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Kuby’s Commentary

Opportunities Knocking…Loudly

Jan 31, 2022

All about AAPL

The selling from the previous week intensified Monday morning with tech stocks bearing the brunt of the pain as the Nasdaq plummeted 4.90%. During afternoon trading all those losses plus another 0.6% were recouped, representing one of the biggest intraday reversals on record. Perhaps the rally was sparked by trader optimism that the Fed would take a less hawkish posture at Wednesday’s FOMC meeting given the recent economic challenges resulting from the Omicron surge. After all, the landscape  has changed dramatically since the December meeting and the minutes of which seemed to spark the recent unrest in the markets. Chairman Powell’s comments Wednesday afternoon clearly dispelled that notion, with the first rate hike almost a certainty in March, with four or five likely during 2022. Stocks nosedived the rest of Wednesday and bounced Thursday morning before heading sharply lower once again. After the market closed on Thursday, Brad Cohen, co-portfolio manager of the North Star Opportunity Fund (NSOIX), sent the following text message: “I feel like the whole market depends on AAPL earnings after the bell.” Indeed, Apple delivered phenomenal earnings, and despite another morning sell-off stocks ended on a high note Friday with a furious late rally to wrap up a roller-coaster week. The S&P 500 added 2.40% for its best session since June 2020 to finish the week +0.77%. The Nasdaq broke even for the week after surging 3.3% on Friday but remains on track for its worst month since the 2008 financial crisis. Small-caps continued to suffer with the Russell 2000 now down 12.33% for the month and 20% since it’s Nov.6, 2021 record high, after declining 0.98% during the week. As noted in our March 2021 White Paper there is a common misperception that small and micro-cap stocks are adversely affected by rising yields. The underlying logic is that rising borrowing costs may prove to be a big pressure point for these asset classes, as the Russell 2000’s corporate debt to total equity is relatively high. Looking back at data over the last 30 years, however, we discovered that there have been seven periods of varying durations where interest rates have increased. In all these instances, small and micro-cap stocks provided positive returns. We are in the eighth period now, and we believe many bargains have been created following the recent price declines.

Outside of Apple Inc (AAPL) other reports have been tasty, but not as delicious. Whereas 77% of companies have exceeded expectations, the magnitude of those earnings beats has only been 4% which is about half of the average over the last five years. Following those upward revisions, composite earnings growth for the quarter is on track to be 24.3% on 13.9% revenue growth. The outlook is for earnings growth over the next two quarters to slow considerably, as analysts expect earnings growth of 5.6% for Q1 and 4.3% for Q2.

Despite concerns over rising interest rates, the yield on the Ten-Year Treasury only inched up 3 basis points to 1.78%. The yield on the Two-Year Treasury increased 10 basis points to 1.18% continuing the recent trend of short-term rates rising more than long-term rates. This flattening of the yield curve merits monitoring, as it can signal increased risks of a recession. On Friday, the measure of U.S. inflation preferred by the Federal Reserve (the PCE) indicated a sharp increase of 5.8% in December from a year earlier underscoring the high wire act the Fed finds itself performing: trying to curtail inflation by raising short-term rates without causing a recession.

The chart above illustrates the much more dramatic percentage change in the yield on the Two-Year Treasury versus the change in the Ten-Year Treasury.

Fantastic sports action over the weekend! Nadal’s heroic performance at the Australian Open will go down in history as one of the greatest comebacks ever. The NFL playoffs have been amazing as well (In addition to his AAPL preview, Brad also picked the Bengals and the Rams as winners on Sunday).

Omicron’s Effect on Unemployment

Earnings season will be in full swing with 109 S&P 500 companies reporting results for the fourth quarter.

The highlight of the economic calendar will be Friday’s release of the January jobs report. The forecast is for a gain of 162,500 jobs in January with the unemployment holding steady at 3.9%, but the unknown effect of the surge in Omicron cases could have a major influence on the actual numbers. If employment proves to be much weaker, then the Fed’s balancing act will become even more difficult. Last month the gain in employment was less than half the forecasted number.

If the downward trend in new COVID-19 cases in the U.S. continues, that could also help provide support to the market, as the pandemic remains the primary cause for the twin concerns of higher inflation and slowing economic growth.

Whereas we generally avoid geopolitical commentary, an invasion of Ukraine by Russia remains a potentially destabilizing risk particularly to European economies.

Stocks on the Move

-20.5% Inc (FLWS) is an e-commerce provider of floral products and gifts. The Company’s product offerings include fresh-cut and seasonal flowers, plants, floral arrangements, home and garden merchandise, and gift baskets. Last week, reported FQ2 2022 earnings per share of $1.34 (missed by $0.45) and revenue of $943.0M (missed by $36.36M). Additionally, the company updated its FY2022 guidance to reflect EBITDA between $140.0M-$150.0M and earnings per share in the range of $0.90-$1.00 implying a net loss for both FQ3 and FQ4. The quarter’s shortfall came from lingering cost issues and an unfulfilled gift basket program with a big customer due to ongoing supply chain disruptions. On a positive note, there are numerous acquisitive opportunities in the space that are available for attractive values.

FLWS is a 2.1% position in the North Star Micro Cap Fund.

+10.1% GATX Corporation (GATX), short for General American Transportation Corporation, leases, operates, manages, and remarkets long-lived, widely used assets, primarily in the rail and marine markets. Last week, GATX announced significantly better than expected Q4 2021 earnings of $1.58/share and revenue of $321.0M. As a result of lower fleet churn, strong commercial performance, efficiency improvements, strong remarketing income, and strategic investment GATX is expected to earn between $5.50-$5.80 per share in FY2022. Additionally, the company raised its quarterly dividend 4% to $0.52/share.

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

+19.1% 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. LSI Industries posted FQ2 2022 earnings of $0.15/share (beat by $0.08) and strong revenue of $111.14M (beat by $14.63M), up 45.50% year-over-year. For the second consecutive quarter, sales exceed $100M and organic sales were up over 19.0% year-over-year. The company also disclosed its JSI business was awarded a $17.0M order from one of the nation’s largest grocery chains.

LYTS is 1.8% position in the North Star Dividend Fund.

+13.2% 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. Blackstone gained last week after Q4 2021 earnings per share of $1.71 were driven by “outstanding investment performance” and record fee-related earnings.

BX is a 5.0% position in the North Star Opportunity Fund.

-11.4% Advanced Micro Devices Inc (AMD) operates as a semiconductor company worldwide. Its products include microprocessors, chipsets, discrete and integrated GPUs, data center and professional GPUS, and development services. Semiconductor stocks were beaten-down last week after Intel Corp’s (INTC) fourth quarter 2021 results suggested earnings growth for chip makers will continue to be capped by supply chain constraints and longer lead times. AMD is confirmed to report its earnings on Tuesday, 02/01.

AMD is a 3.3% position in the North Star Opportunity Fund.

Mentioned But Not a Mover:

Apple Inc (AAPL) designs, manufactures, and markets personal computers and related personal computing and mobile communication devices along with a variety of related software, services, peripherals, and networking solutions. Apple products and services include iPhones, Mac computers and iPad tables, as well as the App Store, Apple Music, the Apple Watch, and other wearable devices. Apple has entered entertainment with the Apple TV+ streaming service.

AAPL is a 3.8% position in the North Star Opportunity 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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