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Kuby’s Commentary


Dec 17, 2018

Last Week:

Pessimism has taken root, as the impact of the “trade war” on global economies has become manifest. In a sporting contest there is usually a winner and a loser. You strategize to beat your opponent. Global trade is not a sporting contest. Quite to the contrary, you want your trading partners’ economies to be robust, so that they can buy more of your goods, and produce the goods they sell you efficiently. On Friday, China released November economic data that fell short of expectations. President Trump gleefully reacted to that news with the following tweet:

‘China just announced that their economy is growing much slower than anticipated because of our Trade War with them. They have just suspended U.S. Tariff Hikes. U.S. is doing very well. China wants to make a big and very comprehensive deal. It could happen, and rather soon!’

The market reacted less enthusiastically, as a sharp sell-off left the S&P 500 down 1.26% for the week with the Russell 2000 posting an even worse 2.57% decline. The yield on the Ten-Year Treasury held steady at 2.89%, while the Dollar inched back up to its annual high.

The losses in the market have clearly taken a toll on the psyche of the individual investor, as 48.9% of respondents to the latest sentiment survey called themselves bearish, the worst reading in 5 ½ years. The downward pressure seems to be exacerbated by both tax loss selling and trading algorithms. Momentum is a fickle friend for people, but computers can easily recognize that there are more aggressive sellers than buyers and simply pile on to the trend.

The short-term bullish case would be that the tax loss selling only has a few weeks left for 2018, and any real progress on the trade front could create institutional buying in the equity markets, which in turn would change the math on the trading algorithms.  Longer term, we feel the recent steep sell-off provides better return investment return opportunities in our portfolio companies, as the median EV/EBITDA ratio has decline almost 25% over the last 3 months. Retail investors who pulled a record $39 billion out of stocks last week might benefit from reflecting on the wisdom of Warren Buffet as found in the Berkshire Hathaway 1987 annual letter, a parable which has helped us during these bouts of pessimism to weather the storm:

“Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.

Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him.

Mr. Market has another endearing characteristic: He doesn’t mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you.”

Mr. Market has been in an increasingly pessimistic since the end of September, but as is his nature, he will be euphoric again in the future. Unfortunately, the timing of those mood changes is very difficult to predict, and while he is depressed it’s easy to see the glass as half empty.

This Week:

The housing market, which has been showing signs of weakness, will be in focus with November housing starts out on Tuesday, expected to show a slight rise from the October level, and November existing -home sales out Wednesday, expected to be flat. Also on Wednesday, the FOMC will announce its interest rate decision, with a quarter-percentage point hike likely, and the “dot plot” perhaps reflecting fewer hikes in 2019 than the last hawkish outlook from the last meeting.

The China trade narrative will continue to influence the mood of the market. Any significant steps towards a resolution could turn the pessimists’ frowns upside down and trigger a Santa Claus rally.

Stocks in the News:

Blue Bird Corp. (BLBD) -10.2%: The Company reported record earnings and provided guidance calling for substantial growth in 2019 the previous week. In October, BLBD completed a tender for approximately 5% of its outstanding common stock at $28/share. Blue Bird s an American bus manufacturing company. The company operates its business in two segments; Bus and Parts segment. Its primary business it to manufacture and designs school buses. BLBD is a 1.42% holding in the North Star Opportunity Fund and a 3.32% holding in the North Star Micro Cap Fund.

Boot Barn Holdings, Inc. (BOOT) -16.7%: There was no news reported. Boot Barn Holdings operates specialty retail stores that sell western and work boots and related apparel and accessories. The Company operates retail locations throughout the U.S. and sells its merchandise via the Internet. BOOT is a 2.38% holding in the North Star Micro Cap Fund.

Collectors Universe, Inc. (CLCT) -12.3%: There was no news reported. Collectors Universe provides authentication and grading services to dealers and collectors of high-value coins, trading cards, event tickets, autographs and memorabilia. CLCT is a 1.93% holding in the North Star Micro Cap Fund and a 2.21% holding in the North Star Dividend Fund.

