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Kuby’s Commentary

Earnings Season Therapeutics

Jul 13, 2020

Last Week:

The market got off to a nice start on Monday after a weekend of significantly lower coronavirus deaths and bullish economic news from China’s state-run media. The middle of the week was dominated by a surge in COVID-19 cases and cautionary comments from Dr. Anthony Fauci, who suggested the states with large outbreaks should considering shutting down their economies again. That downward trend continued Friday morning until a rally was sparked after new data showed that Gilead Sciences’ Remdesivir showed effectiveness in treating the virus. Here is Gilead’s actual press release:

FOSTER CITY, Calif.–(BUSINESS WIRE)– Gilead Sciences, Inc. (Nasdaq: GILD) today announced additional data on Remdesivir, an investigational antiviral for the treatment of COVID-19, adding to the available body of knowledge on treatment outcomes with Remdesivir. The data are being presented at the Virtual COVID-19 Conference as part of the 23rd International AIDS Conference (AIDS 2020: Virtual) and include a comparative analysis of the Phase 3 SIMPLE-Severe trial and a real-world retrospective cohort of patients with severe COVID-19. In this analysis, Remdesivir was associated with an improvement in clinical recovery and a 62 percent reduction in the risk of mortality compared with standard of care – an important finding that requires confirmation in prospective clinical trials.

In our commentary a few weeks ago our message was that V is for Victory and Vaccine, as we believe the key to moving beyond the current reality will be the development of a vaccine. The market’s reaction to the Gilead announcement highlights that advancements in treatments for the disease are also very significant. The rally on Friday resulted in a 1.76% gain for the S&P 500 for the week, while the tech heavy Nasdaq spiked 4.01% to new record highs. Small cap stocks continued to under-perform, with the Russell 2000 shedding – 0.64%. For those who think the market rally is overextended, it is worth noting that in 2020 the Small Cap Value Index is now down -26.84% while the Nasdaq 100 is up 24.08% and the S&P 500 is almost even at -1.42%. In other words, there are lots of stocks trading at bargain basement prices whose names are not Amazon, Apple, Netflix, or (fill in the blank for any e-commerce darling).

Interest rates remained near record low levels with the Ten-Year Treasury yield slipping 4 basis points to 0.63%. These extraordinarily low interest rates along with the speculative fervor in tech stocks remain the cornerstone for the elevated levels of the widely followed equity indices. It feels more and more like the dot-com bubble of the late 90s as the valuations of many non-profitable high-profile companies continue to inflate. Our fundamental belief is that in the long run there is a very significant correlation between future cash flows and equity prices. Either there is going to be an incredible surge in cash flows from a wide swath of popular companies, or there will be a sharp decline in those companies’ share prices. On the other end of the spectrum financial sector and small cap value companies will either see significant price appreciation or experience dramatic decreases in their operating cash flows. The former scenario would benefit XLF (Financial Select Sector SPDR) as well as NSMVX and NSDVX (North Star Micro Cap and Dividend Funds…both current 5 star rated by Morningstar).

Gold continued to advance, rising $14/ounce to touch $1,800 for the first time in eight years. The Dollar remained relatively stable with the spot index holding right in the middle of its trading range for 2020. Further near-term gains may be dependent on the extent of any additional economic stimulus, also likely linked to near-term news regarding Covid-19 and related economic trends.

This Week:

Earnings season kicks into gear with 35 S&P 500 companies (including 4 Dow 30 components) scheduled to report results for the second quarter. Analysts expect Q2 profit for S&P 500 companies to be down 44% before “improving” to -25% in Q3 and -14% in Q4. If -44.6% is the actual decline for the quarter, it will mark the largest year-over-year decline in earnings for the index since Q4 2008 (-69.1%). It will also mark the fifth time in the past six quarters in which the index has reported a year-over-year decline in earnings. All eleven sectors are projected to report a year-over-year decline in earnings, led by the Energy, Consumer Discretionary, Industrials, and Financials sectors. It will be interesting to see if companies provide full-year guidance again amid all the COVID-19 uncertainty, and if guidance is provided how wide the ranges will be.

On the economic calendar, reports of interest include updates on industrial production, consumer prices, jobless claims, and consumer sentiment. Retail sales for June will also be reported with expectations for a 4.5% month-to-month increase.

The biggest stories will continue to be spread of COVID-19 and the progress in developing vaccines and therapeutics, as well as the size and scope of further government stimulus and Fed policies to support the economy.

Stocks on the Move:

PRTS + 31.2%: U.S. Auto Parts Network Inc. is an online provider of automotive aftermarket parts and repair information. The company principally sells its products to individual consumers through its network of websites and online marketplaces. The company’s products consist of collision parts serving the body repair market, engine parts to serve the replacement parts market, and performance parts and accessories. Industry statistics indicated that traffic from searches to the Company’s flagship website increased 482% year over year in June. PRTS is a 7.74% holding in the North Star Micro Cap Fund.

PCOM +19.2%: Points International Ltd. provides loyalty e-commerce and technology solutions to the world’s top brands to power innovative services that drive increased loyalty program revenue and member engagement. Rob MacLean, CEO of Points provided the following update:
“Our performance in the second quarter was much stronger than we originally anticipated at the beginning of the pandemic, as trends have steadily improved since the low points in late March and early April. In June, we generated gross profit that was almost 70% of our 2019 monthly average, up from just under 50% in May and 20% in April. Cash grew through the May/June period and, at this point, we are optimistic these positive trends will continue through the second half of 2020. Given our improved performance and strong balance sheet, we elected to repay $5 million on our revolving credit facility in June, bringing our balance down to $35 million as of June 30, 2020.” PCOM is a 1.5% holding in the North Star Micro Cap Fund.

FLXS +16.6%: Flexsteel Industries, Inc. is one of the largest manufacturers, importers and online marketers of residential furniture and products in the United States. Product offerings include a wide variety of upholstered furniture such as sofas, loveseats, chairs, reclining and rocker-reclining chairs, swivel rockers, sofa beds, convertible bedding units, occasional tables, desks, dining tables and chairs and bedroom furniture. A featured component in most of the upholstered furniture is a unique steel drop-in seat spring from which the name “Flexsteel” is derived. There was no company specific news to account for the share price increase. FLXS is a 1.58% holding in the North Star Dividend Fund.

HEAR +16%: Turtle Beach Corporation is one of the world’s leading gaming audio and accessory providers, headquartered in San Diego, CA. The Turtle Beach brand is highly respected for its pioneering first-to-market features and patented innovations in high-quality, comfort-driven headsets for all levels of gamer, making it a fan-favorite brand and the market leader in console gaming audio for 10 years running. Turtle Beach’s ROCCAT brand combines detail-loving German innovation with a genuine passion for designing the best PC gaming products. On June 16 the company increased its sales outlook for the second quarter by approximately 75%. Since then HEAR share price has rocketed 29%. HEAR is a 6.02% holding in the North Star Micro Cap Fund.

ALOT -14.1%: AstroNova Inc. designs, develops, manufactures, and distributes a broad range of specialty printers and data acquisition and analysis systems, including both hardware and software. The company caters to aerospace, apparel, automotive, avionics, chemicals, computer peripherals, communications, distribution, food and beverage, general manufacturing, packaging, and transportation segments of the market. Shares rallied the previous week on the news that the FAA began 737 MAX testing, but reversed those gains, possibly due to revived concerns about cancellations of 737 MAX orders from major airlines like American. ALOT is a 1.59% holding 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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