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Kuby’s Commentary

Bears Hibernating as Animal Spirits Rise

Nov 30, 2020

Last Week:

The Chicago and Wall Street Bears were both in hibernation as Thanksgiving gave way to winter. I turned off the game versus the Packers last night at halftime. Without Akeem Hicks in the middle, my 18-month old granddaughter Jane could probably gain 5 yards a carry against my beloved Bears.

On a brighter note, the market continued to climb to new record highs fueled by additional vaccine announcements, Biden’s plan to nominate former Federal Reserve Chairwoman Janet Yellen for Treasury secretary, and good old animal spirits. To quote John Maynard Keynes “Even apart from the instability due to speculation, there is instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations”. Optimism is ruling the roost recently, with $80 billion pouring into stock funds the last two weeks. To be clear, we remain bullish long-term on the stock market, and believe the value sector offers great solid return potential. Our “caveat emptor” is only directed to momentum investors, when the momentum subsides there is a long elevator ride down for those popular stocks before they reach a level that makes economic sense. At the end of the day, a stock investment is a contract that provides the buyer with the right to share in the underlying company’s profits – stock shareholder profit interests are residual and therefore UNLIMITED, but only after all other stakeholders (debt holders, vendors, employees, etc. . . .) get paid. The fair price needs to be the present value of those future profits and tends to be so over the long-term. The common rationale for making investments in potentially fast-growing companies is that those companies have exciting new products or services and that their share price has rising rapidly. The danger of that rationale is that it is decoupled from valuation, or “mathematical expectations”, instead it is based on a combination of “beauty contest” and “greater fool” theories. Some of those companies will prove to be the next Amazon or Netflix, but many will disappoint. I am not the Grinch (as was suggested in jest by a client); in 2021 we are bullish on the economy and expect a sizable rebound in corporate profits. Whereas owning a few fliers in your portfolio can be exciting and possibly profitable, the core should be built around solid companies trading at reasonable valuations. In that regard the Financial sector still seems attractive despite a recent bounce off the bottom, and selective mid-cap companies in the Utility sector seem reasonable. Dividend income could be increasingly important in a less bubbly equity market.

Last week the S&P 500 gained 2.27%, and the Russell 2000 shot up 3.92%. That small cap index is on pace for its best month ever since they started keeping records in 1987. Energy stocks were the biggest winners last week, gaining 8.47%. The yield on the Ten-Year Treasury was stable, the dollar continued to descend slowly, and gold had a tough week. It seems as Bitcoin has emerged as traders favorite hedge to sovereign currencies over the last month.

The economic releases indicated some softness, as new claims for unemployment increased form the second straight week. COVID-19 cases and deaths remained at scary elevated levels, and I fear another surge could follow the Thanksgiving holiday celebrations.

This Week:

COVID-19 news will remain the most important storyline. For the fourth Monday in a row there was positive scientific news as Moderna indicated that it was seeking emergency clearance from the FDA for its vaccine. The FDA’s review of Moderna’s vaccine is expected to take a few weeks. The agency will likely schedule an advisory committee meeting to review the vaccine on Dec. 17. Federal agencies are already sending vaccination plans around to staff. Five agencies have started telling employees they could receive Pfizer’s or Moderna’s Covid-19 vaccine in as little as eight weeks.

Political noise will hopefully remain only a distraction, as the transition of power looks to be underway.

On Tuesday the ISM releases its Manufacturing Purchasing Managers’ Index for November. Manufacturing has been a bright spot in the economy, with October’s 59.3 figure the highest reading in the index in more than two years. We think manufacturing companies that have pricing power will fare particularly well in the economic recovery.

Stocks on the Move:

+15.4% BG Staffing Inc (BGSF) provides workforce solutions. The Company recruits commercial and professional staff in information technology, accounting, and finance, light industrial, and real estate fields. There was no significant company news this week. BGSF is a 2.58% holding in the North Star Opportunity Fund and a 2.35% holding in the North Star Dividend Fund.

+18.5% Orion Energy Systems Inc. (OESX) designs, manufactures, and implements energy management systems. The Company’s management system is comprised of high intensity fluorescent lighting system, InteLite intelligent lighting controls, and Apollo Light Pipe. Orion Energy Systems offers energy savings and efficiency gains to commercial and industrial customers. This week, there was no significant company news. OESX is a 6.89% holding in the North Star Opportunity Fund and a 6.51% holding in the North Star Micro Cap Fund.

+14.6% Evolution Petroleum Corporation (EPM) explores for and produces oil and gas. The Company focuses on acquiring established oil and gas fields and applying specialized technology to increase production rates. EPM had no significant company news this past week. EPM is a 2.33% holding in the North Star Dividend Fund and a 0.79% holding in the North Star Micro Cap Fund.

+10.4% Flexsteel Industries, Inc. (FLXS) manufactures and sells wooden and upholstered furniture for the retail, contract, and recreational vehicle (RV) furniture markets. The Company did not have any significant news to report this week. FLXS is a 2.47% holding in the North Star Dividend Fund.

+10.5% Trinity Industries Inc. (TRN) manufactures transportation, construction, and industrial products. The Company’s products include tank and freight railcars, inland hopper and tank barges, highway guardrail and safety products, and ready-mix concrete. There was no significant company news this week. TRN is a 1.02% holding in the North Star Dividend Fund and TRN corporate bonds are a 3.45% holding in the North Star Bond Fund.

+11.3% 1-800-FLOWERS.COM, Inc. (FLWS) is an e-commerce provider of floral products and gifts. The Company’s product offerings include fresh-cut and seasonal flowers, plants, floral arrangements, and home and garden merchandise. The company had no significant news this past week. FLWS is a 3.08% holding in the North Star Micro Cap Fund.

+14.5% United States Lime & Minerals, Inc. (USLM) supplies lime and limestone products to the steel, paper, agriculture, environmental protection, and construction industries. The Company was one of the more significant energy gainers this week. USLM is a 2.57% 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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