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Kuby’s Commentary

First Quarter Porridge Warms Up

Apr 29, 2019

Last Week:

Concerns that the porridge was getting too cold appear to have been unwarranted. The S&P 500 and the Nasdaq Composite hit record highs as strong earnings reports and economic reports fueled investor enthusiasm. Earnings season is about half way over and so far, 80% of companies have reported results that exceeded expectations. The expected decline in S&P 500 first quarter earnings is now down to 2.3% from 3.9% the week earlier as a result of stronger than expected results from Consumer and Tech companies. Expected revenue growth ticked up to 5.1% from 5% in the previous week. GDP growth for the first quarter came in at 3.2% up from 2.2% in the fourth quarter. Much of the increase came from trade and inventory adjustments.  Tame inflation data supported the dovish tilt of the Federal Reserve. The yield on the Ten-Year Treasury drifted down to 5 basis points to 2.51%.

This Week:

Earnings will continue to be in focus as 164 S&P 500 companies (including 5 Dow 30 components) are scheduled to report results for the first quarter. The Federal Reserve will conclude a meeting on Wednesday, with the expectation that there will be no changes in monetary policy. Chairman Jerome Powell’s press conference will be closely watched for hints about inflation targets and the unwinding of the Fed’s bond portfolio. Also, on Wednesday the ISM Manufacturing Index is expected to remain steady from the previous month. The highlight of the economic data will be Friday’s release of the U.S. jobs report for April, with a gain of 180,000 forecasted.

Stocks in the News:

Acme United Corp (ACU) +12.82%: Acme United is a US based company engaged in the supply of cutting devices, measuring, first aid, and sharpening products. The Company’s shares continued to rally after posting better than expected earnings on April 18. ACU is a 2.25% holding in the North Star Dividend Fund, a 3.35% holding in the North Star Micro Cap Fund and a 2.23% holding in the North Star Opportunity Fund.

Consolidated Communications Holdings Inc (CNSL) -38.64%: Consolidated Communications provides communication services for business and residential customers across 11 states in the U.S. through its network with more than 14,000 fiber route miles. The Company reported results that slightly exceeded estimates but eliminated their quarterly dividend to “focus on deleveraging”. Bob Udell, President and CEO explained “To be clear, this isn’t a change driven by a diminished view of our business. It is driven by our view that the long-term interest of shareholders is best served proactively improving our balance sheet through accelerated deleveraging.” I’m not sure what shareholders Mr. Udell is referring to, since the consistent dividend income was clearly the most important attribute of the Company prior to this misguided decision. In fact, most of those shareholders were dividend-oriented ETFs and mutual funds that would be required to sell the shares after the dividend elimination. It is worth noting that the expected value calculation for the Company remains more or less unchanged by this capital allocation decision. CNSL is a 1.11% holding in the North Star Dividend Fund and a 1.03% holding in the North Star Opportunity Fund. CNSL bonds are a 2.92% holding in the North Star Bond Fund and a 1.08% holding in the North Star Opportunity Fund.

Denny’s Corp (DENN) +10.56%: Denny’s is one of America’s largest franchised full-service restaurant chains based on the number of restaurants. It provides Pancakes, Appetizers and soups, Sandwiches and salads, Breakfast Melts, Omelets, and others. The Company’s shares reached an all-time high with first quarter earnings scheduled for release this Tuesday.  DENN is a 1.91% holding in the North Star Opportunity Fund.

Speedway Motorsports Inc (TRK) +34.33%: Speedway Motorsports is a promoter, marketer and sponsor of motorsports activities in the United States. The company also provides souvenir merchandising, including screen-printing and embroidery, as well as food, beverage, and hospitality catering services; and radio programming, production, and distribution services. The Company announced that its Board of Directors received a non-binding proposal from Sonic Financial Corporation to acquire all of the outstanding shares of common stock of the Company, other than the shares held by the Smith family or controlled entities.

Coincidentally I visited their Sonoma Speedway and met with Steve Page the General Manager of that facility. The facility was very impressive, with over $100 million of investments over the last 20 years. It was one of the few days when there was no activity on the track, so the sheep were let loose (thousands of them) to do lawn maintenance.

TRK is a 3.57% holding in the North Star Dividend Fund and TRK bonds are a 2.50% holding in the North Star Bond Fund.

NTN Buzztime Inc (NTN) -18.42%: NTN delivers interactive entertainment and innovative dining technology to bars and restaurants in North America. There was no news to account for the share decline. NTN is a 0.57% holding in the North Star Micro Cap 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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