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Kuby’s Commentary

Rally, Rinse, Repeat

Feb 16, 2021

Last Week:

In the Kuby’s Commentary version of “Rally, Rinse, Repeat,” we once again report that the market set new record highs, the economic data was mixed, the battle with COVID-19 raged on, and the politicians were mired in debate over the size and scope of additional stimulus.

True to the script for another week, all the major stock averages advanced, with small-cap Russell 2000 index leading the charge with a gain of +2.51%, and the S&P 500 +1.23%.

In economic data, there was another week of elevated new claims for unemployment at 793,000 versus 204,000 in the year-ago period. Additionally, consumer sentiment softened to its lowest level since August, with most of the decline coming from a drop in economic expectations to a level of 69.8 versus 92.1 pre-pandemic. Households with incomes under $75,000 experienced the largest decrease, as fatigue set in over the promise and timing of additional stimulus. As the bill currently stands there could be $1.9 trillion additional government programs by the beginning of the spring.

The COVID-19 numbers did show noticeable improvement, with new cases down 56% over the last month on a seven-day average, and hospitalizations down 38%. Perhaps most importantly, the vaccination rollout is accelerating with approximately 10% of the population now having a shot in the arm (thankfully including my parents, who got their second shot last week and will likely be back on the museum circuit shortly)

As shown in the table below, another bright spot has been that corporations are reporting higher earnings for the fourth quarter today relative to expectations at the end of last week and expectations at the end of the quarter. The blended earnings growth rate for the fourth quarter to date is 2.9%, compared to an earnings growth rate of 1.8% as of last week and an expectation for a fourth-quarter year-over-year earnings decline of -9.3% at the end of the fourth quarter. Positive earnings surprises reported by companies in the Financials, Information Technology, and Communication Services sectors have been the top contributors to the overall increase in earnings for the index since the end of the fourth quarter. If 2.9% is the actual growth rate for the quarter, it will mark the first time the index has reported year-over-year earnings growth since the fourth quarter of 2019, and it will mark the highest year-over-year earnings growth reported since the fourth quarter of 2018. It will also mark the second quarter in a row when earnings exceed the original consensus forecast double digits! The magnitude of these missed forecasts would be as if the weatherman predicted sub-zero temperatures, but when you venture out it is 50 degrees and sunny instead.

As Of: 12/31/20 2/8/21 2/15/21

4Q20 S&P E.P.S. Growth Expectations

-9.3% +1.8% +2.9%

The cannabis stocks were the focus of the social media trading mania this past week, with MJ (ETFMG Alternative Harvest) flying 42% higher early in the week before coming down to a 5% gain by Friday’s close as the buzz wore off. My new theory is that some organized group of teenagers from the 1970s is behind the frenetic trading in these stocks. Movie theaters, video games, stereo headphones, pot companies? Does not seem random to me. Coincidentally (?) Playboy (PLBY) is going public through a SPAC this week.

Outside of equities, the other markets were quiet. The yield on the Ten-Year Treasury rose 3 basis points to 1.20%, its highest level since the pandemic hit. The dollar declined fractionally, while gold inched up.

This Week:

The markets were closed Monday in observance of Presidents Day.

Earnings season winds down with 51 S&P 500 companies reporting results for the fourth quarter.

On Wednesday the Producer Price Index for January will be released by the BLS. We believe this inflation gauge is worth monitoring since higher producer prices often lead to higher consumer prices. Expectations are for a 0.4% rise; a significantly higher reading would undermine the Fed’s easy money policies that will likely be the essence of the FOMC January minutes which will be released the same day. Also, on Wednesday the Census Bureau reports retail sales for January. Expectations are for a modest rebound following a dip in December.

Stocks on the Move:

+15.9% Turtle Beach Corporation (HEAR) operates as a sound technology company. The Company designs and markets audio peripherals for video game consoles, personal computers, and mobile devices. Last week, Turtle Beach announced strong preliminary fourth-quarter results that beat the average analyst estimates. The Company sees earnings per share between $0.73 and $0.82 compared to a consensus of $0.47 and EBITDA between $21M and $23M compared to $16.6M in last year’s quarter. The stock also benefitted from the news of record videogame sales in the holiday season. HEAR is a 6.2% position in the North Star Micro Cap Fund and a 2.9% holding in the North Star Opportunity Fund

+20.7% Delta Apparel Inc (DLA) designs, markets, and manufactures branded and private label active and headwear apparel. The Company’s products are sold to boutiques, department stores, outdoor and sporting goods retailers, college bookstores, screen printers, and the US military. DLA announced first quarter earnings per share of $0.28, which beat by $0.22, and revenue of $94.72M, which beat by $0.62M. DLA is 0.8% position in the North Star Micro Cap Fund.

-16.0% Blue Bird Corporation (BLBD) designs and manufactures school buses and commercial buses for school districts, large national fleets, businesses, government agencies, and non-profit organizations. Last week, the Company announced first quarter earnings per share of -$0.06, in-line, and revenue of $130.4M, which missed by $2.8M.  BLBD is a 1.5% position in the North Star Micro Cap Fund.

+20.6% Napco Security Technologies Inc (NSSC) manufactures electronic security devices, fire detection products, access control systems, and digital lock equipment used in residential, commercial, institutional, and industrial installations. The Company announced second quarter earnings of $0.17 per share, which beat by $0.05, and revenue of $27.21M, which bet by $2.89M. NSSC is a 1.5% position in the North Star Micro Cap Fund.

+18.7% Build-A-Bear Workshop Inc (BBW) is an interactive and entertainment mall-based retailer that invites guests of all ages to create their own customized stuffed animals with clothing, shoes, and accessories through a bear-making process. There was no significant company news last week. BBW is a 1.0% position in the North Star Micro Cap Fund.

+12.2% Lakeland Industries Inc (LAKE) manufactures and distributes protective work clothing. The Company offers disposable, chemical, cleanroom, hand, arm, fire, and heat protective clothing for on-the-job hazards, toxic-waste cleanup, and industrial work. There was no significant company news last week. LAKE is a 1.5% position in the North Star Micro Cap 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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