Kuby's Commentary

Earning Season Trumps

2018-07-19T10:58:25+00:00July 16th, 2018|

Last Week:

Global trade tensions once again dominated the news, as the U.S. announced additional tariffs on $200 billion of Chinese goods. Curiously, the S&P 500 responded by rallying 1.5% and the Dow Jones Industrial Average 2.3%. I believe Fed Chairman Jerome Powell summarized the landscape well, as he explained that whereas the economy is in a “good place” now, trade disputes could end up being negative for the economy if they result in a protracted period of widespread higher tariffs. But he added that the Trump administration has portrayed its efforts as an attempt to get other countries to lower their barriers to imports, not raise them. “I think this process that is going on now is a new one,” he said. “It’s very difficult to predict how it turns out and we’ll just have to see.” The bond market seems to be forecasting a less optimistic view of the future than the dollar and the stock market. The spread between the Ten-Year and Two-Year Treasury rates narrowed another 6 basis points (the canary in the coal mine for a recession), while the Dollar and the S&P 500 continued their recent gains (signaling blue skies on the horizon). Perhaps the stock market has a more short-term focus, as clearly the corporate earnings that will be announced over the next few weeks are going to be terrific.

Speaking of terrific, it was great celebrating my Mother’s birthday on Friday. I especially appreciated her comments, over the key lime pie at Joe’s Seafood, regarding the importance of the diversification provided by small-cap value stocks, even as the Mega-cap Tech stocks continue to soar. I guess we went to the same Business School :).

This Week:

Earnings season will kick into gear, with 60 S&P 500 companies scheduled to report second quarter results, with the consensus calling for nearly 20% earnings growth on an 8.8% revenue increase. Investors may be focused on the forward-looking comments during the earnings conference calls, with attention on the impact of the rising dollar and input costs, as well as any cautionary language relating the trade tensions. It’s a light week for economic data in the U.S., with retail sales for June on Monday and housing starts on Wednesday both expected to show some modest sluggishness. On Tuesday, Federal Reserve Chairman Jerome Powell will deliver his semiannual monetary policy report to the Senate Banking Committee. It is likely he will stick to the script of a healthy economy requiring gradual rate hikes.

President Trump and Russian leader Vladimir Putin will meet in Helsinki on Monday. There will probably be a joint press conference at the end of the day. It’s hard to predict the outcome of this meeting, and whether it will have any impact on the markets. In general, with so many hot spots in the world, I do believe that the risk of a disruptive geopolitical event is being underestimated.

Stocks on the Move:

Farmland Partners, Inc. (FPI) -29.7%: On the Seeking Alpha website, a short seller claimed that the company is making self-dealing loans that are inflating earnings as the third parties then return the cash as rent and questioned the solvency of the company. According to FPI CEO Paul Pittman there is “utterly no risk of insolvency” and that the article is “fundamentally inaccurate and misleading.” After the sell-off, B. Riley FBR analyst Craig Kucera upgraded Farmland Partners from Neutral to Buy, noting that as of the first quarter this year, the loan program represents less than 1 percent of its undepreciated assets, additionally only 1 percent of the company’s revenue in 2017 was attributable to the program. The analyst termed the company’s loan program as “concerning, but immaterial.” Farmland Partners has zero debt maturing in 2018 and a cumulative $56 million maturing through 2021. Kucera said he expects the balance sheet’s rapid growth to take a break after the addition of $155 million in farmland over the past year. Farmland Partners owns and aims to acquire high-quality farmland throughout North America. The company is an internally managed real estate company and owns and contracts for over 120,000 acres of farm land, along with storage facilities. FPI is a 1.4% holding in the North Star Dividend Fund.

Ingles Markets, Inc. (IMKTA) -9.6%: The Company’s shares continue to move in sympathy with industry leader Kroger (KR), whose shares dipped after posting gains for the previous few weeks. Ingles Markets Inc is a supermarket chain in the Southeast United States. It operates grocery retail stores offering grocery, meat and dairy products, produce, frozen foods and other perishables, and non-food products. IMKTA is a 1.1% holding in the North Star Dividend Fund and IMKTA bonds are a 2.6% holding in the North Star Bond Fund.

Pioneer Power Solutions Inc (PPSI) +12.7%: Announced it has received an order of $1.4 million, its largest order for dry type distribution solutions received from an electrical distributor to date, for its dry-type transformers for use at a multi-use, corporate facility in downtown Toronto. Nathan Mazurek, Pioneer’s Chairman and Chief Executive Officer, said, “This new order is the direct result of the strategic moves we made to consolidate our dry-type transformer production to a larger and more modernized facility, significantly reducing our manufacturing costs and increasing our competitiveness.” Pioneer Power Solutions manufactures, sells and services a broad range of specialty electrical transmission, distribution, and on-site power generation equipment for applications in the utility, industrial, commercial and backup power markets. PPSI is a 2.1% holding in the North Star Opportunity Fund and a 1.1% holding in the North Star Micro Cap Fund.

Salem Media Group, Inc. (SALM) -18.5%: Shares sold-off after rallying 36% in the previous three weeks. Salem Media Group Inc is a domestic multimedia company with integrated operations including radio broadcasting, digital media, and publishing. The Company has three operating segments, Broadcast, Digital Media, and Publishing.  SALM is a 1.8% holding in the North Star Dividend Fund.

Build-A-Bear Workshop, Inc. (BBW) +6.5%: The Company announced a “Pay Your Age” campaign, where shoppers paid the age of their children for a bear, and it ended disastrously due to the massive crowds, and ultimately stores shutting down due to “safety concerns”. The rally in the Company’s shares supports the adage the “any publicity is good publicity”, as analysts suggested that the brand recognition had been strengthened. Build-A-Bear Workshop Inc is a specialty retailer which offers “make your own stuffed animal” interactive entertainment experience in which guests visit a variety of stations to make and customize a stuffed animal.  BBW is a 2.4% holding in the North Star Micro Cap 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.