One of George Carlin’s best comedy routines was the insight from the Hippy Dippy Weatherman that the forecast for tonight would be dark. With continued dark overnight with widely scattered light by morning. Over the past two months, market gurus have been forecasting progress on trade talks with China and an accommodative Federal Reserve. Like the sun rising and setting, for another week the trade and Fed narratives remained predictable, leading to a 0.61% rise in the S&P 500 and stability in the Ten-Year Treasury which settled unchanged at 2.66%. The entire gain in the market took place on Friday afternoon, perhaps triggered by news that the trade negotiations were going to extend into the weekend. Earnings season also proceeded predictably (with the shocking notable exception of Kraft-Heinz), as the blended growth rate for the fourth quarter remained at 13.1%, and the outlook for first quarter earnings decline worsened to 2.7% from 2.4%. The economic data, such as durable goods and the PMI, also continued the trend of modest softness.
The market is now about 5% below its record high that was set before the collapse triggered by the stormy forecast of a hawkish Fed and a trade war with China. That forecast persisted for three months, and then shifted to the current outlook. My guess is that this current calm based on the predictable narrative has shelf-life of about one more month before the focus will shift to the health of the economy and corporate earnings.
Fed Chair Jerome Powell testifies before Congress on Tuesday and Wednesday giving investors an opportunity to evaluate the degree of the recent dovish tilt in policy. The delayed U.S. GDP data for the fourth quarter will be released on Thursday, with expectations of 2.5% growth down from 3.4% in the previous quarter. All eyes will be on the trade negotiations with China as the March 1 deadline is on Friday. (According to the New York Times, “Mr. Trump, in a tweet on Sunday, said he would delay a Friday deadline to increase tariffs on $200 billion in Chinese imports, citing “substantial progress” during a week of trade talks in Washington between American and Chinese officials.”) Earnings season will wind down, with 39 S&P 500 companies scheduled to report results. There are also many geopolitical wild cards in play that the market so far has ignored, such as the Brexit fiasco, the upheaval in Venezuela, and another meeting between President Trump and North Korean President Kim Jong Un.
Stocks on the Move:
The Kraft Heinz Co. (KHC) -26.7%: Kraft is the third-largest food and beverage manufacturer in North America behind PepsiCo and Nestle and the fifth-largest player in the world. Beyond its namesake brands, the combined firm’s portfolio includes Oscar Mayer, Planters, Ore-Ida, and Philadelphia. Outside of North America, the firm’s global reach includes a distribution network in Europe and emerging markets that drive around one fifth of its consolidated sales base, as its products are sold in more than 190 countries and territories around the world. On Friday, the Company reported disappointing results, reduced their dividend, and disclosed an SEC investigation. Given the stable nature of their business, the low valuation, and the endorsement of Warren Buffet whose Berkshire Hathaway owns 26.7% of the outstanding shares, we were shocked by this news and the stock price reaction. KHC is a 1.2% holding in the North Star Opportunity Fund.
NTN Buzztime, Inc. (NTN)+21.8%: NTN Buzztime Inc., delivers interactive entertainment and innovative dining technology to bars and restaurants in North America. It licenses its customizable solution that offers guests trivia, card, sports and single player games, nationwide competitions, and by offering self-service dining features including dynamic menus, touchscreen ordering, and secure payment. Another week with a double-digit move for NTN, without any specific news. As previously discussed, the Company is exploring its strategic alternatives with a wide range of possible outcomes. NTN is a 0.64% holding in the North Star Micro Cap Fund.
Owens & Minor, Inc. (OMI) -17.1%: Owens & Minor distributes consumable medical supplies to a variety of providers. The company distributes thousands of products produced by more than 1,200 suppliers to about 4,000 healthcare providers. Robert C. Sledd, Chairman and interim President and CEO, kicked off the quarterly conference call by saying “As we look forward, I’m very optimistic about Owens & Minor’s future. Yes, we have challenges in our distribution business, which we will discuss, but outside of distribution, our Company is growing and experiencing positive trends and we have many exciting opportunities as we move forward.” That optimism wasn’t shared by the market as the results for the fourth quarter fell short of expectations, and the company slashed its dividend, while providing guidance for 2019 that suggested the first two quarters would continue to be challenging. Rumors that OMI was exploring a sale of the company generated a small bounce in the shares. OMI is a 0.89% holding in the North Star Dividend Fund.
Lee Enterprises (LEE) +10.4%: Lee Enterprises Inc is a local news publication company in the United States. Its products include daily and Sunday newspapers, weekly newspapers and classified and few other specialty publications. Its products are used as a platform for advertising in the mid-size markets. Lee announced a $10 million stock repurchase plan and the acquisition of the content management system business from Boston-based GTxcel. Additionally, the Company is facing a proxy contest from activist Cannell Capital. LEE is a 1.53% holding in the North Star Opportunity Fund and LEE corporate bonds are a 2.53% holding in the North Star Bond Fund.
National CineMedia, Inc. (NCMI) +12.4%: National CineMedia Inc., is a holding company that operates a digital in-theatre media network across North America. The company displays ads in movie theaters, online, and through mobile video. NCMI reported fourth quarter results that exceeded expectations, and provided upbeat guidance for 2019. Commenting on the Company’s 2018 operating results and 2019 positioning, NCM President and Interim CEO Cliff Marks said, “Overall, it has been a good year for NCM. I’m pleased that we were able to grow our revenue for the year and finish out 2018 within our guidance estimates. We have made great progress on our strategy as we continued to introduce new Noovie Digital products to enhance our core business, paid down debt, strengthened our relationship with our exhibitor partners, and continued to pave the way for growth long into the future. With the first quarter already looking strong and an exceptional film slate coming up for the rest of the year, we continue to feel optimistic about 2019.” NCMI is a 1.96% holding in the North Star Dividend Fund, a 2.01% holding in the North Star Opportunity Fund, and NCMI corporate bonds are a 2.9% holding in the North Star Bond Fund.
Portfolio holdings are subject to change and should not be considered investment advice.
North Star Investment Management Corp. is the Advisor for the North Star Family Mutual Funds