Last Week:
The FOMOTINA Rally (Fear of Missing Out There Is No Alternative) kicked into high gear, with U.S. stocks hitting record closing highs again on Friday and the S&P 500 registering a 1.65% gain, its biggest weekly rise since early September. The rally was fueled by continued optimism about developments in the U.S.-China trade dispute and a strong 0.4% increase in November consumer spending, adding to a string of upbeat data that has helped put a damper on recession fears, which dogged markets earlier this year. What a difference a year can make! Here is an excerpt for our December 24, 2018 commentary:
“The recent downtrend intensified last week, with the S&P 500 and Russell 2000 both posting their largest weekly losses in a decade of 7.05% and 8.42% respectively. It might get worse before it gets better, but the stock market at approximately 14.7 times 2018 earnings seems very reasonably priced, particularly with the Ten-Year Treasury rate at 2.79%. In other words, the earnings yield at 6.8% is an attractive 4% higher than the risk-free rate. Nevertheless, panic has set in, with record outflows from equity funds being registered over the past few weeks, and the level of bearishness amongst individuals at its highest level since the financial crisis. It seems particularly curious that concerns over Fed policy have been largely responsible for the recent downdraft. News flash: The Fed is almost done raising rates, with the target Fed Funds rate at 2.5%, up from 0% a few years ago, and likely to top out at between 2.75% and 3%.”
It turned out that December 24, 2018 was the actual bottom, as a rally started the next trading day that has seen over a 30% rise in equity prices. Meanwhile the Fed has reversed course and has cut the target Fed Funds rate, and the yield on the Ten-Year Treasury stands at 1.92%, up 10 basis points for the week, but down 87 basis points from a year ago.
The bad news is that stocks now seem less reasonably priced, as all the gains came through P/E expansion since corporate profits didn’t grow in 2019. On a personal note, I have noticed an uptick in FOMOTINA amongst our client base that feels reminiscent of the late 90s tech bubble. It’s been over a decade since the 2008-2009 financial crisis, and apparently that has been long enough for the bulls to start running wild. Talk of a “melt-up” of stock prices is working its way into the vernacular.
Meanwhile back in the Capitol, President Trump was impeached, and the market shrugged. There was actually some evidence that the government can function properly, as the U.S.-Mexico Canada Agreement passed the House in a bipartisan vote on Thursday.
This Week:
Trading will likely be very light with the Christmas holiday coming on Wednesday. With an absence of business headlines, the impeachment process might remain in the headlines as before a Senate trial can begin, there are still a couple of steps to be taken. The House must pick an impeachment manager to serve as a prosecutor during the trial, it must send the articles of impeachment to the Senate, and the Senate has to agree on rules for the trial. As I have noted previously, whereas the process has captured the media’s attention, the market has largely shrugged it off.
Biggest Weekly Movers:
LEE -24.9%: Lee Enterprises is a leading provider of local news and information, and a major platform for advertising, with daily newspapers, rapidly growing digital products and over 200 weekly and specialty publications serving 50 markets in 20 states. How low can Lee go? As the Company goes through its digital transformation, the shares continue to nosedive, now down 42.2% year to date. The quarterly results have been challenging. Operating revenue for the 13 weeks ended September 29, 2019 totaled $123.7 million, compared to $139.7 million in the prior year quarter. On a same property basis, revenue decreased 8.2% in the quarter. Including equity in earnings of associated companies, depreciation and amortization, assets loss (gain) on sales, impairments and other, operating income totaled $14.4 million in the current year quarter, compared with $19.1 million a year ago. Nevertheless, management feels confident that they are on the right path, “We made great progress on our digital transformation in 2019, as we saw positive results in digital advertising, continued double-digit growth at TownNews and solid digital-only subscriber growth,” said Kevin Mowbray, President and Chief Executive Officer. LEE is a 0.70% holding in the North Star Opportunity Fund and LEE Corporate Bonds are a 2.42% holding in the North Star Bond Fund.
UAA+10.1%: Under Armour Inc., headquartered in Baltimore, Maryland, is a leading inventor, marketer and distributor of branded athletic performance apparel, footwear and accessories. Powered by one of the world’s largest digitally connected fitness and wellness communities, Under Armour’s innovative products and experiences are designed to help advance human performance, making all athletes better. There was no specific news to account for the share price gain, although the easing of trade tensions with China is a positive for the Company. UAA is a 1.74% holding in the North Star Opportunity Fund and UAA Corporate Bonds are a 2.83% holding in the North Star Bond Fund.
