A Pause in Selling, a Bear Market Rally, or a New Bull Market?
The dark bear-shaped clouds lifted and, in the sunshine, the recession-obsessed camp saw signs on economic resiliency and the inflation hawks viewed the silhouette of softening prices. The S&P, which had been in a bear market (down 20% from high) for a few hours on the previous Friday, rallied smartly on Monday following the unexpectedly positive tone struck at JPMorgan Chase’s Investor Day. The FOMC minutes rang no alarm bells, earnings reports during the week from home builders and retailers beat expectations, and most significantly there were signs of moderating inflation on Friday. The Fed’s preferred inflation gauge, the PCE, rose just 0.2% in April to mark the smallest increase in a year and a half, aided by lower gasoline prices. The 6.3% year-over-year increase in April, softened from a 40-year high of 6.6% in the prior month. Stocks rallied in every sector, with Oil & Gas leading the way with an 8.3% gain followed in close order by Consumer Services, Financials, Consumer Goods, & Technology each advancing more than 7%. The S&P 500, the Nasdaq, and the Russell all enjoyed approximately 6.5% rallies, while the yield on the 10-year Treasury inched 4 basis points lower to 2.75%, gold wiggled slightly higher, the dollar weakened 1.4%, and crude oil pumped 1.7% higher. Somewhat interestingly, cryptocurrencies, which we believe are highly speculative trading vehicles, did not participate in the rally last week; Bitcoin was relatively flat on the week, while the Ethereum price fell approximately 10%.
The shift in financial markets sentiment coincided with some increase in mergers & acquisition (M&A) news flow. On Wednesday, activist investment firm Trian issued an S.E.C. filing that indicated the firm is interested in exploring a possible tender offer for shares or a merger of The Wendy’s Company (WEN) whose shares had declined approximately 30% in 2022 prior to the Trian filing. On Thursday, Broadcom Inc (AVGO) and VMware Inc (VMW) announced an agreement to combine; prior to the announcement, VMWare shares had declined by as much as 20% in 2022. Earlier in the week Saudi Arabian Oil Company Aramco expressed interest in acquiring a major unit of Valvoline Inc (VVV) and animal-health technology firm Covetrus (CVET) agreed to a go-private transaction with two private equity firms; prior to these announcements, VVV shares had traded as much as 28% lower in 2022 and CVET shares had declined approximately 25% in 2022. One of the many aspects of investing in the public equity markets we at North Star like is the valuation transparency that instantaneous mark-to-market stock prices and S.E.C. financial filings continuously provide; this transparency can reveal that stocks have reached a point of being too cheap to ignore… given rising M&A activity, it seems some investors believe that is the case. We see many companies valued at levels that go-private transactions may make sense, so an even further acceleration in acquisition announcements would not surprise us.
Turning to the Chicago sports scene, the Cubs and the White Sox split games against each other over the weekend. My analysis concludes that the Sox still have a reasonable chance of making the playoffs, while Cubs fans are fortunate in that they are accustomed to having fun at Wrigley Field regardless of outcome of the game.
Sanctions Sustain
The markets were closed on Monday in observance of the Memorial Day holiday.
The European Council scheduled a special meeting for Monday and Tuesday the European Council in response to Russia’s invasion of Ukraine. Oil prices jumped Tuesday morning after European leaders came to an agreement to ban 90% of Russian crude by the end of 2022. OPEC is also scheduled to meet, although no significant production changes are anticipated. Following this morning’s jump in oil prices, the equity and bond markets had a soft opening to kick off the shortened week.
Key economic reports due to watch include updates on construction spending, factory orders, U.S. auto sales and the May jobs report. Recent data has indicated that while the economy has remained strong, there has been has modest softening. In that regard, the jobs report will be of particular importance, with a forecast that 329K jobs were added during the month, down from the 428K job adds in April. Any cooling off of the jobs market would ease the pressure on the Fed to aggressively tighten monetary policy.
