of current or future investments. You should not assume that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this commentary will be profitable or will be equal to any corresponding performance levels that might be indicated. Past performance is no guarantee of future results. Investments in securities involve risks including the possible loss of the principal invested. North Star and others associated with it, including employees, may have positions in and effect transactions in securities of companies mentioned or indirectly referenced in this commentary. North Star may buy, sell or hold these securities in proprietary or client accounts. North Star will not be providing regular updates or advising you of any changes in the views expressed herein. Investors should consider their investment objectives, risk tolerance, and financial situation and needs before investing in any security. Tax considerations, commissions, fees and other costs should be carefully evaluated with one’s investment and/or tax advisors. Information provided is obtained from sources deemed to be reliable, but North Star cannot guarantee the accuracy or completeness of the information. This material may not be reproduced, distributed or transmitted to any other person in whole or in part without the prior written consent of North Star. A copy of North Star Investment Management Corporation’s Form ADV Brochure, Privacy Notice and Business Continuity Plan summary can be obtained by calling 312-580-0900.

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