The Eastern Company (EML) -11.6%: There was no news reported. Eastern is a manufacturer and seller of industrial hardware, security products and metal castings. It operates in three business segments: Industrial Hardware, Security Products and Metal Products.  EML is a 3.33% holding in the North Star Micro Cap Fund.

Ecology and Environment, Inc. (EEI) +11.2%: There was no news reported. Ecology and Environment is an environmental consulting company. It offers professional services to clients in industry including energy, natural resource management & restoration, green programs, hazardous material services & health sciences. EEI is a 1.48% holding in the North Star Dividend Fund.

Lakeland Industries, Inc. (LAKE) -10.4%: The Company previously reported that its fiscal 2019 second quarter results were negatively impacted by expenses and delayed and/or lost revenues associated with inventory management for the North American operations during the inventory transition phase of the ERP implementation. Continued elevated expenses and challenges to revenues associated with the ERP implementation and spanning most processes throughout the North American operations and financial reporting are negatively impacting the financial results for the fiscal 2019 third quarter and to a lesser degree the fiscal 2019 fourth quarter results as management continues to resolve any remaining issues. Lakeland Industries manufactures and sells safety garments & accessories for industrial protective clothing market. It offers limited use / disposable protective clothing, chemical protective suits, firefighting & heat protective apparel etc.  LAKE is a 2.85% holding in the North Star Micro Cap Fund.

Lee Enterprises Inc (LEE) -11.0%: Reported earnings of $4.4 million for its fourth fiscal quarter ended September 30, 2018, or 7 cents per diluted common share. For the same quarter a year ago, earnings totaled $3.5 million, or 6 cents per diluted common share. For the fiscal year, earnings totaled $47.0 million, or 82 cents per diluted common share, compared to $28.6 million, or 50 cents per diluted common share, in the prior year, an increase of $18.4 million in the fiscal year. “We are pleased with the fourth quarter operating results,” said Kevin Mowbray, President and Chief Executive Officer. “Revenue was almost flat in the fourth quarter, driven by strong performance from local advertisers, significant revenue growth from TownNews, revenue from the BH Media Group management agreement, as well as an extra week of operations in 2018,” Mowbray added. Lee Enterprises is a premier publisher of local news, information and advertising in midsize markets, with 46 daily newspapers and a joint interest in four others, rapidly growing online sites. LEE is a 1.80% holding in the North Star Opportunity Fund and LEE corporate bonds are a 2.57% holding in the North Star Bond Fund.

Middlesex Water Co. (MSEX) +11.7%: Shares surged on heavy volume and no reported news. The Utility Index is trading at an all-time high. Middlesex is a water utility based in the U.S. state of New Jersey. It is engaged the business of collecting, treating, distributing and selling water for domestic, commercial, municipal, industrial and fire protection purposes. MSEX is a 3.25% holding in the North Star Dividend Fund.

Pioneer Power Solutions, Inc. (PPSI) +11.2%: The sale of Pioneer Custom Electrical Products to CleanSpark (CLSK), in which PPSI is going to receive 7 million shares and additional warrants to purchase shares in CLSK, is scheduled to close around December 31. Pioneer Power Solutions manufactures, sells and services a broad range of specialty electrical transmission, distribution, and on-site power generation equipment for applications in the utility, industrial, commercial and backup power markets. PPSI is a 2.72% holding in the North Star Opportunity Fund and a 1.58% holding in the North Star Micro Cap Fund.

Under Armour, Inc. (UAA) -19.0%: The Company presented a five-year plan for growth, that some analysts felt was disappointing. Under Armour is a developer, marketer and distributor of branded performance apparel, footwear and accessories for men, women and youth. It markets its products under the brand name of Under Armour, Heatgear, Coldgear, and Allseasongear. UAA is a 2.46% holding in the North Star Opportunity Fund and UAA corporate bonds are a 1.76% holding in the North Star Bond 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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