Kuby's Commentary

High Water Mark

2018-05-09T13:36:18+00:00May 1st, 2018|

Last Week:

Tuesday was a tough day, with the S&P 500 sliding 1.3% and the yield on the Ten-Year Treasury topping 3% inter-day. The rest of the week, the stock market made up those losses to finish unchanged, and the Ten-Year Treasury also finished where it started, at 2.95%. Earnings reports continued to exceed expectations, with the composite growth rate for the quarter now at 23.2%, and with all eleven sectors now with higher growth rates than forecasted a month ago. Alphabet, Facebook, Microsoft, Intel, and Amazon all contributed to the increased growth by positive upside surprises. So why the muted response? The new brick in the wall of worry is that the best days for corporate profit growth are now behind us. The sensitivity to that worry was most evident from the market’s reaction to Caterpillar’s earnings report, or more specifically, the comment from the CFO during the conference call that referred to their spectacular first-quarter earnings as the “high-water mark”. After those comments, Caterpillar’s stock closed 5.8% lower, and most of the other industrial and material companies suffered similar declines.

Adding to the wall of worry were the mixed economic releases, with upbeat readings from existing home sales and initial jobless claims, but lackluster manufacturing and consumer spending data suggesting a less robust environment. Additionally, inflation hawks were alarmed by the largest increase in the Personal Consumption Expenditures price index, which saw its biggest increase in over ten years.

Spring has finally arrived in Chicago! Or is it summer already?

This Week:

It will be another busy week of earnings reports, with 142 S&P 500 companies scheduled to report first quarter results. The FOMC will be meeting on Wednesday, and it is widely anticipated that there will be no change in rates, since there is no press conference scheduled. The federal funds futures, however, are suggesting a 34% probability of a hike. That surprise would be most unwelcome to the stock market. The April Jobs report will be out on Friday, and consensus calls for another solid gain for the month. Tariff talk will also continue to generate unease, as policy attempts to be developed, and uncertainty remains widespread.

Stocks on the Move:

Advanced Micro Devices, Inc. (AMD) +11.2%: Revenue was $1.65 billion, up 40 percent year-over-year and 23 percent quarter-over-quarter, driven primarily by higher revenue in the Computing and Graphics segment. Net income was $81 million compared to net losses of $33 million a year ago and $19 million in the prior quarter. “The first quarter was an outstanding start to 2018 with 40 percent year-over-year revenue growth,” said Dr. Lisa Su, AMD president and CEO. “PC, gaming and datacenter adoption of our new, high-performance products continues to accelerate.  We are excited about our long-term roadmaps and focused on delivering sustained revenue growth and profitability.” The company also provided guidance for an acceleration in revenue growth in the current quarter to 50%. Advanced Micro Devices designs and produces microprocessors and low-power processor solutions for the computer, communications, and consumer electronics industries.

Freeport-McMoRan, Inc. (FCX) -20.4%: The Company posted first quarter net income of $692 million, or 47 cents a share, up from $228 million, or 16 cents a share in the same period in 2017. The company projected 2018 operating cash flow of $5.6 billion and capital expenditures of approximately $3 billion, suggesting free cash flow of more than $2.5 billion, or $1.75 per share.  But that was below analysts’ forecasts of 56 cents per share. The company also lowered its expectations for copper sales while increasing its outlook on costs. Freeport is facing struggles with new environmental regulations put in place by the Indonesian government, which is one of the places where the company has copper mining operations. Freeport-McMoRan, Inc. is a mining company. It operates large, long-lived geographically diverse assets with reserves of copper, gold, and molybdenum. It also has mining operations in the Americas. The North Star Opportunity Fund holds a 2.1% position in FCX.

LSI Industries, Inc. (LYTS) -22.1%: Net sales in the third quarter of fiscal 2018 were $78,843,000, an increase of 1% compared to the $78,156,000 reported in the third quarter of the prior year.  Reported net income was $220,000 in the third quarter versus a loss of $(531,000) in Q3 FY 2017. The Company’s shares suffered after the surprise announcement of the departure of Dennis W. Wells as president and chief executive officer on April 23, 2018 led to the unfounded speculation that the earnings were going to be much worse than expected. LSI is engaged in providing corporate visual image solutions through the combination of digital and screen graphics capabilities and indoor and outdoor lighting products, lighting control systems and related professional services. The North Star Micro Cap Fund holds a 1.4% position in LYTS and the North Star Dividend Fund holds a 1.3% position.

Rocky Brands, Inc. (RCKY) +14.1%: First quarter net sales were $61.4 million compared to $63.1 million in the first quarter of 2017, and net income was $3.3 million, or $0.44 per diluted share compared to a net income of $1.5 million, or $0.20 per diluted share. Jason Brooks, President and Chief Executive Officer, commented, “The new year is off to a strong start. Our wholesale and retail divisions continue to benefit from the strategies we’ve implemented to drive improved full price selling across our core work, western and outdoor categories. At the same time, our commercial military business grew double digits over the same period last year as our domestic and international expansion plans gain further traction. The growth in commercial military sales partially offset the expected top-line headwinds from our contract military business while also helping expand gross margins through increased productivity at our company-owned manufacturing facilities. We are very pleased with our recent performance and the Company’s strong financial position. That said, our sights are firmly focused on the future and on continuing to deliver enhanced profitability and greater value for our shareholders.”  Rocky Brands is a designer, manufacturer and marketer of footwear and apparel marketed under a portfolio of brand names including Rocky, Georgia Boot, Durango, Lehigh, Creative Recreation and the licensed brand Michelin. The North Star Micro Cap Fund holds a 4% position in RCKY and the North Star Dividend Fund holds a 4.6% position in RCKY.

Under Armour, Inc. (UAA) +10.7%: The Company’s beaten down shares rallied as a Jeffries analyst suggested that the Company could post better than expected earnings this week. Under Armour is a developer, marketer and distributor of branded performance apparel, footwear and accessories for men, women and youth. It markets its products under the brand name of Under Armour, Heatgear, Coldgear, and Allseasongear. The North Star Opportunity Fund holds a 3.0% position in UAA, and the North Star Bond Fund holds a 1.7% in UAA corporate bonds.

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