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Kuby’s Commentary

Rising Prices

Apr 19, 2021

Last Week:

The U.S. economic data and corporate earnings reports clearly indicated a strengthening recovery, along with new signs of mounting inflationary pressures.

Retail sales surged 9.8% in March compared to the prior month, its steepest increase since May last year, when the retail sector rebounded from the early spring shutdowns across the nation. US jobless claims plunged to 576,000 last week, their lowest level of the COVID-19 pandemic, and far lower than the consensus forecast expected of 700,000 claims. On the earnings front, a record number of companies are beating estimates by a record amount, leading to the strongest growth in over a decade. The blended earnings growth rate for the first quarter increased to 30.2% from an expected earnings growth rate of 24.6% the previous week. Positive earnings surprises reported by companies in the Financial sector were mainly responsible for the improvement in overall earnings for the index during the past week. The near-term future for year-over-year results looks even brighter, as we will be lapping the pandemic shutdowns.  Analysts now project double-digit earnings growth for the remaining three quarters of 2021, with earnings growth expected to peak in the June quarter at 54.6%. The forward 12-month P/E on those record projected earnings is a very lofty 22.5.

Retail inflation for March came in hotter than expected, but apparently not hot enough to burn bond investors, as yields in the Ten-Year Treasury actually declined 10 basis points to 1.57% during the week.  The headline CPI rose 0.6% for the month and was up 2.6% year over year. The core rate rose 0.3%, up 1.6% year over year. In the same vein as with earnings, we think that over the next few months the year-over-year inflation numbers will appear to be large because the comparable 2020 months were at the heart of the economic shutdown, and with the additional cost pressures coming from the current supply chain shortages. In our recent conversations with the management teams of our portfolio companies, they almost all indicated they are experiencing cost pressures which they plan on passing on to the consumers of their goods and services.

“Party on traders!”

Market participants seem unconcerned with those inflationary risks, or any risks for that matter. As evidence, the VIX (traditionally viewed as the “fear” index, but possibly a “complacency” index too) sank 2.6% to its lowest level since the pandemic hit in February 2020.

The S&P 500 once again set new records, gaining 1.4%, its sixth weekly gain out of the last seven. The forward P/E ratio on the S&P is 22.5. The Russell 2000 gained 0.6%, as small caps remained out of favor despite the very strong economic data.  This is somewhat surprising given the U.S. domestic nature of small-cap equities relative to larger cap equities, especially in light of quite ominous Covid case trends outside the United States relative to inside the U.S.

Speaking of small caps, our podcast, the North Star InvestCast, just released a series titled the “Small Cap Bootcamp.” Our most recent episode defining the universe and analyzing the Financial Sector can be found on our website.

The dollar slid 0.6%, while gold gained 2%. Coinbase (COIN) started trading on Wednesday and reached a market capitalization of $100 billion, or 80-times revenue (there are no profits). That valuation equaled the Nasdaq (NDAQ) and Intercontinental Exchange (ICE, which owns the NYSE) combined. Bitcoin reached a record $64,800 on Wednesday but fell steeply over the following days and over the weekend to reach a three-week low. Other altcoins such as ether, polkadot, litecoin, ripple, and dogecoin, also declined sharply from their recent frenzy highs. In response to these uncertain market conditions, the launch of kubycoin has been suspended.

This Week:

Earnings season kicks into full gear, with 81 S&P 500 companies scheduled to report results for the first quarter.

The economic data calendar is pretty light, with Thursday’s releases on existing home sales and initial claims for unemployment probably in focus. The ECB will also be announcing its monetary policy decision on Thursday. The central bank is expected to keep short-term rates at negative 0.5%.

COVID-19 cases, variants, and vaccine news will remain the most important variables. The recent global trends have been troubling, and the surge in several U.S. states, most notably Michigan, is alarming. The good news is that 25% of Americans have now been fully vaccinated. The bad news is that a record 5.2 million people globally were diagnosed with Covid-19 last week, with the worst outbreaks coming in India and Brazil.

Stocks on the Move:

-10.5% 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. There was no significant company news last week; this morning, the Company announced the appointment of Yie-Hsin Hung as a new director. Huang currently serves as the CEO of New York Life Investment Management.

HEAR is a 4.4% position in the North Star Micro Cap Fund.

-10.2% 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 news last week, although the company did upload its Form 10-K on April 15th.

BBW is a 1.0% position in the North Star Micro Cap Fund.

+10.0% Hamilton Beach Brands Holding Company (HBB), through its subsidiaries, markets and designs electric household and specialty houseware appliances, as well as commercial products for restaurants, bars, and hotels. There was no significant news last week.

HBB is a 1.0% 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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