It was a pretty quiet news week, as the Wall Street Bears remained in hibernation, while the Chicago Bears emerged (a win is a win).
As we moved into the ninth inning of earnings season, the blended (combines actual results for companies that have reported and estimated results for companies that have yet to report) earnings decline for the third quarter improved modestly to -2.4%, from -2.8% last week. Positive earnings surprises reported by companies in multiple sectors were responsible for the decrease in the overall earnings decline during the week. If -2.4% is the actual decline for the quarter, it will mark the first time the index has reported three straight quarters of year-over-year declines in earnings since Q4 2015 through Q2 2016. It will also mark the largest year-over-year decline in earnings reported by the index since Q2 2016 (-3.2%). It’s been quite a mixed bag with five sectors reporting year-over-year growth in earnings, led by the Utilities and Health Care sectors, and six sectors reporting a year-over-year decline in earnings, led by the Energy, Materials, and Information Technology sectors.
Despite the tepid earnings results, the stock market set new highs, as trade optimism rose based on comments from China suggesting that there was a mutual agreement to roll back tariffs if a phase one trade deal could be reached. The S&P 500 gained 0.8%, and has now risen for five consecutive weeks, while the yield on the Ten-Year Treasury jumped 20 basis points to 1.93% as recession fears dissipated. The long-term relationship between interest rates and equity prices is complex, but recently the two have been positively correlated as both gauges have been primarily reacting to the ebb and flow of recessionary concerns.
Bear down Chicago Bears. An 11-5 record and a play-off spot are still possible.
Renewed turmoil in Hong Kong created a somber tone to kick-off trading. President Trump’s comments over the weekend that America hasn’t yet reached an agreement with China and that all tariffs wouldn’t be eliminated also weighed on investor sentiment. Earnings season comes to a close, with 15 S&P 500 companies scheduled to report results for the third quarter.
Monday is Singles Day in China, with expectations that over 500 million consumers will buy over $30 billion worth of products, nearly twice Black Friday and Cyber Monday combined. Married people can participate too (for those like me who misunderstood the name) as the event is called Singles Day because it always occurs on November 11, thus 11-11, or four singles.
Speaking of consumers, U.S. retail sales will be released on Friday. Consensus estimates are for a 0.2% increase in the month of October. I think Goldilocks wants that number to be a bit warmer to keep the recession fears in check.
Stocks on the Move:
PRTS +39.9%: U.S. Auto Parts Network Inc. is an online provider of automotive aftermarket parts and repair information. Improving business fundamentals and continued sizable insider purchases helped drive the share price to a 52-week high on heavy trading volume. PRTS is a 3.83% holding in the North Star Micro Cap Fund.
HEAR -21.5%: Turtle Beach Corp. operates in the technology sector primarily in the United States. It is one of the leading providers of audio solutions for use across various platforms and products. Third Quarter results showed net revenue of $46.7 million versus $74.4 million, and a net loss of $3.1 million, or $(0.22) per share, compared to net income of $14.9 million, or $0.91 per share; and Adjusted EBITDA of $0.3 million compared to $17.6 million. “As was the case in the first half of the year, our results for the third quarter tracked closely to our expectations, with revenue stronger than any other third quarter outside of last year,” said Juergen Stark, CEO, Turtle Beach Corporation. “This confirms that many new gamers remain in the market and are joining the headset replacement cycle. We are also pleased with the progress we are making in the PC accessories business, with ROCCAT’s gaming mice, keyboards and headsets supplementing our own Atlas line of PC headsets, which we began a year ago. “Looking forward, we remain uniquely positioned to capitalize on the continued growth in video gaming around the globe, as consumers increasingly rely on our headsets and accessories to enhance their gameplay and improve the entertainment experience.” HEAR is a 0.93% holding in the North Star Micro Cap Fund.
CNSL +10.8%: Consolidated Communications Holdings Inc. is a leading broadband and business communications provider serving consumers, businesses, and wireless and wireline carriers across rural and metro communities and a 23-state service area. Leveraging an advanced fiber network spanning 37,000 fiber route miles, Consolidated Communications offers a wide range of communications solutions, including: high-speed Internet, data, phone, security, managed services, cloud services and wholesale, carrier solutions. Shares continued to rebound after reporting results that exceeded expectations the previous week. CNSL is a 0.52% holding in the North Star Dividend Fund. CNSL corporate bonds are a 2.52% holding in the North Star Bond Fund and a 1% holding in the North Star Opportunity Fund.
MSEX -10.7%: Middlesex Water Co. owns and operates regulated water utility and wastewater systems in the U.S. The firm primarily operates in the eastern states of New Jersey, Delaware, and Pennsylvania. Consolidated net income for the quarter was $11.1 million, a decrease of $1.2 million from $12.3 million for the same period in 2018. Diluted earnings per share for the quarter were $0.66, down from $0.74 for the same period in 2018. Middlesex Chairman, President and Chief Executive Officer Dennis W. Doll said, “While unfavorable weather impacted consumption in the third quarter, we remained focused on strategic growth and increasing reliability and resiliency throughout our various systems. We announced the acquisition of approximately 1,000 new customer connections in Delaware. We raised $60 million through the New Jersey Economic Development Authority by issuing tax-exempt first mortgage bonds to help fund the recently commenced $70 million upgrade to our largest treatment plant in New Jersey. In addition, we were pleased to announce a 6.7 % increase in the common dividend in late October, demonstrating our ongoing commitment to returning value to shareholders. This increase represents our 47th year of consecutive dividend increases in our company’s history,” added Doll. MSEX is a 1.73% holding in the North Star Dividend Fund.
