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Kuby’s Commentary

Are Tech Traders Troubles Here To Stay?

Sep 8, 2020

Last Week:

At lunch on Friday I saw a band called “The Momentum Traders” singing a somber tune:

The market was such an easy game to play
Now it looks as though might stocks might sway
Oh, I believe in yesterday

My portfolio isn’t what it used to be
There’s a margin call hanging over me
Oh, yesterday came suddenly

Why Tesla had to go low, I don’t know
Elon wouldn’t say
Even Apple did something wrong
Now I long for yesterday

During dessert (before the refrain) the Nasdaq started a furious rally which erased about half the losses for the week, leaving the S&P 500 only down 2.3% and the Nasdaq -3.27%. The Band packed up their instruments and went into the holiday weekend whistling “Here Comes the (Tech) Run”.

Earlier in the week the market had actually surged reaching record highs on Wednesday, fueled by the enthusiasm generated by the Tesla and Apple stock splits. Tell me why (there was the brief nasty reversal)? This rally has been fueled by a combination of relatively inexperienced retail investors and highly sophisticated algorithmic-based trading firms, with both groups largely driven by price momentum rather than valuations. Anything that disrupts that momentum will create dramatic spikes of volatility. This time it appears that there was unusual stock option trading that created an imbalance.

The yield on the Ten-Year Treasury finished the week where it started at 0.73%, while gold and the dollar both softened almost imperceptibly. The economic releases showed continued improvement in consumer spending off of as very low base, and 1.4 million jobs added in August taking the unemployment rate down to 8.4% (still more than double where it was in March and with some signs of impending layoffs). However, according to Bloomberg News, and offsetting the positive sentiment associated with overall the job gains, there was an increase in the estimated number of people classifying their job losses as permanent, rather than temporary.

This Week:

The U.S. equity and bond markets were closed on Monday in observance of Labor Day.

Economic reports of note during the week will include the JOLTS survey on September 9 and another jobless claims update on September 10, as well as the federal budget update and inflation data on September 11. Both the Producer Price Index and the Consumer Price Index are expected to show very low inflation levels.

Virus, virus, virus. Vaccine, vaccine, vaccine. Repeat and rinse and repeat. COVID-19 cases and deaths remain elevated, and social gatherings over the holiday weekend coupled with the outbreaks already starting on university campuses suggest more bad news to follow.

The tech sector will remain in focus as investors determine whether to stay with the popular pandemic plays or rotate into the cyclical companies that would prosper in an economic recovery. Stock market futures turned negative on Monday, with the Nasdaq futures suffering disproportionately, after President Trump on Monday vowed to “decouple” the US economy from China. For those with short memories, in the fall of 2018 the S&P 500 declined 19.8% during the height of the “trade war” with China rhetoric.

Stocks on the Move:

Profit taking hit our portfolios as well, with some of our YTD biggest winners selling off without any company specific news during the week:

PRTS -29.7% (+386.8% YTD): 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. While there was no significant company news this week, further research and peer comparison indicates strong profitability and fast growing EV/Revenue. PRTS is a 5.84% holding in the North Star Micro Cap Fund and a 2.27% holding in the North Star Opportunity Fund.

HEAR -11.4% (+84.9% YTD): Turtle Beach Corp. is a gaming audio and accessory brand offering a broad selection of gaming headsets for Xbox, PlayStation, and Nintendo consoles, as well as e-learning audio solutions for PC, Mac, and mobile/tablet devices. There was no significant company news this week. HEAR is a 5.25% holding in the North Star Micro Cap Fund and a 1.35% holding in the North Star Opportunity Fund.

PETS -12.2%: (+29.4% YTD): PetMed Express Inc. is a leading nationwide pet pharmacy. The company markets prescription and non-prescription pet medications, health products, and supplies for dogs and cats, direct to the consumer. There was no significant company news this week. PETS is a 0.97% holding in the North Star Dividend Fund.

FLWS -15.03%: (+79.1% YTD): Inc. is a United States-based provider of gourmet food and gift baskets, consumer floral, and BloomNet wire serve. The company’s products are offered through omnichannel and multiple brands, such as Harry & David, The Popcorn Factory, Cheryl’s, Fannie May,, Wolferman’s, and Stock Yards. According to Barron’s, the company’s chairman sold $20 million in shares this week for the first time since 2015. FLWS is a 3.93% holding in the North Star Micro Cap Fund.

LAWS + 17.8%: (-20.8% YTD): Lawson Products Inc. is an industrial distributor of maintenance and repair supplies. It serves the industrial, commercial, institutional, and government operations market. The company offers fastening systems, hand tools, battery maintenance, electrical, metal fittings, welding products, specialty chemicals and safety products. This week, Lawson Products Inc announced the acquisition of Partsmaster for approximately $35.3 million. Michael DeCata, President and CEO of Lawson cited this acquisition as a key part of their 3-step growth strategy. LAWS is a 1.08% 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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