Kuby's Commentary

It’s a Mad Mad Mad Inversion

2019-04-01T13:13:22-05:00March 25th, 2019|

Last Week:

The last six months have certainly been “interesting”. A dramatic rally in January and February recovered about most of the horrific losses of October- December, followed by a brief nasty sell-off to kick off March which quickly reversed into a Mad March bounce which lasted until Friday’s swoon, which left the S&P 500 down 0.8% for the week. Whereas the market was responding to policy issues (monetary and trade) throughout most of this time period, the focus has clearly shifted over the last month to health of the global economy. I believe that the inversion of the yield curve on Friday, commonly viewed as a predictor of an upcoming recession, triggered a wave of sell programs by algorithmic traders. It probably didn’t help that many investors were distracted by March Madness basketball parties as the closing bell rang.

Small cap companies have suffered more damage. The heavy weighting of financials in the Russell 2000 is partially to blame, as is the greater perceived sensitivity of smaller companies to the economic conditions. The counter argument would be that smaller companies derive a much lower percentage of their revenue from international markets, and therefore the global slowdown would have a lesser effect on them. The financial stocks may also be being overly punished, as concerns over compression in net interest margins are overshadowing the positives of the improved credit quality and strong overcapitalized balance sheets. The global economic concerns were stoked by a report on Friday that showed factory output in the Eurozone fell in March at its fastest pace in six years, sending the German 10-year bond yield back into negative territory for the first time since 2016. The yield on the Ten-Year Treasury dropped 13 basis points to 2.46%, its lowest level since the beginning of 2018. Our economy is also slowing, as evidenced by weak manufacturing data on Friday, but nevertheless we may be the best house on the block again. The Fed is also clearly the market’s friend again, as on Wednesday the central bank made it clear that there are no more rate increases on the horizon.

This Week:

Consumer confidence will be in focus with the Conference Board releasing its Index for March on Tuesday and the Michigan Sentiment reading out on Friday. Both numbers are forecasted to be unchanged from February. A slightly hotter number would be well received, as cold porridge is out of favor this spring.

It is not anticipated that there will be any substantive developments on the trade negotiations with China, but the market would certainly rally if there was a positive surprise on that front.

Speaking of surprises, despite all the excitement over the underdogs in the NCAA tournament in the first round, we are now left with all the one, two, and three seeds in all the regionals. With only the Oregon Ducks (a twelve seed) and The Auburn Tigers (a five seed) crashing the party. In my opinion the refs missed several calls in the last 10 seconds of the Duke victory over Central Florida, but then again, I’m still convinced that Alonzo Mourning fouled Kit Mueller at the buzzer in the 1989 classic one versus sixteen matchup.

Stocks on the Move:

Last week it was Peter and I that were “on the move”, attending the Roth Conference in beautiful Laguna Niguel California. During the conference we had the opportunity to meet with the management teams from 17 of our portfolio companies, of which I’m going to provide a summary of the 7 companies which are trading near 52-week low prices.

Crown Crafts Inc. (CRWS) current price $5.16, 52-week range $5.00-6.25: operates in the infant and toddler products segment of the consumer products industry through its wholly-owned subsidiaries. The infant and toddler products segment consist of infant and toddler bedding, bibs, soft bath products, disposable products, and accessories. We think the Company has done a great job navigating through the the liquidation of Babies R Us as well as the “naked crib” trend. Their strategy is to focus on their Sassy brand as well as customizing products through their Carousel division. In discussing the dividend, which is currently offering a 6.2% yield, CEO Randall Chestnut compared it to drugs, saying “Once you are on them, it’s hard to get off them”. CRWS is a 2.81% holding in the North Star Dividend Fund and a 2.29% holding in the North Star Micro Cap Fund.

Lakeland Industries Inc. (LAKE) current price $11.35, 52-week range $9.90-16.85: manufactures and sells safety garments and accessories for industrial protective clothing market. It offers limited use / disposable protective clothing, chemical protective suits, and firefighting and heat protective apparel. The costs and disruptions of recently installed ERP system will continue to negatively affect the next few quarters, then sales and earnings should rebound. LAKE is a 2.98% holding in the North Star Micro Cap Fund.

LSI Industries Inc. (LYTS) current price $2.72, 52-week range $2.62-8.33: provides corporate visual image solutions to the petroleum and convenience store industry. We met Jim Clark, the recently appointed President and Chief Executive Officer. He articulated his vision to refocus on the business opportunities where the Company’s ability to provide integrated graphics and lighting nationwide gives them a competitive advantage. LYTS is a 0.72% holding in the North Star Dividend Fund and a 0.86% holding in the North Star Micro Cap Fund.
Escalade Inc. (ESCA) current price $11.53, 52-week range $10.50-15.25: manufactures and distributes sporting goods for a varied range of activities. These sports include archery, table tennis, basketball goals, trampoline, play systems, fitness, game tables like hockey and soccer, billiards, darting, and other outdoor games. Another company that has done a great job in a difficult environment. Additional Pickle Ball and tailgating games offer growth opportunities through tuck-in acquisitions, and archery has rebounded nicely. ESCA is a 3.30% holding in the North Star Dividend Fund and a 3.38% holding in the North Star Micro Cap Fund.

Blue Bird Corp. (BLBD) current price $17.00, 52-week range $15.67-26.95: is an American bus manufacturing company headquartered in Fort Valley, Georgia. We really love this business as it has tremendous stability with a consistent replacement cycle of 30,000 or more new school buses a year, plus a market share growth component as Blue Bird dominates the clean energy segment with 80% share of propane and natural gas vehicles. BLBD is a 3.51% holding in the North Star Micro Cap Fund and a 1.20% holding in the North Star Opportunity Fund.

Farmer Brothers Co. (FARM) current price $20.50, 52-week range $20.31-31.70: is engaged in manufacturing, wholesaling, and distributing coffee, tea, and culinary products to food-service establishments and retailers in the United States. The Company has gone through a transformation over the last two years, having built a large state of the art facility outside of Dallas, as well as acquiring Boyd’s Coffee. They have a small share of a very large market. FARM is a 3.87% holding in the North Star Micro Cap Fund.
US Auto Parts Network Inc. (PRTS) current price $1.03, 52-week range $0.88-2.189: is an online provider of automotive aftermarket parts and repair information. The new management team is moving quickly to rebuild the e-commerce business by improving the speed and content on their sites, as well as hiring eight marketing professionals to build their brands. Their mission statement is to provide the right part at the right place at the right time. PRTS is a 1.75% 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.

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