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Kuby’s Commentary

Chutes and Ladders

Oct 11, 2021

Objective? Reach the “Winner” Square

The stock market over the last few months parallels Hasbro’s Chutes and Ladders: “an exciting up and down game for little children.” On Monday the market slid down with energy prices spiking, festering fears of a U.S. default, and Facebook leading a sell-off in the Nasdaq following a negative “60 Minutes” story on Sunday night. A deal in Washington to extend the federal government debt ceiling to December on Wednesday was a ladder that led to a powerful two-day rally, but an unlucky roll of the dice landed on another chute in the form of a disappointing employment report on Friday. That report showed that September was the slowest month for job growth this year, with just 194,000 jobs added compared to consensus estimates for a half-million, signaling a slowing of the labor market recovery. The monthly employment report has been very volatile, with mixed messages about the health of the economy. On the positive side, the unemployment rate fell sharply to 4.8 percent, wages again rose strongly, August job growth was revised upward, and economists said the September figures would have looked stronger had it not been for statistical quirks in measuring public-school hiring. On the other hand, the labor participation rate fell, particularly among women, a sign that the hiring challenges won’t be quickly resolved.

The surge in energy prices stoked inflation concerns and pushed long-term interest rates higher, with the benchmark 10-year yield rising to 1.61% after adding 15 basis points on the week. The dollar and gold both held steady, while the S&P 500 gained 0.79%, the Nasdaq inched forward 0.09%, and the Russell 2000 slipped 0.38%.

It was a good weekend for Chicago’s sports teams. The Chicago Bears were surprise victors in Las Vegas against the Raiders, the White Sox bats came alive to beat the Astros 12-6 in ALDS action, and the Chicago Sky took a 1-0 lead in the WNBA finals after dominating the Mercury in Phoenix. We encourage sports fans to watch the WNBA finals, as it is the highest quality women’s basketball ever played!

Pains and Gains

The bond market will be closed in observance of Columbus Day on Monday, but the stock market will be open for trading.

Earnings season kicks off, with the high-profile Financials sector companies reporting results for the third quarter. We continue to suggest overweighting Financials, as they seem well-positioned in a rising interest rate environment. The KBW Bank Index has already rallied 39% this year as Treasury yields have risen. Consensus estimates call for another quarter of solid earnings growth of 27.6% for the S&P 500, but the forward-looking comments will probably have the biggest impact on share prices. Investors will be particularly interested in how companies are handling labor shortages, supply chain disruptions, and rising input costs.

It is a very busy week of economic reports, with CPI on Wednesday and PPI on Thursday providing additional information on the inflationary pressures. Friday will focus on the consumer, with Consumer spending expected to show a fractional month-over-month decline, and Consumer Sentiment forecasted to show a small bounce from the previous month.

Stocks on the Move

-13.0% CarParts.Com Inc (PRTS) retails automobile parts online. The Company offers mirrors, engines, headlights, brakes, interior and exterior accessories, tools, wheels, lighting, bumpers, and other aftermarket autobody parts in its network of over 1.2 million SKUs. There was no significant company news last week.

PRTS is a 3.5% position in the North Star Micro Cap Fund.

+13.4% 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. The stock is continuing to rally after an optimistic Q4 earnings call the previous week, as well as an updated Buy rating and $7.80 price target by ROTH Capital Partners.

EPM is a 1.7% position in the North Star Micro Cap Fund and a 4.3% position in the North Star Dividend Fund.

+11.1% Resources Connection Inc (RGP) is a professional services firm. The Company provides accounting and finance, human resources management, and information technology professionals to clients on a project-by-project basis. Resources assists its clients with discrete projects requiring specialized expertise, compensation program designs, and transitions of management information systems. Resources Connection jumped last week following a FQ1 revenue beat of $183.1M, an increase of 24.3% y/y, and $0.43/share in non-GAAP earnings. The Company attributed the strong quarterly performance to growth in digital transformation work and favorable macro-opportunities within its largest verticals including healthcare, financial services, and technology. Following the results, management commented, “We remain optimistic about our ability to compete and win as our business model attracts in-demand talent who desire more choice, transparency, and diversity of experience.”

RGP is a 0.6% position in the North Star Dividend 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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