We would also encourage further M&A activity, particularly in the shares of some of the terrific bargain-priced positions in the North Star Funds.
Stocks on the Move
+12.5% The Blackstone Group Inc (BX) operates as an investment company. The Company focuses on real estate, hedge funds, private equity, leveraged lending, senior debts, and rescue financing. Last week, Blackstone director James Breyer disclosed a $1M share purchase. Additionally, the Company priced €500M of 3.5% senior notes due 2034.
+12.0% JPMorgan Chase & Co (JPM) provides global financial services and retail banking. The Company provides services such as investment banking, treasury and securities services, asset management, private banking, card member services, commercial banking, and home finance. JPMorgan boosted net interest income guidance due to the Fed’s hawkish tone and loan growth.
+11.9% Movado Group Inc (MOV) designs, manufactures, retails, and distributes watches, as well as jewelry, tabletop, and accessory products. Its brands include Movado, Hugo Boss, Lacoste, Ferrari, Coach, and Tommy Hilfiger. Movado reported strong results last week with FQ1 non-GAAP earnings of $0.82 per share beating consensus estimates by $0.36 per share, and quarterly revenue of $163.4M (+21.2% y/y) beating estimates by $19.4M. The company saw moderate US sales growth during the quarter, and exceptional international growth. Wholesale revenues showed strength, and the company is not experiencing any major supply chain disruptions with product lead times remaining normal.
+12.1% Valvoline Inc (VVV) manufactures and distributes automotive lubricants and chemicals. The Company produces motor oil, anti-freeze, brake fluid, and grease products. Saudi Arabia ARAMCO approached Valvoline about acquiring its Global Products business. VVV has been publicly saying for about a year that the company is searching for strategic alternatives for its Global Products business. That segment has steady free cash flow generation but tends to be volatile. Valvoline sees the most potential in its Retail Services business which has room for both organic and acquisitive growth.
+10.6% Boot Barn Holdings Inc (BOOT) sells western and work gear for individuals and families. The Company sells boots, jeans, shirts, hats, belts, jewelry, and other accessories. There was no significant company news last week.
+11.0% CarParts.com Inc (PRTS) retails automobile parts online. The Company offers mirrors, engines, headlights, brakes, interior and exterior accessories, tools, wheels, lighting, bumpers, and other aftermarket autobody parts in its network of over 1.2 million SKUs. There was no significant company news last week.
+10.3% Evolution Petroleum Corporation (EPM) explores for and produces oil and gas. The Company focuses on acquiring established oil and gas fields and applying specialized technology to increase production rates. There was no significant company news last week.
+10.9% PetMed Express Inc (PETS), doing business as 1-800-PetMeds, operates as a pet pharmaceutical company. The Company provides prescription and non-prescription pet medications, as well as health and nutritional supplements. There was no significant company news last week.
+10.8% Resources Connection Inc (RGP) is a professional services firm. The Company provides accounting and finance, human resources management, and information technology professionals to clients on a project-by-project basis. Resources assists its clients with discrete projects requiring specialized expertise, compensation program designs, and transitions of management information system. There was no significant company news last week.
+11.9% 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, Honeywell, XTRATUF and licensed brand Michelin. There was no significant company news last week.
+15.2% Duluth Holdings Inc (DLTH) is a growing lifestyle brand of men’s and women’s casual wear, workwear, and accessories primarily solid through its own omnichannel platform. There was no significant company news last week.
+15.9% Hamilton Beach Brands Holding Company (HBB), through its subsidiaries, markets and designs electric household and specialty houseware appliances, as well as commercial products for restaurants, bars, and hotels. There was no significant company news last week.
+17.0% Napco Security Technologies Inc (NSSC) manufactures electronic security devices, fire detection products, access control systems, and digital lock equipment used in residential, commercial, institutional, and industrial installations. There was no significant company news last week.
The stocks mentioned above may be holdings in our mutual funds. For more information, please visit www.nsinvestfunds.com.