On Tuesday night, the mid-term elections went pretty much as planned, and the market responded with an impressive rally on Wednesday. Perhaps there was relief that the Democrats didn’t take control of both the House and the Senate, or perhaps there was enthusiasm over the prospects of a big infrastructure bill (yippee, more debt!), something that both Democrats and Republicans seem to support. The rally fizzled on Friday with the release of the PPI, which showed that U.S. wholesale prices rose by the most in six years in October, led higher by more expensive gas, food, and chemicals. Given this evidence of inflationary pressure combined with an economy at full employment, it seems as if the Fed might not be “loco” with its intention to continue raising interest rates. By the closing bell on Friday, the S&P was still positive 2.13% for the week, while the Russell 2000 was essentially unchanged. As the chart below indicates, Small cap stocks have underperformed during this “correction”, following their excellent performance from April through the beginning of September.
As such, Small cap stocks remain about 10% off their highs, while Large cap stocks are off about 5%. Given the perception that Small cap stocks are riskier, I believe this underperformance is an indication that investors are feeling more cautious about the economy and the equity markets.
Crude oil prices declined almost 5% for the week and have now plunged 20% since their recent high. This decline in energy prices could provide some relief to the inflationary pressures. The Dollar inched marginally higher, while the yield on the Ten-Year Treasury slipped 2 basis points to 3.19%.
I must be a glutton for punishment, as I stayed up until 2 am Saturday night watching the USC Trojans blow a 14-0 lead and lose to the Cal Bears 15-14. There was one key play that seems relevant to investing, which was when a Trojan cornerback was flagged for unsportsmanlike conduct after jawboning with the Cal sideline with one-minute left in the game. In a stressful situation it is human nature to let your emotions get the better of you, leading to bad decisions which can cost you the game (or your money in the market analogy). Nobody panics when they are cruising to an easy victory, or during a bull market rally. Winning in the long-run is determined by how you behave when the environment is more challenging.
Given the elevated PPI number last week, the CPI report on Wednesday will be in focus, with economists looking for a 2.5% rise year over year. Tuesday is the deadline for the Italian government to submit an amended budget draft to comply with EU rules. So far, the market has been unconcerned with the financial struggles in Italy as well as the Brexit negotiations. Back in the U.S., with the mid-term elections and earnings season both behind us, we enter a slow news period through the end of the year, with a couple of events to keep an eye on. The G20 conference at the end of November will certainly be in focus given the hope that a trade truce could be reached between the U.S. and China. Additionally, the final jobs report of the year will be released on 12/7 and could influence the final FOMC meeting on 12/19. It is widely anticipated that after that meeting the Fed will raise rates, with the dot plot for 2019 expected to indicate 3 further hikes.
Stocks on the Move:
With a surge in stock specific volatility, we had numerous double-digit percentage winners and losers.
AMC Entertainment Holdings, Inc. (AMC) -17.6%: Total revenues increased 3.6% to $1,221.4 million compared to total revenues of $1,178.7 million for the three months ended September 30, 2017. Admissions revenues were nearly unchanged at $751.4 million compared to $753.5 million for the same period a year ago, primarily driven by an 8.6% surge in attendance at U.S. theatres compared to the third quarter a year earlier, which was a U.S. attendance record for the third quarter for AMC, offset by a decline in U.S. average ticket price of 6.6% and industry-wide softness in Europe. Total Adjusted EBITDA decreased 3.4% to $142.4 million compared to $147.4 million for the three months ended September 30, 2017. Adam Aron, CEO and President of AMC, said, “We are so thoroughly encouraged by AMC’s performance in the third quarter of 2018, both because of the $142.4 million of Adjusted EBITDA we generated and the enormous strategic advances our company made in the quarter. We performed significantly ahead of our expectations going into the quarter, and when combined with our stellar second quarter results, we are now highly confident in saying that from an Adjusted EBITDA perspective, full year 2018 will be the best-ever year in AMC’s 98-year history.” AMC Entertainment Holdings is engaged in theatrical exhibition. It is principally involved in the theatrical exhibition business and owns, operates or has interests in theatres located in the United States. AMC is a 2.07% holding in the North Star Opportunity fund and AMC corporate bonds are a 2.21% holding in the North Star Bond Fund.
