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Kuby’s Commentary

It’s a Profit Deal

Jan 28, 2019

Last Week:

The holiday-shortened trading week started with a doink (yes, I’m still mourning the Bears loss) as the IMF cut its forecast for world economic growth in 2019 to 3.5% from 3.7%, leading to a 1.42% loss in the S&P 500, the largest market decline since Christmas Eve. Most of those losses were recouped by Friday’s close, driven by reasonably good corporate profits reports and a deal to reopen the Government while the negotiations continue over border security (notice the reframing of the issue to not obsess on the wall). The yield on the Ten-Year Treasury remained stable at 2.75%, the same level that it offered five years ago.

It’s earnings season, and to steal a line from Navin R. Johnson in the 1979 classic file “The Jerk”, we should always remember “It’s a profit deal”. So far those profits have been pretty good, with 71% of the companies beating estimates and blended earnings growth of 10.9% (combining the reported earnings with the estimates for the companies that haven’t yet reported). The forward guidance was decent, in particular nearly every bank CEO was sanguine on the domestic growth outlook, and consumers are still buying Tide detergent and Starbucks fancy coffees. Nevertheless, the results indicate a significant deceleration from the first three quarters of 2018 which all posted growth in excess of 20%. Additionally, 2019 estimates continue to be reduced, and now suggests around 6% growth. The corporate tax cut provided a one-time boost to the growth rate in 2018 growth, which also benefited from a high level of share buybacks.

The U.S.-China trade negotiations appear to be making progress, as both sides now appear eager to reach a compromise. The China economic data last week (although the accuracy is always subject to questioning) suggested some stabilization. It’s a global economy, and it’s in our best interest for the all our trading partners to prosper. The U.S. data was surprisingly strong, with the lowest weekly jobless claims number since the Miracle Mets of 1969 broke the hearts of Cub fans, and January Purchasing Managers Index exceeding expectations.

This Week:

It’s a profit deal, with 126 S&P 500 companies scheduled to report results for the fourth quarter. Unfortunately, Caterpillar (CAT) kicked off the week with results that disappointed Wall Street leading to a steep sell-off Monday morning. On Wednesday the FOMC will likely leave interest rates unchanged, but the language will be very carefully analyzed. Over the past few weeks the perception has developed that the Powell Fed will continue on the data dependent path of the Bernanke and Yellen Feds.  The next round of U.S.-China talks will take place on Wednesday and Thursday. If progress is made, then one might expect the tariff increase scheduled for March 1 to be pushed back.  On Friday the employment report will be released.

Stocks on the Move:

ARC Document Solutions, Inc. (ARC) -10.6%: After rallying over 30% to start the year, the Company’s share price retreated. There has been no news. ARC Document Solutions is engaged in providing document management solutions to businesses, including non-residential segment of architecture, engineering & construction industry. Its offering include; onsite, digital, color & traditional reprographics. ARC is a 0.80% holding in the North Star Micro Cap Fund.

NTN Buzztime, Inc. (NTN) -14.8%: The Company’s share price retreated from its gain of over 60% to start the year. NTN Buzztime provides interactive entertainment and dining technology to bars and restaurants in North America. Its main products are Buzztime, Playmaker, Mobile Playmaker, BEOND Powered by Buzztime and Play Along. NTN is a 0.41% holding in the North Star Micro Cap Fund.

Sharps Compliance Corp. (SMED) +17.3%: Revenue in the second quarter of fiscal 2019 increased 11% to $12.4 million, as compared to revenue of $11.1 million in the same prior year quarter, driven primarily by a $1.5 million increase in flu shot-related orders, partially offset by lower billings to Pharma Manufacturers due to the timing of inventory builds.  The Company reported net income of $0.8 million or $0.05 per basic and diluted share in the second quarter of fiscal 2019, as compared to net income of $0.2 million or $0.01 per basic and diluted share. David P. Tusa, President and Chief Executive Officer of Sharps, stated, “Our strong second quarter results reflect our success promoting the value of our three primary solution offerings: traditional medical waste mailbacks, route-based medical waste pick-up services and unused medication management solutions. During the second quarter we achieved growth across all of these solutions, further strengthening our leadership position as a comprehensive solutions provider to the healthcare-related and retail markets.  Additionally, our new single-use device recycling system solution contributed $200,000 of revenue in the second quarter and is reflected in our billing by solution as Mailbacks. Sharps Compliance Corp is a provider of waste management services including medical, pharmaceutical and hazardous. It serves customers in multiple markets such as home health care, retail clinics and pharmaceutical manufacturers. SMED is a 1.17% 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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