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Kuby’s Commentary


Mar 19, 2018

Last Week:

The glass was half-empty, as the rally that was ignited by the previous week’s release of the February Jobs report proved to be short lived, and the S&P 500 declined Monday through Thursday before bouncing on Friday to finish the week down 1.2%. A couple of weak economic reports, most notable a surprising decline in retail sales weighed on the equity markets but did help drive the yield on the Ten-Year Treasury down 4 basis points to 2.85%. Additionally, the strength of the February Jobs report came into question, as further analysis suggested that many of the new entrants into the job market came from workers displaced from Puerto Rico.

In other news, Secretary of State Rex Tillerson was tweeted out of office, and Special Counsel Robert Mueller subpoenaed the Trump Organization. Meanwhile, the trade war rhetoric with China heated up, with shares of Boeing under specific pressure on fears of retaliatory tariffs.

Peter Gottlieb and I attended the Roth Securities Growth Stock Conference, where we saw presentations by 26 small-cap companies. The mood was uniformly upbeat, except for the companies that had exposure to Toys R Us. The consensus on the Tariffs was that the costs were likely to be passed on to the U.S. consumers, since almost every manufacturer sources from China, but that the prices increases would be modest.

What a fantastic NCAA tournament so far! Being an advocate of diversification, I filled out 4 distinct brackets. Like the stock market, often the ball doesn’t bounce as expected in basketball. If West Virginia wins the Championship, my “warm weather” bracket could be a winner. One friend’s dog filled out a bracket, taking all the schools with dogs as mascots, including the UMBC Golden Retrievers.

This Week:

On Wednesday, the Federal reserve is expected to raise rates .25%, although there is an outside chance it will raise rates .5% (which would most likely be greeted with a steep sell-off of stocks and bonds). Chairman Jerome Powell will be holding his first press conference, with much focus on the dot-plot projections for the path of future rate hikes.

Stocks in the News:

Connecticut Water Service, Inc. (CTWS) +17.4%: The Company agreed to merge with SJW Group. Under the terms of the agreement, Connecticut Water shareholders will receive 1.1375 shares of SJW Group common stock for each share of Connecticut Water common stock they own, the equivalent of $61.86 per share, or about $750 million in the aggregate, based on SJW Group’s closing stock price as of March 14, 2018, and the agreed upon exchange ratio. David C. Benoit, President and Chief Executive Officer of Connecticut Water, said, “In addition to delivering a premium of 18 percent to Connecticut Water shareholders, this compelling combination honors our unique public health mission and entrepreneurial vision.  Together, we create a new larger, stronger company capable of delivering greater value and benefits for our shareholders, customers, employees and communities than either company could deliver on its own.” Connecticut Water Service is a non-operating holding company. The Company is engaged in supplying water to its customers. It operates in three segments; water activities, real estate transactions, and services and rentals. The North Star Dividend Fund holds a 1.1% position in CTWS.

National CineMedia, Inc. (NCMI): -17.4%: Total revenue for the fourth quarter ended December 28, 2017 decreased 1.3% to $140.7 million from $142.5 million for the comparable quarter last year. Adjusted OIBDA decreased 4.4% to $82.6 million for the fourth quarter of 2017 from $86.4 million for the fourth quarter of 2016. Operating income decreased 2.9% to $70.2 million for the fourth quarter of 2017 from $72.3 million for the fourth quarter of 2016. The Company also reduced its quarterly dividend to $.17 per share from $.22. Commenting on the Company’s fourth quarter and full year 2017 operating results, Andy England, NCM’s CEO said, “While there is no question that 2017 was a challenging year for NCM, it was really a tale of two halves, with a tough first half of the year followed by a far better second half. Much progress was made this year in many key areas to better position us to deliver on our long-term strategy, including the expansion of our national network, the strengthening of our leadership team, and of course, the launch of our new Noovie pre-show and Noovie Digital ecosystem. National CineMedia is a holding company. The company through its subsidiary, operates digital in-theatre media network in North America, through which it sells in-theatre and online advertising and promotions. The North Star Opportunity Fund holds a 1.7% position and the North Star Dividend Fund holds a 1.3% position in NCMI. The North Star Bond Fund holds a total 2.7% position in NCMI corporate bonds.

Del Taco Restaurants, Inc. (TACO): –14.5%: System-wide comparable restaurant sales growth of 2.4% and company-operated comparable restaurant sales growth of 2.1%, marking the 17th and 22nd consecutive quarter of gains, respectively. Company-operated comparable restaurant sales growth was comprised of average check growth of 2.5% offset by a transaction decrease of 0.4%. Adjusted EBITDA of $23.3 million compared to $25.3 million in the fiscal fourth quarter 2016. Adjusted EBITDA in the fiscal fourth quarter 2016 included an estimated $1.1 million benefit from the additional operating week in the quarter. John D. Cappasola, Jr., President and Chief Executive Officer of Del Taco, commented, “We continued our momentum in 2017 by leveraging our value oriented QSR+ positioning to deliver a fourth consecutive year of mid-single-digit SSS results with two and three-year comps that are among the best in our industry. System-wide, we also opened 20 restaurants, representing a substantial increase from 13 opened in 2016. We are obviously very proud of these results and thank all of our team members, franchisees and guests for making them possible. ”Del Taco Restaurants is an operator and franchisor of restaurants featuring fresh and fast made-to-order cuisine, including both Mexican inspired and American classic dishes. The North Star Micro Cap Fund holds a 2.1% position in TACO.

Transact Technologies, Inc.(TACT): +10.5%: The Company’s shares bounced back from the previous week’s decline, after investors had a chance to digest the news from their earnings release. We were very impressed by the presentation that Bart Shuldman, Chairman and Chief Executive Officer, made at the Roth conference. Transact Technologies is engaged in developing and selling software-driven technology and printing solutions for restaurant, POS automation and banking, casino and gaming, lottery, mobile and oil and gas. The North Star Dividend Fund holds a 1.6% position in TACT.

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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