KEQU -26.3%: Kewaunee Scientific Corp., is engaged in the design, manufacture, and installation of laboratory, healthcare, and technical furniture products. Sales for the quarter were $39,722,000, a 6.6% increase from sales of $37,278,000 in the prior year second quarter. Pre-tax loss for the quarter was $158,000 compared to a pre-tax profit of $1,760,000 for the prior year period. Profitability was negatively impacted during the quarter by increased operating costs within the Company’s Domestic segment and a number of low margin orders the Company aggressively pursued and secured over the past year. Profitability was also negatively impacted by a strategic order in the Middle East that the Company aggressively secured over two years ago at lower than normal margins. Operating costs were also higher in India as they made investments in capabilities that have already strengthened their position in the Indian market. The Company’s Board of Directors elected to suspend the Company’s dividend as the Company believes that, at this time, investing in projects intended to improve the Company’s operating performance will provide a better long-term return to the Company’s shareholders. These investments include upgrading and replacement of the underlying information technology supporting all aspects of the business as well as capital investments intended to improve the Company’s manufacturing productivity and cost structure. “Overall, the market for laboratory furniture and related technical products remains healthy,” said Thomas D. Hull III, Kewaunee’s President and Chief Executive Officer. “We are seeing a consistent volume of bid activity in most of our key markets as investment in infrastructure requiring Kewaunee’s expertise and broad product offering continues. While our sales were strong in our second quarter, the sales mix did not translate into the earnings we expected.”
It amazes me when companies that have long-standing dividend policies decide to eliminate the dividends and cite the long-term benefit of the shareholders as a rationale. The quarter itself was sloppy, but not disastrous. KEQU has no long-term debt and almost $10 million in cash. The cost of the annual dividend was approximately $2 million. Shareholders lost almost $13 million in value last week after the elimination of the dividend. KEQU is a 1.61% holding in the North Star Dividend Fund.
SCS +14.5%: Steelcase Inc., is a furniture company primarily based in the United States and has operations in Europe, the Middle East, and Africa. Steelcase markets its products primarily through a network of independent and company-owned dealers. Revenue increased 6 percent in the third quarter compared to the prior year, reflecting strong growth in the Americas and the Other category. “We’re proud to deliver another quarter of outstanding results, including a 28% improvement in adjusted earnings and terrific year-over-year increases in operating margins in the Americas and EMEA,” said Jim Keane, president and CEO. “Our teams continue to execute against our strategies for growth and profit improvement. We continue to capitalize on the investments we’ve made in new product development and drive initiatives for improving our cost structure.” SCS is a 1.58% holding in the North Star Dividend Fund.
ARC +13.6%: ARC Document Solutions distributes documents and information to facilitate communication for design, engineering and construction professionals, real estate managers and developers, facilities owners, and a variety of similar disciplines. At its most recent meeting, the Company’s Board of Directors authorized an initial annual cash dividend of four cents per share, payable quarterly. The first quarterly dividend of one cent is payable February 28, 2020 to the Company’s shareholders of record on January 31, 2020. “Using ARC’s strong cash flows to aggressively pay down our bank debt has provided the company with outstanding flexibility during this time of transition,” said Suri Suriyakumar, CEO of ARC. “Given that our debt ratios are healthy we think it is time for us to embark on a dividend program that will directly benefit our shareholders, especially considering the current market conditions in our industry and our recent stock performance. We are happy to shift our capital allocation strategy to a return of shareholder value via a dividend program and expectations for continued purchases of our own stock in the open market given the current strength of cash flows in the business.” ARC is a 0.44% holding in the North Star Micro Cap Fund.
BSET +12.3%: Bassett Furniture Industries Inc. is a leading manufacturer and marketer of high-quality home furnishings. With 103 company- and licensee-owned stores, Bassett has leveraged its strong brand name in furniture into a network of corporate and licensed stores that focus on providing consumers with a friendly environment for buying furniture and accessories. Zack’s Investment Research highlighted BSET in an upbeat article about the furniture industry. BSET is a 2.43% holding in the North Star Micro Cap Fund.
USLM + 11.2%: United States Lime & Minerals Inc. is engaged in the business of manufacturing lime and lime products with interests in natural gas. There was no company specific news on USLM, but enthusiasm about the global economy provided a lift for the shares. USLM is a 2.72% holding in the North Star Micro Cap Fund.