ARC Document Solutions, Inc. (ARC) +24.0%: Net sales were $100.5 million, a 4.2% increase compared to the third quarter of 2017, and adjusted EBITDA grew to $13.6 million from $11.5 million. “I am pleased to announce another successful quarter,” said Suri Suriyakumar, Chairman, President and CEO of ARC Document Solutions. “As I’ve mentioned previously this year, we continue to make steady progress toward our strategic objectives to protect print revenues in spite of the market’s inherent challenges, while investing in technology initiatives that further strengthen our position in the construction and real estate space. Our decision to invest in the business last year has paid solid dividends, and the print market and its use of technology continues to evolve in our favor. We have strengthened our revenue base and expanded our share in most of the major markets where we operate.” ARC Document Solutions is engaged in providing document management solutions to businesses, including non-residential segment of architecture, engineering & construction industry. Its offerings include; onsite, digital, color & traditional reprographics. ARC is a 0.88% holding in the North Star Micro Cap Fund.
Crown Crafts, Inc. (CRWS) +11.9%: Net income for the second quarter of fiscal 2019 was $1.8 million, or $0.18 per diluted share, on net sales of $20.5 million, compared with net income of $725,000, or $0.07 per diluted share, on net sales of $16.5 million for the second quarter of fiscal 2018. “We are pleased to report our second quarter performance, which includes a 24.8% increase in sales, along with considerable improvements in gross margin and net income,” said E. Randall Chestnut, Chairman, President and Chief Executive Officer. “During the past twelve months, we have navigated unusually challenging retail conditions, including the bankruptcy and liquidation of one of our largest customers. Throughout these challenges, we maintained a strong financial position, while pursuing opportunities through acquisition, product innovation and new distribution channels. We are very encouraged by the second quarter results, which reflect the impact of those initiatives, and we remain excited about our future prospects for profitable growth.” Crown Crafts through its subsidiaries operates in the infant and toddler products segment within the consumer products industry. It designs and distributes, infant and toddler bedding and blankets, bibs, disposable products and accessories. CRWS is a 2.81% holding in the North Star Dividend Fund and a 2.29% holding in the North Star Micro Cap Fund.
Middlesex Water Co (MSEX) + 12.9%: The Company’s investment rating got an upgrade to buy from neutral at Janney, in light of Q3 results that came in above expectations and the recent selloff in U.S. utility stocks. Middlesex Water is a water utility based in the U.S. state of New Jersey. It is engaged the business of collecting, treating, distributing and selling water for domestic, commercial, municipal, industrial and fire protection purposes. MSEX is a 2.46% holding in the North Star Dividend Fund.
Miller Industries, Inc. (MLR) + 10.9%: For the third quarter of 2018, net sales were $195.7 million, an increase of 27.6%, compared to $153.4 million for the third quarter of 2017. Net income in the third quarter of 2018 was $8.7 million, or $0.76 per diluted share, an increase of 94.7%, compared to net income of $4.5 million, or $0.39 per diluted share, in the prior year period. Jeffrey I. Badgley, Co-Chief Executive Officer of the Company stated, “Performance in the third quarter continued to be strong, with year-over-year revenue growth of 27.6%, as we continue to realize the benefits of increased production capacity in a strong global demand environment. We continued to achieve significant profitability improvement this quarter due to increased volume and improved workflow, with gross margin expansion of 80 basis points year-over-year to 11.0% and overall year-over-year gross profit and net income growth of 37.2% and 94.7%, respectively. Our selling, general and administrative expenses as a percent of total revenue also contracted 80 basis points year-over-year to 4.8%. Economic conditions in our markets remain robust and we are confident our capacity increases as a result of our capital investments will continue to create sustainable shareholder value.” Miller Industries is a manufacturer of towing and recovery equipment. Its products are marketed under the brand names of Century, Challenger, Holmes, Champion, Eagle, Titan, Jige, Boniface, Vulcan, and Chevron. MLR is a 1.06% holding in the North Star Micro Cap Fund.
