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Kuby’s Commentary

Bossy Big Caps & Moody Small Caps

Jul 6, 2021

Last Week:

We hope that everyone enjoyed their holiday weekend.  One highlight at North Star was watching Joey Chestnut break his own world record at the annual Nathan’s Hot Dog Eating Contest on July 4th after devouring his 76th hot dog and bun in front of a packed Maimonides Park stadium in Coney Island.

(Nathan’ Famous [NATH] is a 0.5% holding in NSMVX)

Turning to the broader market, meet the new bosses of the market. Same as the old bosses. After moving sideways for the first 5 months of 2021 the Big Tech Boys are back in town, with Apple, Microsoft, Amazon, Alphabet, and Facebook dominating the leadership board for the last month. The S&P 500 closed Friday at a record level for the seventh consecutive day, its longest streak of record closes since 1997. Peeling back the onion, the broader market was less tasty, with the Russell 2000 slipping 1.23%, and declining and advancing issues about equal. The performance dispersion was most notable on Friday following a strong jobs report for June that showed a better-than-expected increase of 850,000 in nonfarm payrolls. It is a bit of a mystery as to why that strong data point would favor the large-cap tech companies, given that the small caps have generally performed better when there has been evidence of renewed economic strength. Additionally, curious was the 11-basis-point decline in the Ten-Year Treasury to 1.43% during the week. Perhaps at the core of these recent movements is concern that the Delta variant of Covid-19 might disrupt the recovery later in the summer or in the fall. In any event, small caps have been very moody recently, exhibiting substantially more day-to-day volatility than their big-cap brethren. Such day-to-day volatility can offer great opportunities to own more of the world-class businesses North Star seeks to invest in.

Switching to a bigger picture and longer-term lens, I found China’s President Xi Jinping’s speech on the 100th anniversary of the Chinese Communist party somewhat disquieting, as the world’s two largest economies seem to be at odds. Meanwhile, over the last 5 months, the Chinese stock market has dramatically underperformed the U.S. market.

When combined with a relatively strong dollar, this dispersion might suggest that global investors remain more comfortable with our version of capitalism.

This Week:

U.S. markets are only open for four trading days after taking a breather for the Independence Day holiday. The economic calendar is light, with Wednesday’s release of the minutes from the FOMC’s last meeting in focus. Earnings season is on deck with consensus estimates calling for a 65.4% increase versus last year’s June quarter that was hit hard by the pandemic. During the second quarter, analysts increased earnings estimates for companies in the S&P 500 by 7.3%, which represents the largest increase in the bottom-up EPS estimate during a quarter since FactSet began tracking the quarterly bottom-up EPS estimate in Q2 2002. The previous record was 6.5%, which occurred in the previous quarter (Q1 2021). Optimism is high, and fear is on holiday as evidence by the VIX trading at its lowest level since February 2020. What was it the Warren Buffett said about buying when others are fearful and sell when they are greedy? In other words, we are advising investors to keep to their discipline and stick to their target equity exposure.

Stocks on the Move:

+10.6% Advanced Micro Devices Inc (AMD) operates as a worldwide semiconductor company that provides microprocessors as an accelerated processing unit, chipsets, discrete and integrated graphics processing units, data center and professional units, and custom development services. It services original equipment manufacturers, public cloud service providers, system integrators, independent distributors, online retailers, and add-in-board manufacturers. Last week, AMD won unconditional approval from the European Union for its $35 billion acquisition of Xilinx (XLNX).
AMD is a 2.9% position in the North Star Opportunity Fund.

-16.0% Blue Bird Corporation (BLBD) designs and manufactures school buses and commercial buses for school districts, large national fleets, businesses, government agencies, and non-profit organizations. There was no significant company news last week.

BLBD is a 1.7% position in the North Star Micro Cap Fund.

-13.9% Build-A-Bear Workshop Inc (BBW) is an interactive and entertainment mall-based retailer that invites guests of all ages to create their own customized stuffed animals with clothing, shoes, and accessories through a bear-making process. There was no significant company news last week; however, we anticipate the pullback could be due to investors taking 1H 2021 gains as the consumer sector dominated the period from the reopening economy and Reddit trader frenzy.

BBW is a 2.4% position in the North Star Micro Cap Fund.

The White Sox have extended their lead in the AL Central, but the Cubs are on a losing streak, casting doubt on the All-Chicago World Series fantasy.

Have a great week and enjoy the sunshine!

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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