RCKY +10.6%: Rocky Brands Inc. acts as a designer, manufacturer, and marketer of premium quality footwear and apparel. The company’s family of brands includes Rocky, Georgia Boot, Durango, Lehigh, Creative Recreation, and the licensed brand Michelin footwear. Shares rebounded following a sell-off the previous week after reporting excellent results that were overshadowed by tariff concerns. RCKY is a 3.99% holding in the North Star Dividend Fund and a 3.49% holding in the North Star Micro Cap Fund.
UAA -16.7%: Under Armour develops, markets, and distributes athletic apparel, footwear, and accessories in North America and other territories. The company reported quarterly results that exceeded expectations but lowered its revenue-growth outlook to 2% from the previously expected range of 3% to 4%. The guidance implies expected revenue of $5.29 billion, below the Street estimate of $5.35 billion. The company said it expects full-year EPS at the high end of its previous range of $0.33 to $0.34, meeting the Street projection of $0.34. Additionally, Under Armour reportedly said in a statement that it’s facing investigations from the U.S. Department of Justice and the Securities and Exchange Commission. Multiple analysts lowered their price target on the shares, while most maintained their ratings. UAA is a 1.47% holding in the North Star Opportunity Fund and UAA corporate bonds are a 2.82% holding in the North Star Bond Fund.
GWPH -19.9%: GW Pharmaceuticals PLC is a biopharmaceutical company focused on discovering, developing and commercializing novel therapeutics from its proprietary cannabinoid product platform in a broad range of disease areas. Its business activities are functioned through three reportable segments which are Commercial, Sativex Research and Development and Pipeline Research and Development. Revenue for the quarter ended September 30, 2019 was $91.0 million compared to $2.4 million for the quarter ended September 30, 2018, cash and cash equivalents at September 30, 2019 were $554.7 million compared to $591.5 million as of December 31, 2018, and the net loss for the quarter ended September 30, 2019 was $13.8 million compared to a net loss of $79.9 million for the quarter ended September 30, 2018. “In this first year of launch, we are pleased to report continued Epidiolex revenue growth in the US. Receptivity to the introduction of this breakthrough treatment continues to be highly encouraging as a result of positive physician and patient experiences as well as strong payer coverage,” stated Justin Gover, GW’s Chief Executive Officer. “We see significant opportunity for the short, medium and long term and believe that all the fundamentals are in place to make Epidiolex a very successful brand. We can expect to see additional momentum from Europe as well as the launch of the Tuberous Sclerosis indication during 2020. On top of this, GW is ideally placed to consolidate its leadership in cannabinoid science through advancing several mid and late stage pipeline programs in the months ahead.” GWPH is a 1.09% holding in the North Star Opportunity Fund.
NCMI -10.1%: National CineMedia Inc. is a holding company that operates a digital in-theatre media network across North America. The company displays ads in movie theaters, online, and through mobile video. National CineMedia’s most important operation is First Look, its programming that plays before a movie and related trailers start. Total revenue for the third quarter ended September 26, 2019 increased 0.4% to $110.5 million from $110.1 million for the comparable quarter last year. Operating income decreased 5.4% to $40.0 million for the third quarter of 2019 from $42.3 million for the third quarter of 2018. Commenting on the Company’s first nine months of 2019 operating results and full year 2019 positioning, NCM CEO Tom Lesinski said, “Although the third quarter was not quite as strong as we expected, we still grew our top line and have put a strategic growth plan in place that is designed to create shareholder value through increasing the quality and value of our on-screen media, growing our digital products and ad inventory, building a data-driven business, and optimizing our affiliate network, allowing us to deliver to our investors a substantial dividend driven by long-term revenue and free cash flow growth.” NCMI is a 2.18% holding in the North Star Dividend Fund and a 2.15% holding in the North Star Opportunity Fund. NCMI corporate bonds are a 1.18% holding in the North Star Bond Fund.
TACT -14.5%: TransAct Technologies Incorporated is a global leader in developing software-driven technology and printing solutions for high-growth markets including restaurant solutions, POS automation, casino and gaming, lottery, and oil and gas. On a preliminary basis, TransAct generated 2019 third quarter net sales of $11.7 million compared with 2018 third quarter net sales of $15.8 million. Net income in the 2019 third quarter was $384 thousand, or $0.05 per diluted share, compared to net income of $2.6 million, or $0.33 per diluted share, in the prior-year period. Bart Shuldman, Chairman and Chief Executive Officer of TransAct, commented, “During the 2019 third quarter, TransAct continued the significant transition in the focus of our business to execute on the very large Restaurant Solutions market opportunity that our BOHA! products provides, including recurring software subscription, maintenance and service contracts and label sales and also sales of our purpose-built BOHA! hardware. While our 2019 third quarter results reflect the ongoing transition in our business, including the impact from our decision to exit certain legacy businesses as well as the impact from several large casino and gaming orders in last year’s third quarter that did not repeat, we are achieving notable progress with the roll-out of the BOHA! ecosystem. This success includes a ten-fold year-over-year increase in BOHA!-related SaaS revenue and an approximate three-fold year-over-year increase in restaurant solutions recurring revenue. Importantly, we generated growth in restaurant solutions net sales as well as significant growth in BOHA! label sales and service contracts that are reported in our TransAct Services Group (“TSG”) unit. TACT is a 1.57% holding in the North Star Dividend Fund.