On Monday the market opened sharply lower, but reversed course after the Fed expanded its asset purchasing to include corporate bonds. Optimism over the Fed Put (let’s have a contest to come up with a catchier name) and a significantly better than expected surge in U.S. retail sales drove prices higher on Tuesday. Wednesday was a welcome quiet day in the market, but the increase in COVID-19 cases and hospitalizations in many states and the related decision by Apple to close stores in four states poured cold water on the rally later in the week. Nevertheless at the closing bell on Friday the S&P was still ahead by 1.86%, cutting its YTD decline to 4.12%.
The yield on the Ten-Year Treasury was virtually unchanged at 0.7%, while gold gained 0.75% to reach $1745.90/ounce, and crude oil continued to rally.
What to do? What to do? What to do?
Whereas the S&P 500 is trading at an elevated P/E multiple on an absolute basis, the spread of the earnings yield over the risk-free rate (using the Ten-Year Treasury) remains quite wide at 3.62%. We believe there are even better investment opportunities in non-index stocks, particularly the out-of-favor small-cap value companies. Gold also seems attractive, based on the enormous increase in government debt around the globe. Longer-term bonds seem to have significant price risk, but bond funds with shorter durations, such as VFSUX (Vanguard Short-Term Investment Grade Fund) and our very own NSBDX (North Star Bond Fund) offer reasonable monthly income and less price exposure to rising rates.
The mega-tech heavy Nasdaq 100 has recently made new record highs and is up 14.6% in 2020. These stocks look very expensive, but the underlying businesses are benefiting from the shifts in economic activity towards the internet that have accelerated during the pandemic. I think if the economy rebounds and interest rates increase then this group will be vulnerable to profit taking. In other words, I wouldn’t be adding to these companies at this stage.
There has been a surge in trading activity in very speculative shares. Buying historically thinly traded low-priced stocks because their price is rising on extraordinarily high trading volume is a very dangerous game. You don’t want to be without a chair to sit in when the music stops.
The economic calendar is pretty busy, with the May durable goods report on Thursday and personal income and spending on Friday of interest. The continuum of COVID-19 news and the responding additional government support programs will remain front and center. The recent developments contain encouraging and discouraging signals. On the one hand, cases are on the rise with seven states reporting single-day record number of cases on Saturday, and nationwide there has been a 15% increase over the last two weeks. On the other hand, there were 267 new deaths reported on Sunday, the lowest number since the early days of the pandemic. By way of reference, on April 21 there were 2,693 new deaths reported, or ten times more than yesterday’s total.
Stocks on the Move:
It was nice to see that the companies with the biggest percentage changes were reacting to actual company news, rather than sector-driven basket trading.
HEAR +27.6%: Turtle Beach Corp is a gaming audio and accessory brand offering a broad selection of gaming headsets for Xbox, PlayStation, and Nintendo consoles, as well as for PC, Mac, and mobile/tablet devices. The Company raised its sales outlook for Q2 far above Wall Street’s expectations to a range between $74 million and $77 million. Analysts polled by Capital IQ had projected $43.8 million. “Consumer demand for both console and PC gaming headsets and accessories has remained stronger than expected,” and the company has been able to further increase supply, CEO Juergen Stark said in a statement. HEAR is a 5.11% holding in the North Star Micro Cap Fund and a 1.01% holding in the North Star Opportunity Fund.
ABM +21.1%: ABM Industries is a provider of integrated facility solutions. It offers its solutions through five segments: business and industry, aviation, technology and manufacturing, education, and technical solutions. The company derives the majority of its revenue from the business and industry segment, which encompasses janitorial, facilities engineering, and parking services for commercial real estate properties and sports and entertainment venues, as well as vehicle maintenance and other services to rental car providers. The Company reported earnings that significantly exceeded analyst expectations and declared its normal quarterly dividend. Scott Salmirs, President and Chief Executive Officer of ABM Industries commented, “Very shortly following the announcement of our first quarter results, the COVID-19 pandemic spread rapidly throughout the country and the world. We immediately mobilized to respond to the critical needs of our clients while focusing on protecting our team members. As an essential service provider, we have been called on to keep customers’ facilities safe and sanitized and the response has been overwhelming.”
Mr. Salmirs continued, “The underlying profit and margin performance we achieved during the second quarter illustrates our ability to rapidly and effectively deploy our services to meet the heightened demand across our diversified end-markets. We leveraged our variable business model to adapt to an ever-changing operating environment that uniquely impacted each of our industry groups as client demands modulated up and down throughout the quarter. I have never been prouder of ABM’s ability to rise to a challenge that has impacted our team members and our clients so deeply. Our best-in-class execution, and status as a trusted advisor to our clients, continue to differentiate us.” ABM is a 1.31% holding in the North Star Dividend Fund.
CLCT + 23.5%: Collectors Universe Inc provides authentication and grading services to dealers and collectors of coins, trading cards, event tickets, autographs and historical and sports memorabilia. The company generates revenues principally from the fees paid for its authentication and grading services. Hedge fund Alta Fox nominated a new slate of directors stating “CLCT shares are materially undervalued”, blaming mostly “the complacency that exists on the board.” It also cited “inadequate shareholder engagement, poor capital allocation, and a lack of digital innovation.” CLCT is a 3.82% holding in the North Star Dividend Fund and a 3.49% holding in the North Star Micro Cap Fund.
I hope everyone had an enjoyable Father’s Day holiday. Exercising an abundance of caution, we opted to celebrate virtually on Zoom (an excellent example of a technology company with a great business and a very elevated share price). I look forward to next year in Hyde Park in person. I did get to see two of my three children and my granddaughter (wow) in person, so the glass was at least half full.