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Kuby’s Commentary

Resilient. Week 3

Jun 18, 2018

Last Week:

Once upon a time, a long time ago, in February and March, the market declined, and volatility spiked over concerns of a trade war and tightening monetary policy. Last week Investors (traders?) displayed tremendous resilience to those concerns. On the heels of the previous weekend’s disastrous G-7 summit, which threatened the NAFTA talks, on Friday the U.S. imposed tariffs on $50 billion of goods from China, which immediately said it would retaliate in kind. On Wednesday the Federal Reserve raised interest rates and indicated that it was now likely that there would be two more rate hikes this year instead of one. The market shrugged, as the S&P 500 gained a fraction and the Russell 2000 continued to outperform, rising 0.68%. The yield on the Ten-Year Treasury ticked down 1 basis point to 2.92%, while the VIX (the so called “fear index”) declined 1%. I had an interesting exchange with a brilliant investor who wondered why I mentioned the VIX in last week’s block, given the fact that I don’t think it has any predictive value. The VIX provides us with a reading on how much demand there is for short-term protection against a market downturn, analogous to buying property insurance on the coast during hurricane season. If insurance premiums are low, that indicates the consensus that a storm isn’t going to hit the mainland. The current low level of the VIX tells us that the market believes that neither the “trade war” nor the tightening fed policy will damage the economy in the short-run. That complacency makes us feel incrementally more cautious, albeit still positive on the market given the strength of the economy, the robust corporate earnings, and the still very low level of interest rates.

I hope everyone had an enjoyable Father’s Day weekend. A special greeting to my dad, R.J. Kuby (86 years old), who thrilled his grand-daughters by draining a free-throw on Sunday during a spirited game of HORSE.

This Week:

The economic calendar is light, with various housing data reports Monday through Thursday, and the flash PMI on Friday. OPEC is scheduled to meet on Friday, which will likely have some impact on the Energy sector. Trade issues will remain in focus, as the possibility of an escalation of tariffs remains a very real concern.

Stocks on the Move:

Orion Energy Systems, Inc. (OESX) +24.4%: Multiple insider purchases triggered a nice bounce in the Company’s shares off of a depressed multi-year low price. Orion Energy Systems researches, develops, designs, manufactures, markets, sells and implements energy management systems consisting of energy efficient commercial and industrial interior and exterior lighting systems and related services. OESX is a .6% position in the North Star Micro Cap Fund and a 1.5% position in the North Star Opportunity Fund.

Salem Media Group, Inc. (SALM) +11.3%: Zacks Equity Research identified the Company as a “top value stock pick”. According to their write up, “SALM may be an interesting play thanks to its forward PE of 12.5, its P/S ratio of 0.4, and its decent dividend yield of 6.5%. These factors suggest that Salem Media Group is a pretty good value pick, as investors have to pay a relatively low level for each dollar of earnings, and that SALM has decent revenue metrics to back up its earnings.” Salem Media Group is a domestic multimedia company with integrated operations including radio broadcasting, digital media, and publishing. The Company has three operating segments, Broadcast, Digital Media, and Publishing. SALM is a 1.7% position in the North Star Dividend Fund and SALM corporate bonds are a 2.5% in the North Star Bond Fund.

Motorcar Parts of America, Inc. (MPAA) -12.5%: Adjusted net sales for the fiscal 2018 fourth quarter increased 7.8 percent to a record high $123.8 million from $114.9 million a year earlier. Adjusted net income for the fiscal 2018 fourth quarter was $10.9 million, or $0.56 per diluted share, compared with $11.3 million, or $0.58 per diluted share, a year earlier.  Adjusted net income for the quarter includes the negative impact of a one-time excess customer freight surcharge allowance and less proceeds from scrap sales due to lower prices compared with the prior year. “We achieved record sales for the fiscal year, despite the impact of widely reported negative industry dynamics,” said Selwyn Joffe, chairman, president and chief executive officer. Motorcar Parts of America is a manufacturer, remanufacturer, and distributor of aftermarket automotive parts for import and domestic cars, light trucks, heavy duty, agricultural and industrial applications. MPAA is a 2.1% position in the North Star Micro Cap Fund and a 1.7% position in the North Star Dividend Fund.

Brooks Automation, Inc. (BRKS) +15%: The Company’s shares continued to rally after posting record results last month. Brooks Automation is a provider of automation and cryogenic solutions for multiple applications and markets. The company serves the semiconductor capital equipment market and sample management market for life sciences. Both the life sciences and technology markets are very much in favor right now amongst investors, which could be contributing to the momentum in the stock price. BRKS is a 2.0% position in the North Star Dividend 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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