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Kuby’s Commentary

Let the Good Times Roll

Jun 1, 2021

Last Week:

Equity markets ground higher, fueled by (1) good earnings from economy re-opening companies and from several residential real estate-related companies; (2) a benign bond market that seems comfortable with the Fed’s ‘inflation is transitory’ party line; (3) improving U.S. and European Coronavirus data trends that support economic re-opening plans, and even a meaningful decline in the 7-day moving average of cases in India to less than 200,000 since peaking at more than 400,000 in early May; and (4) continued improvement in employment data, as weekly new jobless claims reached a 15-month low. Additionally, the consumer showed renewed strength, with purchases of goods and services rising 0.5% in April after an upwardly revised 4.7% jump in March, the biggest since last June. Investors seemed unconcerned about mounting inflationary pressures, despite a 0.7% increase in the core personal consumption price gauge for April that was the biggest monthly gain since October 2001. President Biden issued his first full budget proposal, detailing more than $6 trillion in spending over the coming fiscal year, but Treasury yields edged lower for the week, with benchmark 10-year yield down three basis points to 1.58%. An unusual combination of small caps and tech stocks provided the best equity performance with the Russell 2000 gaining + 2.42% and the Nasdaq + 2.06%, while the S&P 500 advanced 1.16%. Three sectors were in the red, led by Utilities -1.47%, with Telecom -0.51%, and Health Care -0.31%. Gold, which remains our favorite hedge against global sovereign currency debasement, rallied another 1.5% to close over $1900/ounce.

This Week:

The economic calendar is fairly light during holiday-shortened trading. The May jobs report on Friday will be in focus, as investors will learn whether the previous month’s disappointing results were an anomaly. There will also be data on construction spending and the Purchasing Managers Index to provide a gauge on current business activity. With the government continuing to increase its influence on the economy, we note that the political news flow seems to be following the typical post-election pattern of gridlock in Washington, D.C.  The most prominent topic in U.S. politics seems to be the size and scope of a possible infrastructure spending bill.  The most partisan leaders have proposed the most extreme budgetary ideas and the final result typically falls quite close to the middle of the starting points.  We expect that clean energy, transportation infrastructure, and financials are likely among the biggest winners when the final plan becomes law.  Some of our existing investments will benefit, but we welcome any new ideas from our wonderful investor community, particularly in the clean energy sector where we have traditionally focused on the Invesco WilderHill Clean Energy ETF (PBW). Speaking of current investments, we hope the New York Knicks can rebound from the 3-1 hole they are in against the Atlanta Hawks. We love seeing 15,000 vaccinated fans at Madison Square Garden (MSGE)!

Year-to-date equity market returns have been enough to make most investors fairly happy in an entire year.  The S&P 500 is up 11.9%, the NASDAQ is up 6.7%, and the Russell 2000 up 14.9%.  Heavy inflows into equity markets continued last week with$17.9 billion bringing 2021’s total inflows to $512 billion. Whereas we believe there are pockets of froth, such as some of the meme stocks that have become large positions in the Russell 2000, we believe that there are still great bargains available for investment. Our bottom-up, fundamental approach to security selection based on future cash flows provides comfort that we are always inclined to buy more of the most undervalued securities, particularly when financial markets volatility offers opportunities.  Given fairly uninterrupted financial markets increases year-to-day, increased volatility that creates some bargains would not surprise us. In this environment, the case for actively managed stock portfolios versus passive indexing is very strong.

With one clear exception, which is semiconductor-supply-constrained businesses, the dozens of industry-specific economic statistics data series we follow all showed great strength in March and April.  In fact, many of the indicators are finally lapping their comparison from two years ago in 2019.  So, we don’t think the recent strength is merely a comparison to the peak of the economic impact of the pandemic.  But obviously, economic strength acceleration always raised the specter of potentially higher interest rates, which we believe are a distinct possibility and should be a consideration in positioning for coming quarters. As such we continue to favor very short duration as well as inflation-protected bonds and believe the VCSH and VTIP ETFs are good building blocks for fixed income portfolios.

Stocks on the Move:

Companies with news…

+55.5% Build-A-Bear Workshop Inc (BBW) is an interactive and entertainment mall-based retailer that invites guests of all ages to create their own customized stuffed animals with clothing, shoes, and accessories through a bear-making process. Last week, Build-A-Bear rallied after reporting Q1 revenue of $91.69M (+96.7% year-over-year) and non-GAAP EPS of $0.60 (beat by $1.13). E-commerce demand rose 87% year-over-year, and gross profit margin increased to 52.8% compared to 17.3% a year ago. Additionally, the Company raised the guidance range for full-year EBITDA to $28-$32M, representing an increase from its previous guidance to be higher than FY2019 of $15.3M. Chief Executive Officer Sharon Price John noted this was one of the strongest first quarters in Build-A-Bear’s 25-year history.

BBW is a 2.2% position in the North Star Micro Cap Fund.

+10.9% Cresco Labs Inc (CRLBF), together with its subsidiaries, cultivates, manufactures, and sells retail and medical cannabis products in the United States under the Cresco, Good News, Wonder Wellness Co, High Supply, FloraCal, Mindy’s Edibles, and Kiva brands. Last week, Cresco Labs reported Q1 2021 results of $178.4M in revenue and $35.0M in EBITDA. The Company expects to reach annualized revenue run rate of more than $1 billion by the end of 2021, and Chief Executive Officer Charles Bachtell noted Cresco’s sequential growth from existing assets and the achievement of reaching #1 market share positions in two of the industry’s top-five states.

CRLBF is a 0.5% position in the North Star Opportunity Fund.

+12.6% LSI Industries Inc (LYTS) designs, manufactures, and markets a variety of lighting fixtures, menu board systems, and graphic products. The Company sells its products to the petroleum and convenience store market, the multi-site retail market such as restaurants and automobile dealerships, and the commercial and industrial lighting market. Last week, LSI Industries announced the all-cash acquisition of JSI Store Fixtures from RFE Investment Partners for $90.0M. Maine-based JSI is a provider of retail commercial display solutions throughout North America. James A. Clark, Chief Executive Officer, commented that this transaction will significantly increase LSI’s total addressable markets within the grocery and convenience store verticals.

LYTS is a 1.7% position in the North Star Dividend Fund.

Companies without news…

+12.8% Rocky Brands Inc (RCKY) designs, develops, manufactures, and markets men’s and women’s footwear. Its footwear brands, which are sold in retail sporting goods and outdoor stores, include Rocky, Georgia Boot, Creative Recreation, Durango, Lehigh, and licensed brand Michelin. There was no significant company news last week.

RCKY is a 4.3% position in the North Star Micro Cap Fund and a 6.2% position in the North Star Dividend Fund.

+11.1% Turtle Beach Corporation (HEAR) operates as a sound technology company. The Company designs and markets audio peripherals for video game consoles, personal computers, and mobile devices. There was no significant company news last week.

HEAR is a 5.3% position in the North Star Micro Cap Fund.

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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