Motorcar Parts of America, Inc. (MPAA) -19.5%: The Company delayed filing its quarterly report for fiscal Q2 and its planned conference call which were scheduled for Friday as it continues to evaluate its accounting policies related to new business contracts. Motorcar Parts of America Inc is a manufacturer, remanufacturer, and distributor of aftermarket automotive parts for import and domestic cars, light trucks, heavy duty, agricultural and industrial applications. MPAA is a 1.98% holding in the North Star Micro Cap Fund.
National CineMedia, Inc. (NCMI) -13.0%: Total revenue for the third quarter ended September 27, 2018 decreased 5.4% to $110.1 million from $116.4 million for the comparable quarter last year, and adjusted OIBDA decreased 14.4% to $53.6 million for the third quarter of 2018 from $62.6 million. The Company also announced that Andrew J. England has stepped down as Chief Executive Officer and a member of the Company’s Board of Directors. Commenting on the Company’s first nine months of 2018 operating results and fourth quarter of 2018 positioning, NCM President and Interim CEO Cliff Marks said, “Q3 was indicative of the volatility of our business, with National spending moving out of the quarter and Local and Regional spend down. However, we remain in firmly positive territory year to date and expect both our National and Local and Regional business to be solid in Q4, so we are confident in the updated guidance for the full year 2018. We made good progress against our strategy in Q3, with the expansion of our Noovie local offerings, the pay down of $7.7 million of debt, and the release of our industry-first big screen augmented reality activation with The Walt Disney Studios, the Ralph Breaks the Internet Noovie ARcade Game.” National CineMedia is a holding company. The company through its subsidiary, operates digital in-theatre media network in North America, through which it sells in-theatre and online advertising and promotions. NCMI is a 2.47% holding in the North Star Opportunity Fund and a 1.69% position in the North Star Dividend Fund and NCMI corporate bonds are a 2.20% holding in the North Star Bond Fund.
NTN Buzztime, Inc. (NTN) -16.9%: Total revenues were $6.0 million, up 15.5% from $5.2 million in the third quarter of 2017, as hardware revenue increases offset lower subscription revenue. Net income was $222,000, or $0.08 per share, improved from a net loss of $184,000, or $0.07 per share, in the prior year quarter. EBITDA was $1.1 million, compared to $517,000 in the third quarter of 2017. Third quarter 2018 delivered 15.5% revenue growth over third quarter 2017; reported positive net income for the first time since 2012; and reached $1.1 million in EBITDA, more than double third quarter 2017,” said Ram Krishnan, NTN Buzztime CEO. “The results reflect our diversification strategy, which includes focusing on hardware sales, licensing content, and entering new markets. To drive future growth, we continue to invest in advancing our technology platform and extending our solution suite. Leveraging our foundation interactive entertainment, we are developing new options in functionality, form factor, and mobility culminating in an entry-level price point option that we expect to broaden market appeal.” On the negative side, the new ownership of the Company’s largest customer, Buffalo Wild Wings, has decided that it will not be carrying forward many of their prior management initiatives, including pay-at-the-table technology, which was the primary near-term growth driver for NTN. NTN Buzztime provides interactive entertainment and dining technology to bars and restaurants in North America. Its main products are Buzztime, Playmaker, Mobile Playmaker, BEOND Powered by Buzztime and Play Along. NTN is a 0.56% holding in the North Star Micro Cap Fund.
NAPCO Security Technologies, Inc. (NSSC) + 15%: For the first quarter, net sales increased 10% to $23.4 million, which was a record first quarter performance and the 17th consecutive quarter of year-over-year record sales. Net income for the first quarter increased 69% to a first quarter record of $1.5 million or $0.08 per diluted share as compared to $890,000 or $0.05 per diluted share last year. Richard Soloway, Chairman and President said, “Our Q1 performance provided a strong start to our Fiscal 2019 year and we have continued our uninterrupted pace of 17 consecutive quarters of increased sales growth for our Company. The investments we have made in the research & development and marketing of unique security, fire, communication, access control/locking and IoT product solutions, have provided the fuel for substantial, consistent growth in sales and profitability for NAPCO. NAPCO Security Technologies is engaged in manufacturing of security products, encompassing access control systems, door security products, intrusion and fire alarm systems and video surveillance products. NSSC is a 1.80% holding in the North Star Micro Cap Fund.
