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Kuby’s Commentary

Ebb and Flow of Tensions and Stresses

Jun 24, 2019

In early November 2016 the Fed Funds Rate was 0.25% and the yield on the Ten-Year Treasury was just under 2%. The consensus opinion was that rates had been artificially low since the 2008-2009 financial crisis, but that it was time to normalize those rates. Turn the clock forward to this past Wednesday, the Ten-Year Treasury briefly traded below a 2% yield, while the Fed left short-term rates unchanged at 2.25% but suggested that cuts could be coming. Across the pond ECB chief Mario Draghi said his bank would reduce rates if inflation didn’t increase. The yield on the Ten-Year German bond is slightly negative (yes, you have to pay them to hold your money), which helps explain the lid on U.S. long-term rates as well as the relative strength of the dollar. In fact, there are $13 trillion of bonds around the globe paying below zero percent interest rates. Trade tensions, which has been the other dominant storyline for the last year, appeared to ebb a bit as hope of some progress at the upcoming G20 (June 28-29) grew based on the latest tweets and other semi-official comments. The S&P 500 responded by setting a new record high on Thursday and finished the week up 2.2%. The Russell 2000 continued to lag, advancing only 1.1%, and still trading 11% below its high from last summer.

At the risk of seeming like a “Debbie Downer”, there were some troubling headlines that the market chose to largely ignore. On Thursday, Iran shot down a U.S. drone, and President Trump ordered a retaliatory air strike, but then called it off. Yikes! Additionally, the economic numbers that came out were all weak, suggesting that the manufacturing sector in particular is feeling the strain of these trade issues and related supply chain disruptions. Most notable was the Flash Purchasing Managers Index for June which registered a reading of 50.1, its lowest level since 2009. A reading under 50 suggest a contraction.

This Week:

All eyes will be on the two-day G20 Summit in Osaka, Japan that starts on Friday. The other economic data will likely be a sideshow, with June Consumer Confidence on Tuesday and Consumer Sentiment on Friday perhaps of note as it will give us a reading as to whether consumers are feeling the same stresses as manufacturers. The data for May showed 18-year highs for consumer sentiment.

The situation in Iran should not be ignored, particularly as it relates to energy assets, but also their nuclear weapons program presents very serious risks.

Stocks on the Move:

Kewaunee Scientific Corporation (KEQU) -19.10%: Kewaunee Scientific is engaged in the design, manufacture, and installation of laboratory, healthcare, and technical furniture products. The Company posted a very sloppy quarter, with an operating loss on a 21.9% decline in revenues. “Fiscal year 2019 proved to be a challenging year for Kewaunee,” said Thomas D. Hull III, Kewaunee’s President and Chief Executive Officer.  “The second half of the year was especially demanding, as the Company was unable to convert the quotes necessary to achieve our desired operating levels. With a renewed commercial focus, we are beginning to see a reversal of booking trends from fiscal year 2019.  We are working actively with our channel partners to improve our win rate and are encouraged by early results.  Rebounding from fiscal year 2019 performance is of paramount importance, and I believe the pace of activity and investment in the marketplace is sufficient for Kewaunee to achieve this objective.”  KEQU is a 2.23% holding in the North Star Dividend Fund.

Steelcase, Inc. (SCS) -11.51%: Steelcase is a furniture company primarily based in the United States and has operations in Europe, the Middle East, and Africa.The Company released quarterly results that fell modestly short of forecasts but maintained their guidance for the year. “We are pleased to have delivered another quarter of strong growth in sales and operating income,” said Jim Keane, president and CEO. “Our 15 percent order growth was particularly strong and in line with our expectations.  We fell just short of our revenue estimates because order growth was weighted toward the second half of the quarter and customers requested delivery dates later than we typically see, in part because of construction labor shortages that caused their projects to be delayed.  We ended the quarter with a high backlog and a strong pipeline of customer opportunities which support our outlook for the second quarter.”  SCS is a 1.02% holding in the North Star Dividend Fund.

PetMed Express, Inc. (PETS) -11.08%: PetMed Express Inc., along with its and subsidiaries is a leading nationwide pet pharmacy. Competitor, Chewy Inc., went public and saw it shares surge 63% on its first day of trading to provide it with a $13 billion market cap, even though it is expected to lose money until 2022. PETS whose market cap has shrunk to $314 million, has operated comfortably profitable for over a decade, has no debt and $100 million in cash, and offers a trailing dividend of 6.90%. Quite the conundrum for a value investor. PETS is a 1.34% holding in the North Star Dividend Fund and a 0.87% holding in the North Star Opportunity Fund.

OneSpaWorld Ltd. (OSW) +14.58%: OneSpaWorld Holdings is an operator of health and wellness centers onboard cruise ships and operator of health and wellness centers at destination resorts worldwide. It offers suite of premium health, fitness, beauty and wellness services and products. There was no news to account for the rise in the share price.  OSW is a 1.50% holding in the North Star Micro Cap Fund.

Consolidated Communications Holdings, Inc. (CNSL) +10.54%: Consolidated 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. The shares recouped their losses from the last week of May, when I commented “The Company’s history dates back 125 years, of which the first 123 years were rewarding for shareholders. In July 2017 the Company acquired FairPoint Communications and the pain for shareholders commenced. In hindsight, that acquisition redefined Consolidated from a stable dividend-oriented enterprise to a heavily leveraged growth company. It may prove to be a brilliant transformation, but not for their entire base of shareholders who owned the stock for its long history of dividend stability. The shares have now declined over 50% since the Board of Directors made the foolish decision to eliminate the dividend following their first quarter earnings results, essentially forcing their previous shareholders to liquidate their holdings. The business results modestly exceeded expectations and there has been no incremental news since. The dividend irrelevance theory created in 1961 by Modigliani and Miller would suggest this reaction to the dividend elimination is an aberration. Time will tell.”

The Company will report second quarter earnings the first week in August. The jury is still out.  CNSL is a 0.99% holding in the North Star Dividend Fund. CNSL corporate bonds are a a 1.07% holding in the North Star Opportunity Fund and a 2.93% holding in the North Star Bond Fund.

Portfolio holdings are subject to change and should not be considered investment advice.

North Star Investment Management Corp. is the Advisor for the North Star Family Mutual Funds.

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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