Baby, it’s cold outside, and on Wall Street. Parenthetically, the Frank Loesser classic holiday song of that title (the “Elf” rendition is my favorite) has been banned from certain radio stations, but that’s a topic for a different forum. The glow from the warmth of the weekend Trump/Xi G20 meeting quickly faded, as details of any U.S./China trade agreement proved sketchy at best, leading to nearly an 800-point drop in the DJIA on Tuesday. The market was closed on Wednesday, to commemorate the passing of President George H.W. Bush. When I boarded a flight returning from Los Angeles (more on the LD Microcap conference later) Wednesday night the futures were signaling a rebound, as the Chinese had issued a series of optimistic releases concerning their plans to improve trading relations. While I was in the air, Wanzhou Meng, CFO of Chinese technology company Huawei, was arrested in Canada, on charges the Company defrauded banks in order to continue doing business in Iran in breach of U.S. sanctions. A steep sell-off ensued on Thursday, although an end of day rally spurred by optimism over Fed comments concerning interest rate policy erased most of the day’s losses.
Nonfarm payrolls were released Friday morning, showing 155,000 new jobs were created, seemingly a “Goldilocks” number, in that it certainly wasn’t too hot. After a brief rally, the market turned sharply lower again, as concerns that the economy is too cold surfaced. The cacophony of the recession Cassandras filled the air, and the algorithm driven trading programs overwhelmed the market, leading to a 4.6% decline in the S&P 500 for the week and a 5.56% drubbing of the Russell 2000. The yield on the Ten-Year Treasury dropped 16 basis points to 2.85%, while Crude Oil gained over 3% and Gold inched up 2%.
After this most recent sell-off, the market is back down to the lower band of its recent range, and the twin headwinds of trade tensions and Fed policy seem likely to become short-term tailwinds. Whereas growth is likely to slow in 2019, perhaps to a 2% clip for GDP, a recession seems unlikely with full employment, a high level of consumer confidence, and no apparent financial stress in the system. Equity valuations are reasonable at under 15x 2019 earnings estimates with a 2.85% Ten-Year Treasury rate. Stock prices in the short-term are determined by traders not investors, and those currently negative oriented momentum-based trading models can swing quickly. Meanwhile, companies continue to deploy their capital to create long-term value. At the LD Micro conference this past week, I heard presentations by dozens of small companies, all of which were focused on the growth prospects in their respective businesses. None of the companies spent any significant time discussing either trade or Fed policy.
On Wednesday, the Bureau of Labor Statistics will release the consumer price index for November. Anything below a 2.2% year-over-year reading would support the case for a pause in rate hikes by the Fed. Retail sales data for November will be out on Friday, with consensus estimates calling for a tepid 0.2% rise. The state of the trade ceasefire will likely dominate the headlines, as China’s anger over the actions taking against Huawei could derail the tariff truce.
Stocks in the News:
American Airlines Group. Inc. (AAL) -12.6%: The Airline sector suffered its worst week in years, as concerns over a slowing economy and “undisciplined capacity growth” led an analyst to downgrade the group. American Airlines Group operates over 6,000 flights per day to more than 300 destinations across the world from hubs in Charlotte, Chicago, Dallas/Fort Worth, Los Angeles, Miami, New York, Philadelphia, Phoenix and Washington, D.C. AAL is a 2.92% holding in the North Star Opportunity Fund.
Build-A-Bear Workshop, Inc. (BBW) -25.6%: The Company posted a $0.42 per share loss for the third quarter on a 9% decline in revenues. Sharon Price John, President and Chief Executive Officer, commented, “In a seasonably small third quarter in which we had forecasted a loss, we ultimately delivered sales and profitability below expectations. We believe we are taking the necessary steps to address the current business while our long-term focus remains on driving the strategies intended to transform the company to better monetize the equity of the Build-A-Bear brand. We have laid substantial groundwork and are beginning to see results on a number of fronts such as outbound licensing and the evolution and diversification of our real estate portfolio to include more tourist, seasonal, and shop-in-shop venues designed to broaden our consumer reach beyond traditional malls. Examples range from the recently opened location inside FAO Schwarz in New York City to six new pilot locations inside of a large national retailer. Additionally, our e-commerce business has consistently delivered double-digit quarterly growth following the upgrade of our website last October as we continue to add capabilities. In fact, even with a number of changes and disruptions in market dynamics, we believe many of the puzzle pieces of our overarching strategy from retail diversification to international franchising to out-bound licensing, are beginning to fall into place. With that in mind, we continue to systematically work toward our goal of a being a company that can consistently and profitably monetize the power of one of the most trusted, recognized and beloved kids’ brands today,” concluded Ms. John. Build-A-Bear Workshop Inc. is a specialty retailer which offers “make your own stuffed animal” interactive entertainment experience in which guests visit a variety of stations to make and customize a stuffed animal. BBW is a 2.05% holding in the North Star Micro Cap Fund.
