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Kuby’s Commentary

30 for 30 Optimism

Aug 17, 2020

Last Week:

The S&P 500 gained 0.64% to finish at 3372.85, just fractionally below the record close of 3386.15 set on February 19 of this year. It briefly reached an all-time intra-day high Wednesday, before dipping lower later in the afternoon. Both the bond market and gold had difficult weeks, with the yield on the Ten-Year Treasury jumping 15 basis points to 0.71% and the yellow metal sliding 3.6% from its record level. We still favor gold as a purchasing-power-preservation tool relative to negative real interest rate long term U.S. Treasury bonds. The dollar declined fractionally to hold slightly above its 52-week low.

After rallying 51% off its March lows, the S&P 500 is now trading at 26.34 times actual earnings, and roughly 21 times consensus 2021 forecasted earnings. Both of those ratios are approximately 30% higher than historic averages, and reflect the optimism that earnings are going to grow 30% in 2021. This version of “30 for 30” is built on the premise that the financial damage of COVID-19 will largely be contained to 2020, and that the “Fed put” will remain in place (“whatever it takes” monetary policy).

I googled “sayings on optimism” in light of the disconnect between the market level and the state of the world. The most appropriate response was “optimism doesn’t wait on the facts”. Hopefully, the facts will follow post-haste!

Russia claimed victory in the global race for a COVID-19 vaccine on Tuesday. Despite being an optimist, I think I will wait for the facts before signing up.

Initial U.S. unemployment weekly claims fell below one million for the first time since the COVID-19 pandemic took hold in March. By way of reference, the weekly average was around 210,000 before the pandemic.

Retail sales were up 1.2% for the month of July, equal the level registered in February. Consumer spending could be under renewed pressure in August, as the federal programs that aided the economy, including the extra $600 of weekly unemployment benefits, expired at the end of July. There was no progress on an agreement between the White House and Democratic congressional leaders for a new stimulus program.

Hotter than expected inflation numbers came out mid-week. According to the BLS CPI report on August 12th:

• The index for all items less food and energy rose 0.6% in July, its largest increase since January 1991. This is a 1.6 % increase for the past 12 months.
• The food index increased 4.1% over the last 12 months, with the index for food at home rising 4.6%.
• The indexes for shelter, communication, used cars and trucks, and medical care also increased in July, while the index for recreation declined.
• Despite increasing in July, the energy index fell 11.2% over the last 12 months.

This Week:

With earnings season essentially over, the big macro of COVID-19 and the related policy responses will once again dominate the narrative. On Wednesday, the Federal Open Market Committee will release its minutes from the July 28-29 policy meeting which likely will reinforce the expected “whatever it takes” mantra.

The House will be called into an emergency session to address funding for the postal service. There are no stimulus negotiations scheduled, but perhaps while they are in town?????

The TikTok Tech Tussle between China and the U.S. still is a ticking time bomb between the two largest economies in the world.

Stocks on the Move:

Small cap value stocks enjoyed another week of outperformance. We still like this investment universe, particularly those companies that also have healthy dividend policies.

BGSF +12.7%: BG Staffing Inc. provides temporary staffing services to the Real Estate, Professional, and Light Industrial segments. The majority of the group’s revenue is derived from Professional relationships, connecting staffing to jobs in information technology, finance, and accounting partner projects. The company announced a $0.05 dividend this week which was in line with analyst estimates. BGSF is a 2.29% holding in the North Star Opportunity Fund and 2.12% holding in the North Star Dividend Fund.

PRTS +18.7%: Inc. is an online provider of automotive aftermarket parts and repair information. The company principally sells its products to individual consumers through its network of websites and online marketplaces. The company’s products consist of collision parts serving the body repair market, engine parts to serve the replacement parts market, and performance parts and accessories. This week, the company announced an equity offering of 6 million shares which will be used for general corporate purposes, including working capital. PRTS is a 3.35% holding in the North Star Opportunity Fund and a 7.81% holding in the North Star Micro Cap Fund.

CSCO -10.4%: Cisco Systems Inc. is the world’s largest hardware and software supplier within the networking solutions sector. In collaboration with the company’s initiative on growing software and services, its revenue model is focused on increasing subscriptions and recurring sales. This week, the company’s earnings reflected strong COVID headwinds with total revenue down 9%. CSCO is a 1.05% holding in the North Star Opportunity Fund.

CRWS +19.8%: Crown Crafts Inc operates in the infant and toddler products segment. The company serves a diverse range of customers including mass merchants, mid-tier retailers, juvenile specialty stores, and internet-based wholesalers with brands like NoJo, Neat Solutions, Sassy, and Carousel. Earnings released this week highlighted a 1.6% revenue increase year over year. The Company also reinstated its quarterly dividend. CRWS is a 4.36% holding in the North Star Dividend Fund and a 2.36% holding in the North Star Micro Cap Fund.

HCSG -15.2%: Healthcare Services Group Inc is a provider of housekeeping and facility-management services to the healthcare industry. The company operates two main business segments: housekeeping, laundry, and linen services; and dietary department services. Its clients are primarily nursing homes, retirement complexes, rehabilitation centers, and hospitals. Concerns over the financial health of HCSG’s largest customers pushed down the share price. HCSG is a 2.66% holding in the North Star Dividend Fund.

MGRC +11.6%: McGrath RentCorp is a rental company comprised of four reportable business segments: modular building and portable storage, electronic test equipment, containment solutions, and classroom manufacturing. There was no significant news this week that contributed to the share price. MGRC is a 2.51% holding in the North Star Dividend Fund.

TACO +16.4%: Del Taco Restaurants Inc is a franchisor of restaurants featuring fresh and fast made-to-order cuisine, including both Mexican inspired and American classic dishes. The company holds approximately 564 Del Taco restaurants, a majority of these in the Pacific Southwest. There was no significant company news this past week. TACO is a 2.16% holding in the North Star Micro Cap Fund.

DENN +10.1%: Denny’s Corp is one of America’s largest franchised full-service restaurant chains. The company generates its revenue from two sources: sale of food and beverages and the collection of royalties and fees from restaurants. There was no significant company news this past week. DENN is a 1.05% holding in the North Star Micro Cap Fund.

LAKE -12.8%: Lakeland Industries Inc manufactures and sells safety garments and accessories for the industrial protective clothing market. It offers limited use/disposable protective clothing and its customers include integrated oil, chemical, smelting, munition plants, janitorial, pharmaceutical, as well as scientific and medical laboratories. The stock took a dip this week ahead of their upcoming Q2 earnings release. LAKE is a 1.10% holding in the North Star Micro Cap Fund.

PCOM +12.4%: Points International Ltd is a Canadian company that provides web-based solutions in the loyalty program industry. The company generates revenue from its Loyalty Currency Retailing, Platform Partners, and Points Travel segments. While the travel and hospitality sectors still struggle, CEO Robert MacLean emphasized the large-scale loyalty programs and how they can be used for their partners, such as United MileagePlus, to return to growth in 2021. PCOM is a 1.36% holding in the North Star Micro Cap Fund.

SP +20.9%: SP Plus Corp provides parking management, ground transportation, and other ancillary services to commercial, institutional, and municipal clients in urban markets and airports across the US, Canada, and Puerto Rico. There was no significant news that contributed to this week’s share price. SP is a 2.73% 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.

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