November got off to a shaky start with the S&P 500 slipping 3.4%, the Nasdaq nosediving 5.7%, and the Russell 2000 retreating 2.6%. Almost the entire decline came in the last hour of trading on Wednesday, courtesy of Fed Chair Jerome Powell’s press conference. The Chairman’s ultra-hawkish tone contrasted to the official Fed statement, which suggested that future interest rates would be data-dependent and recognized the lag in the effects on the economy of the cumulative rate hikes that have already been implemented. The market erased some of the losses on Friday following the October jobs report which showed decelerating wage gains and a rise in the unemployment rate, while still registering a healthy gain in monthly nonfarm payrolls. Treasury rates increased across the curve, with the 10-year rising 15 basis points to 4.16% and the 2-year jumping 25 basis points to 4.66%, thus expanding the recession-signaling inversion to 50 basis points. The Dollar held steady, while among commodities Gold gained 2% and Crude Oil rose over 5%. Among equity sectors, only the Energy sector finished positive for the week, with the Technology sector suffering the worst decline at 9%.
Third quarter earnings season continued to progress without much fanfare, with the S&P 500 on track to post modest profit growth of 2.2%, up a tick from the previous week. Forward guidance for the fourth quarter, on the other hand, trended lower, and now suggests a 1.0% decline in earnings versus a forecast of 3.9% at the end of September and 9% at the end of June. Winter is coming, both literally and figuratively, but we believe the 20% decline already incurred in the stock market reflects the upcoming economic chill.
On the Chicago sports scene, Justin Fields set an NFL rushing record during the Bears 37-34 loss to the Dolphins. The Bulls are 5-6, the Blackhawks 5-5-2, and the Bears are now 3-6. The undefeated University of Chicago Maroons basketball team opens their season versus Lake Forest College this Thursday night.
Another Inflation Reading
Earnings season will wind down, with 30 S&P 500 companies reporting results for the third quarter.
The midterm elections are on Tuesday, the outcome of which likely will have significant implications, but apparently only a minor impact on the financial markets. Very few companies have even mentioned the elections during their quarterly conference calls.
The Consumer Price Index release on Thursday, on the other hand, will certainly be a major focus for stock and bond traders. Economists forecast an 8% year-over-year increase in October, down from 8.2% in September. Used car pricing and home prices have certainly cooled, but those factors may not show up in the data yet; we continue to expect slowing inflation data in the coming months, aided by both cooling input costs and easier comparisons to late 2021 and early 2022.
On Friday, the University of Michigan releases its Consumer Sentiment Index for November, with a consensus reading of 59.7, roughly unchanged from the previous month. Within that report, consumers’ expectations for inflation will also be of interest.
Stocks on the Move
Movers with news…
-17.9% Turtle Beach Corporation (HEAR) jumped up 22% on a third quarter earnings beat before reversing course and ending the week down almost 18%. In their earnings call, the Company attributed its 39% sales decline to lower consumer spending and continued retailer inventory reduction.
-17.5% The Container Store Group Inc (TCS) reported fiscal 2022 second quarter non-GAAP earnings of $0.27 per share and revenue of $272.6M which missed estimates by almost $9M. Despite being on track with its longer-term growth strategy, the Company announced it would be withdrawing its fiscal 2022 guidance due to sustaining macro challenges. Full-year results are anticipated to be not too far off from original expectations of $1.125B in net sales, low single digits SSS growth, and $1.14-$1.24 in GAAP earnings. Additionally, TCS has $25M remaining under its $30M share repurchase plan.
+16.6% Rocky Brands Inc (RCKY) rebounded from a streak of challenging quarters, reporting third quarter non-GAAP earnings of $0.75 and revenue of $147.5M which beat by $0.58 and $6.6M, respectively. While sales are anticipated to be down in the fourth quarter, the Company is hyper focused on reducing inventory by $40M at the end of 2022. North Star is modeling RCKY to do $620M in revenue for 2023, characterizing it as a normalized “base year.”
-18.9% Otter Tail Corporation (OTTR) reported a Q3 beat last week on both an earnings and revenue basis; however, the Company narrowed its FY22 outlook to the lower end of the original range mainly due to a reversal in favorable PVC pipe pricing. Otter Tail Power, the electric utility component of the business, continues to perform well, and the Company announced plans for continued investment in its wind power operations.
+19.7% LSI Industries Inc (LYTS), equity research analyst Brooke Kuby’s top stock pick for this year, reported fantastic FY23 first quarter earnings per share of $0.22 and net sales of $127.1M, up 20% y/y. The strong results were attributed to strategic execution on bundling lighting solutions, technical expertise, and leverage reduction. LYTS continues to grow its backlog and win new business.
+10.8% Innovative Industrial Properties Inc (IIPR) reported a solid beat with third quarter AFFO/share of $1.97 and revenue of $70.9M. These results were driven by newly acquired infrastructure. As previously disclosed, the REIT did not collect about $5.7M in rent from two tenants in CA during the quarter. IIPR continues to grow its portfolio of high-quality properties and serve the increasingly regulated cannabis industry.
-14.8% Paramount Global (PARA) slipped last week with third quarter results that slightly missed estimates, reporting earnings of $0.39 per share and revenue of $6.9B. While the platform continues to add subscribers and produce desirable content, North Star understands the overall market’s growing concern over slowed advertising revenue for all streamers. Paramount+ is expanding internationally during the fourth quarter, and investors hope to see a meaningful bump in subscription revenue.
-14.4% Zoetis Inc (ZTS) missed both top and bottom-line estimates in its third quarter earnings release with non-GAAP EPS of $1.21 missing by $0.03 and revenue of $2B missing by $80M. The Company also lowered its FY22 guidance implying continued supply constraints, veterinary workforce challenges, and foreign exchange rates to have a meaningful impact on its fourth quarter and full year results.
-12.9% Qualcomm Incorporated (QCOM) reported in-line fiscal fourth quarter earnings of $3.13 and a slight revenue beat with $11.4B in sales for the period. The choppy semiconductor industry continues to struggle with QCOM’s customers reducing their inventories which prompted the Company to revise its FY2023 guidance from an upper single digits volume decline to a low double digit percentage decline.
Movers with no significant news…
-13.4% Alphabet Inc (GOOGL)
-10.8% Apple Inc (AAPL)
-13.6% Amazon.com Inc (AMZN)
-10.5% Napco Security Technologies Inc (NSSC)
-20.3% Value Line Inc (VALU)
The stocks mentioned above may be holdings in our mutual funds. For more information, please visit www.nsinvestfunds.com.