Consolidated Communications Holdings, Inc. (CNSL) -15.2%: There was no news to account for the decline. Consolidated Communications Holdings is a provider of telecom services in the United States. The company’s offering spans local and long-distance services, broadband Internet access and cloud data services. CNSL is a 0.68% holding in the North Star Dividend Fund and a 0.93% holding in the North Star Opportunity Fund. CNSL corporate bonds are a 0.24% holding in the North Star Bond Fund and 2.99% holding in the North Star Opportunity Fund.
Healthcare Services Group, Inc. (HCSG) -10.9%: One of the Company’s customers, Senior Care Centers, filed for chapter 11 bankruptcy. HCSG is an unsecured creditor that is owed approximately $8 million, but historically the Company has been able to recapture most these troubled debts, so the market cap decline seems like an overreaction. Healthcare Services Group provides management, administrative and operating expertise and services to the housekeeping, laundry, linen, facility maintenance and dietary service departments of the health care industry in United States. HCSG is a 2.02% holding in the North Star Dividend Fund.
Johnson Outdoors Inc (JOUT) -12.9%: Due to the seasonality of the warm-weather outdoor recreation equipment industry, the Company’s fourth quarter results reflect the industry-wide slowing of sales and production. Total Company net sales in the quarter dipped slightly year-over-year to $91.1 million, a decline of less than 1 percent. Operating loss was ($2.0 million) in the current year fourth quarter versus ($0.1 million) in the prior fourth quarter, primarily due to continued digital investments. Net loss of ($5.0 million), or ($0.49) per diluted share in the current year quarter compared unfavorably to net income of $0.6 million, or $0.06 per diluted share, in the prior year quarter. The annual results were terrific, as the Company announced all-time high revenue and earnings for the second consecutive fiscal year. Strong marketplace demand for new products in the Company’s core Fishing and Diving brands propelled an 11 percent increase in sales as operating profit grew 38 percent and net income rose 16 percent over the prior fiscal year. “Unprecedented growth in our flagship Fishing business has driven record results two years in a row on the strength of revolutionary, consumer driven innovation. Our goal is consistent bigger, better new product success like this across our entire brand portfolio,” said Helen Johnson-Leipold, Chairman and Chief Executive Officer. Johnson Outdoors is a global manufacturer and marketer of branded seasonal, outdoor recreation products. It offers products under Watercraft, Diving, Marine Electronics and Outdoor Gear. JOUT is a 2.66% holding in the North Star Micro Cap Fund.
Kewaunee Scientific Corp. (KEQU) -14.7%: Sales for the quarter were $37,278,000, a 10.1% decrease from sales of $41,471,000 in the prior year second quarter, and net earnings decreased 18.0% for the quarter to $1,414,000, or $0.51 per diluted share, as compared to net earnings of $1,724,000, or $0.62 per diluted share. “Kewaunee’s Domestic segment had a solid second quarter, offset by softness in our International segment and higher raw material costs,” said David M. Rausch, Kewaunee’s President and Chief Executive Officer. “Looking forward, we have a strong order backlog and a large pipeline of outstanding quotations. We also expect to see a continuation of the gains in operating performance made during the second quarter. As the market leader, Kewaunee will continue to drive its strategy of worldwide growth through operational excellence to create value for its customers and shareholders.” Kewaunee Scientific Corp is engaged in designing, manufacturing, and installation of laboratory, healthcare, and technical furniture products. Its products include fume hoods, casework, safety cabinets, exhaust systems, and energy saving controls. KEQU is a 2.54% holding in the North Star Dividend Fund.
Lazard Ltd (LAZ) -11.8%: There was no news to account for the decline. Lazard Ltd is a financial advisory and asset management firm. It offers corporate, institutional, government and individuals with financial advisory services for mergers and acquisitions, restructurings, capital structure, capital raising and others. LAZ is a 2.03% holding in the North Star Opportunity Fund.
Movado Group, Inc. (MOV) – 10.3%: The Company reported impressive third quarter results, with sales growing 9.6% and adjusted earnings per share rising 13.5%. Additionally, their balance sheet remains strong with $142.7 million in cash, which they are using to repurchase stock as well as to invest in the recently acquired MVMT brand. Movado Group designs, sources, markets and distributes fine watches. Its brands include Coach Watches, Concord, Ebel, ESQ Movado, Scuderia Ferrari Watches, HUGO BOSS Watches, Juicy Couture Watches, Lacoste Watches, Movado, and Tommy Hilfiger Watches. MOV is a 3.17% holding in the North Star Micro Cap Fund.