Mega-cap tech stocks carried the S&P 500 to a new record high, with Apple accounting for 60% of the 0.7% weekly gain. The tech-heavy Nasdaq composite jumped 2.65% and is now up 26.07% for 2020. The breadth of the market needed a tic-tac as decliners outnumbered advancers by almost 2-1. The Russell 2000 declined -1.61%, as small stocks remained -6.95% year-to-date. The impasse over further Federal coronavirus relief continued, with speculation mounting that no help will be coming from Washington prior to the election in November. The economic reports were mixed with strong existing home sales and robust PMI composite flash print, but an increase in the weekly initial claims for unemployment. Crude oil slipped 1.3%, pushing the energy stocks down 6.19%. The dollar index rose 0.5% off its multi-year low. Gold was unchanged, however Berkshire Hathaway disclosed a $600 million position in mining company Barrick Gold, suggesting that legendary investor Warren Buffet had warmed up to the metal.
“Show me the money!” My favorite movie is the 1996 classic Jerry Maguire. If you have a single romantic bone in your body, you must tear up when Dorothy Boyd (Renee Zellweger) says to Jerry (Tom Cruise) “you had me at hello”. But I digress. Whereas Alphabet, Amazon, Apple, Microsoft, Netflix, Tesla, etc. are great companies, there still needs to be relationship between their valuations and the cash they produce. Apple now has a $2.13 trillion market cap. From now to eternity will the company generate $2.13 trillion in cash? They generated $58 billion in net income over the last 12 months. Amazon is valued at $1.65 trillion and generated $13.2 billion over the last 12 months. Remember there are 1000 billions in a trillion. Tesla and Netflix sport market caps of $382 billion and $217 billion respectively and have just recently turned a profit. “Help me help you”, be careful with falling in love with and over-concentrating your portfolios in these very pricey shares. It is likely that one day they will be valued based on their actual earnings, which might result in share prices for these companies significantly lower than today’s share prices. To a large extent the expanded multiples that these high-profile growth stocks are currently commanding are likely predicated on the extraordinarily low interest rates that are the cornerstone of the government policy response to the economic crisis caused by the pandemic. We actually never were able to exit the monetary measures that were employed to combat the financial crisis of 2008-2009. After more than a decade, investors are increasingly becoming comfortable with very low interest rates and the resulting very high P/E multiples on growth stocks. I’m not predicting when it will end, only that it will end.
We still believe that gold offers a good hedge to the inflation risk posed by the expansive monetary policy, and that small cap and dividend paying stocks offer a good balance to the popular but pricey market leaders.
Economic reports to watch next week include updates on consumer confidence, durable goods orders and second quarter GDP. On Tuesday, the Conference Board releases its Consumer Confidence Index for August with the expectation of a reading of 93.6 up slightly from July. That Index registered at 132.6 in February, very close to a record high, before plummeting to 85.7 in April. New orders for manufactured durable goods are forecasted to have risen 4.5% in July continuing to rebound, albeit at a slower pace than May and June. The consensus calls for no change in the -32.9% decrease in the annual rate for second quarter GDP. That decline would be the worst on record, far surpassing the 10% downturn in the first quarter of 1958.
The Federal Reserve’s annual retreat to Jackson Hole goes online this year with a symposium on “Navigating the Decade Ahead: Implications for Monetary Policy” set for August 27-28. It will be interesting to hear if there is a game plan other than trying to normalize policy while remaining data dependent.
The Virus will continue to dominate the narrative. CDC officials expect COVID-19 cases, hospitalization, and death numbers to trend better next week, while vaccine and therapeutic developments will capture the attention of investors (and everyone else).
Stocks on the Move:
BGSF -14.1%: BG Staffing Inc provides temporary staffing services to the Real Estate, Professional, and Light Industrial segments. The majority of the group’s revenue is derived from Professional relationships, connecting staffing to jobs in information technology, finance, and accounting partner projects. There was no significant company news this week. BGSF is a 1.96% holding in the North Star Opportunity Fund.
OESX +16.8%: Orion Energy Systems Inc is a developer, manufacturer, and seller of lighting and energy management systems. There was no significant company news this week. OESX is a 4.27% holding in the North Star Micro Cap Fund. OESX is a 4.14% holding in the North Star Opportunity Fund.
TGT +12.5%: Target is a leading American general merchandise retailer, offering a variety of products across several categories, including beauty and household essentials, apparel and accessories, food and beverage, home furnishings and décor, and hardlines. Most of Target’s stores are large format, averaging roughly 130,000 square feet. The company also has a significant e-commerce presence and owns Shipt, an online same-day delivery platform. Target reported terrific earnings last week with revenues up 24.7%, almost triple analyst expectations. TGT is a 2.35% holding in the North Star Opportunity Fund.
HEAR +14.1%: Turtle Beach Corp is a gaming audio and accessory brand offering a broad selection of gaming headsets for Xbox, PlayStation, and Nintendo consoles, as well as for PC, Mac, and mobile/tablet devices. The company’s portfolio includes gaming headsets, PC gaming headsets, PC gaming key boards, and other accessories that appeal to the shift to e-learning. According to Yahoo!Finance, Turtle Beach announced this week its July 2020 sales were the “highest July sales in history” which prompted the company to raise its outlook for 2020 from $224 million to $300 million. HEAR is a 5.71% holding in the North Star Micro Cap Fund and a 1.43% holding in the North Star Opportunity Fund.
LYTS +10.4%: LSI Industries provides corporate visual image solutions to the petroleum and convenience store industry. The company generates most of its revenue from the Lighting segment, which manufactures and markets outdoor and indoor lighting and lighting controls for the commercial, industrial, and multi-site retail markets. The Graphics segment manufactures and sells exterior and interior visual image elements related to signage, such as menu boards. This week, LSI Industries reported earnings in-line with estimates and declared a $0.05 dividend. LYTS is a 1.95% holding in the North Star Dividend Fund.