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Kuby’s Commentary

Climbing the Wall of Whatever

Aug 27, 2018

Last Week:

Stocks hit new highs, with the S&P 500 gaining 0.86% to finally close above its January 26th top, while small stocks fared even better, as the Russell 2000 surged 1.93%. The often-cited adage is that the stock market climbs the wall of worry. I would suggest that the current market is instead climbing the wall of “whatever”, because no one seems particularly worried about anything. The global supply chain and trade agreements are all in flux, not only with China, but also with the EU and NAFTA as well. “Whatever”. The Fed is raising short-term rates and unwinding its massive multi-trillion-dollar balance sheet. “Whatever”. The 10-2 Year Treasury spread (historically a good predictor of recessions) is at its lowest level since right before the financial crisis. “Whatever”. Italy, Turkey, Argentina, Venezuela, Greece, to name a few countries, are all experiencing significant economic difficulties. “Whatever”. The “axis of evil” is alive and well and expanding, with President Donald Trump directing Secretary of State Mike Pompeo to delay a planned trip to North Korea, citing insufficient progress on denuclearization. “Whatever”. The legal problems for the White House keep intensifying, as Cohen pleaded guilty to bank and tax fraud, including campaign finance violations, and Manafort was convicted on eight felony counts. During an interview on Fox & Friends, President Trump said “If I ever got impeached, I think the market would crash. I think everybody would be very poor”. “Whatever”.

At North Star, we remain believers in the stock market, recognizing that corporate profits are surging, consumer sentiment is high, while unemployment and interest rates are low. Our enthusiasm remains tempered by all the event risks identified above, as well as the “whatever” attitude that most market participants seem to have adopted. In short, with the market trading at an all-time high, we think it is a good time for investors to be prepared for a moment when the complacency of the crowd gets tested.

This Week:

There are a few economic reports that could be of interest towards the end of the week, although trading will likely be thin as we approach the holiday weekend. On Thursday, the Fed’s preferred measure of inflation, the PCE deflator, is expected to show a rise 2.3% in July. Any significant divergence from that forecast could influence the path of interest rate hikes. On Friday, the ISM releases its Chicago Purchasing Manager index for August. This reading could reflect some early warnings signs relating to the trade issues. It will be interesting to see if businesses are also adopting a “whatever” attitude, or worrying enough to reduce purchases.

Stocks on the Move:

Advanced Micro Devices, Inc. (AMD) +21%: After decades of being considered a step behind Intel in chip development, recently investor perception of AMD has changed for the better, and the shares have been red hot, advancing over 30% in the last month alone since last reporting earnings. Advanced Micro Devices designs and produces microprocessors and low-power processor solutions for the computer, communications, and consumer electronics industries. AMD is a 5.4% holding in the North Star Opportunity Fund and AMD corporate bonds are a 2.7% holding in the North Star Opportunity Fund.

Alaska Communications Systems Group, Inc. (ALSK) +19.6%: Shares rallied, perhaps in a delayed reaction to the improved quarterly earnings reported a few weeks earlier. Alaska Communications Systems Group provides integrated communications services in Alaska. It provides local, long-distance, and wireless telephone services, Internet access, and data services to residential and business customers. ALSK is a 2.2% holding in the North Star Opportunity Fund.

AstroNova, Inc. (ALOT) +18.8%: Total revenue was $33.8 million, a 23 percent increase over the prior year. Net income was $1.2 million, or $0.17 per diluted share, compared with net income of $727,000, or $0.11 per diluted share, in the prior year. “Our strong second-quarter performance was highlighted by record sales and improved operating expense leverage that helped to generate significant increases in operating income and earnings per share,” said President and CEO Greg Woods. “Our Test & Measurement segment led the way, with top-line growth of more than 80 percent helped by contributions from the Honeywell product printer line in our Aerospace business unit and new ToughWriter contracts. AstroNova designs, develops, manufactures and distributes specialty printers and data acquisition and analysis systems that acquire, store, analyze and present data in multiple formats. ALOT is a 2.2% holding in the North Star Dividend Fund.

Daktronics, Inc. (DAKT) -15.9%: Reported fiscal 2019 first quarter net sales of $154.2 million, operating income of $4.0 million, and net income of $4.6 million, or $0.10 per diluted share, compared to net sales of $172.7 million, operating income of $11.7 million, and net income of $8.4 million, or $0.19 per diluted share, for the first quarter of fiscal 2018. Reece Kurtenbach, chairman, president and chief executive officer stated, “As expected, first quarter sales were less than the first quarter of 2018 and reflect the financial fluctuations caused by the timing of large projects. Year to date orders have increased over last year, and we achieved a respectable gross profit margin on this level of business. During the quarter, we installed several of the new generation of narrow pixel pitch products for high resolution indoor applications. We continue to invest in broadening our narrow pixel pitch product line and control solutions. Our pipeline of innovative new products and technologies is poised to meet the growing market demand for digital canvases.” Daktronics along with its subsidiaries is engaged in the design, manufacture and sale of electronic display systems and related products for Commercial, Live Events, Schools and Theatres, and Transportation. DAKT is a 1.9% holding in the North Star Dividend Fund.

1-800-Flowers.com, Inc. (FLWS) -13.5%: Reported revenue for the fiscal fourth quarter was $229.9 million, down 4.0 percent compared with $239.5 million in the prior year period. This reflected both the shift of the Easter holiday into the Company’s fiscal third quarter, compared with the prior year when the holiday fell in the Company’s fiscal fourth quarter, and the sale in May of 2017 of the Fannie May Fine Confections business. Chris McCann, CEO said, “Our results for the fourth quarter represent a strong finish to the fiscal year. During the quarter, we achieved healthy revenue growth in our Consumer Floral and BloomNet segments. This was driven by strong everyday gifting demand combined with a solid Mother’s Day period, which more than offset the impact of the Easter holiday shift. In our Gourmet Foods and Gift Baskets segment, where the Easter shift has the largest impact, we saw a continuation of the accelerated growth in everyday gifting that we noted throughout the fiscal year, particularly in our Harry & David and 1-800-Baskets brands.” 1-800-Flowers.com is a U.S. based provider of gourmet food and gift baskets, consumer floral, and BloomNet wire service. FLWS is a 3.2% holding in the North Star Micro Cap Fund.

U.S. Auto Parts Network, Inc. (PRTS) +19.1%: Shares recouped most of the loss suffered after reporting earnings the previous week. U.S. Auto Parts Network is an online provider of automotive aftermarket parts and repair information. Its products are classified into three subcategories: collision parts, engine parts, and performance parts and accessories. PRTS is a 1.7% 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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