Douglas Dynamics, Inc. (PLOW) -13.3%: Net sales were $124.8 million, a slight decrease when compared to prior year net sales of $125.3 million. This slight decrease is attributable to the timing of shipments and ongoing chassis availability issues in Work Truck Attachments, partially offset by higher price realization and increased demand in Work Truck Solutions. Adjusted EBITDA was $20.5 million, a decrease of $3.7 million, compared to Adjusted EBITDA of $24.2 million in the prior year. “We are pleased with our overall performance for the quarter, and year to date, especially in light of the ongoing supply headwinds,” commented James L. Janik, Chairman, President and Chief Executive Officer. “Similar to the rest of the industry, chassis availability and component supply issues continue to impact our municipal products operations, and, to a lesser extent, the Work Truck Solutions segment. Douglas Dynamics is a manufacturer and upfitter of commercial vehicle attachments and equipment. Its products include snow plows, sand and salt spreaders, and turf-care equipment sold under the Blizzard, Fisher, Snowex, Western, and Turfex brands. PLOW is 2.84% holding in the North Star Dividend Fund.
Pioneer Power Solutions, Inc. (PPSI) + 10.1%: Third quarter revenue of $26.0 million, up 1.8% compared to $25.5 million in Q3 2017 and up 5.5% sequentially compared to $24.6 million in Q2 2018. Net income from continuing operations in the third quarter of $788,000, up $1.0 million compared to a net loss from continuing operations of $219,000 in Q3 2017 and an improvement of $866,000 compared sequentially to a net loss from continuing operations of $78,000 in Q2 2018. Backlog from continuing operations as of September 30, 2018 was approximately $41.0 million, the highest in company history, up 13.0% compared to $36.3 million at June 30, 2018 and up 33.7% compared to $30.6 million at September 30, 2017. Nathan Mazurek, Pioneer’s Chairman and Chief Executive Officer, said, “Our backlog and profit continue to grow, and a rebound in the oil, gas and mining sectors, as well as long-awaited infrastructure spending, would be incremental to this progress. Our results also overcame foreign currency headwinds related to the strength of the U.S. dollar relative to other currencies. We continue to enjoy broad-based demand for our solutions, resulting from favorable economic conditions in the United States and Canada. In particular, the recent legislation legalizing cannabis in Canada has spurred significant demand for sophisticated power solutions to help the burgeoning industry meet newfound demand. Data center business, cryptocurrency mining and general construction are all contributing to continued demand for our equipment and services.” 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 2.43% holding in the North Star Opportunity Fund and a 1.16% holding in the North Star Micro Cap Fund.
Qualcomm, Inc. (QCOM) -10.4%: The Company’s shares fell despite a strong earnings report, as their dispute with Apple (AAPL) over technology licensing fees cast a cloud over future results. Qualcomm develops and licenses wireless technology. It also engages in designing chips for mobile phones. The company is also the world’s largest wireless chip vendor, supplying many premier handset makers with leading-edge processors. QCOM is a 1.71% holding in the North Star Opportunity Fund.
Transact Technologies, Inc. (TACT) -16.1%: Third quarter 2018 net sales were $15.8 million, up 2% from $15.5 million in the third quarter last year. Net income was $2.6 million for a record $0.33 per diluted share in the ’18 third quarter, compared to net income of $1.8 million or $0.24 per diluted share in the year-ago period. The Tax Cuts and Jobs Act resulted in a nice benefit to their effective tax rate, lowering it to 18.4% in the ’18 third quarter from 29.8% a year ago. Adjusted EBITDA for the third quarter of ’18 was $3.6 million, which was up 19% compared to $3 million in the third quarter last year. Bart Shuldman, Chairman and Chief Executive Officer of TransAct, commented, “TransAct delivered strong third quarter results across several financial metrics clearly highlighting the effectiveness of our strategy to leverage our leading position and success in the casino and gaming industry to fund the build out of our products and software solutions to address the significant opportunity in the restaurant solutions market. Reflecting this success, we generated quarterly records for gross margin, operating margin and diluted EPS. Transact Technologies is engaged in developing and selling software-driven technology and printing solutions for restaurant, POS automation and banking, casino and gaming, lottery, mobile and oil and gas. TACT is a 1.41% holding in the North Star Dividend Fund.