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Kuby’s Commentary

Slightly Cold Porridge and a Pretty Hot Market

Jun 10, 2019

Last Week:

Since the end of September, Federal Reserve and Trade policies have been the two storylines that have influenced the mood on Wall Street. Simply stated, the market wants the Fed to lower interest rates and for tariffs to go away. As a result, slightly cold porridge is in favor, as soft economic numbers improve the chances of both of those outcomes. In this twisted reality show, the economic headwinds created by the “trade war” seem likely to pressure the Fed into lowering rates. In fact, there is now an 85.6% chance of a cut in the July meeting according to CME FedWatch. Federal Reserve Chairman Jerome Powell said on Tuesday that the central bank would “act as appropriate to sustain expansion”. On Wednesday private-sector employment data showed a steep drop in hiring, and on Friday Nonfarm payrolls for May came in well below expectations. The yield on the Ten-Year Treasury dropped another 6 basis points to reach the same yield of 2.08% that it offered before the Fed started raising rates two years ago. On the trade front, hopes for some progress with China at the G20 at the end of the month as well as a smattering of encouraging tweets about Mexico (no tariffs after all?) combined to support the thinking that there is method to this madness. In any event, enough optimism was generated to fuel a 4.4% rally in the S&P 500, erasing over half the decline from the previous month. As we approach the end of the first half of 2019 the report card would read well, with the market strong and rates dropping.

We all have short memories but let us not forget what the picture looks like going back to the end of September when these disruptions to international trade really took hold. This chart paints a less rosy picture of a global slowdown leading to lower interest rates and stagnant stock prices.

This Week:

Investors will be paying close attention to trade issues as the G20 approaches and as the on again off again Mexico tariff narrative shifts. U.S. inflation data will be out with PPI on Tuesday and CPI on Wednesday both expected to be tame. The University of Gottlieb (Michigan) Consumer Sentiment Index for June is expected to show a modest softening on Friday. Also, on Friday retail sales for May are forecasted to bounce back from a small decline in April.

Stocks on the Move:

Advanced Micro Devices, Inc. (AMD) +18.24%: Advanced Micro Devices designs and produces microprocessors and low-power processor solutions for the computer and consumer electronics industries. The majority of the firm’s sales are in the computer market via CPUs and GPUs.  Morgan Stanley hiked its rating on AMD stock from “underweight” to “equal weight” on Thursday, while it increased the price target from $17 to $28. According to Morgan Stanley analyst Joseph Moore, the chipmaker is likely to grow its market share in 2020 owing to its robust pipeline of products. AMD is a 2.37% holding in the North Star Opportunity Fund. AMD corporate bonds are a 2.69% holding in the North Star Bond Fund.

American Airlines Group, Inc. (AAL) +13.55%: American Airlines operates almost 7,000 flights per day to more than 350 destinations in 50 countries from hubs in Charlotte, Chicago, Dallas/Fort Worth, Los Angeles, Miami, New York, Philadelphia, Phoenix, and Washington, D.C. Investors were encouraged by significant insider buying in the Company’s shares, as well as the perceived easing of trade tensions. AAL is a 1.81% holding in the North Star Opportunity Fund.

BorgWarner, Inc. (BWA) +12.09%: BorgWarner is a Tier I auto-parts supplier that has two operating segments. The engine group makes turbochargers, emissions system components, timing chains, and other items that enhance fuel efficiency and reduce emissions. Engine group products have averaged about 70% of sales. Drivetrain group produces transmission and four-wheel-drive/all-wheel-drive system components that facilitate the distribution of engine torque to the wheels. The Company’s shares gained back most of its losses that had resulted from concerns over trade issues with Mexico. BWA is a 1.10% holding in the North Star Opportunity Fund,

Lazard LTD. (LAZ) +10.30: Lazard has a storied history that can be traced back to 1848. The company’s revenue is nearly equally split between financial advisory, such as acquisition and restructuring advisory, and asset management. There was no company specific news last week. LAZ is 1.82% holding in the North Star Opportunity Fund.

Orion Energy Systems, Inc. (OESX) +39.38%:  Orion Energy Systems Inc is a developer, manufacturer, and seller of lighting and energy management systems. The Company reported a 49% increase in fourth quarter revenues and gave guidance for over 100% growth in their current fiscal year ending March 31,2020. Mike Altschaefl, Orion’s CEO and Board Chair, commented, “Orion’s fourth quarter and full year FY 2019 operational improvements reflected solid execution in our national accounts channel, continued efforts building our energy service company (ESCO) and agent driven distribution channels along with realizing the benefits of cost discipline and significant operating expense reductions implemented in FY 2018.  OESX is a 3.44% holding in the North Star Opportunity Fund and a 1.54% holding in the North Star Micro Cap Fund.

Under Armour, Inc. (UAA) +13.60%: Under Armour develops, markets, and distributes athletic apparel, footwear, and accessories in North America and other territories. The Company’s shares continue to rebound, even if the Golden State Warriors aren’t. UAA is a 2.13% holding in the North Star Opportunity Fund.

Brooks Automation, Inc. (BRKS): +11.52%:  Brooks Automation Inc., is a United States-based company that is principally engaged in its semiconductor business. The company has two core business segments: Brooks Semiconductor Solutions Group, which primarily provides wafer handling robotics and systems, semiconductor contamination control solutions, cryogenic pumps and compressors, and support services; and Brooks Life Science Systems, which mainly provides automated cold-storage systems, sample management services, consumables, instruments and devices, informatics, and support services.

The Company participated in the Jeffries Global Health Care Conference last week. BRKS is a 2.58% holding in the North Star Dividend Fund.

Collectors Universe, Inc. (CLCT): -12.12%: Collectors Universe Inc., provides authentication and grading services to dealers and collectors of coins, trading cards, event tickets, autographs and historical and sports memorabilia. A short seller wrote a negative article about “card trimmers” committing fraud to get cards graded higher. CLCT is a 3.85% holding in the North Star Dividend Fund and a 3.15% holding in the North Star Micro Cap Fund.

Compass Diversified Holdings (CODI): +17.81%: Compass Diversified Holdings is a diversified businesses conglomerate based in the United States. It serves its customers through its two businesses, branded products and Niche industrial. Barron’s wrote a very positive story highlighting the stock’s “huge” dividend yield and suggesting it would be “a good way to avoid the trade war.” CODI is a 1.64% holding in the North Star Dividend Fund and CODI preferred stock is a 2.02% holding in the North Star Bond Fund and a 0.76% holding in the North Star Opportunity Fund.

Myers Industries, Inc. (MYE): +10.64%: Myers Industries is a plastic manufacturer of returnable packaging, storage and safety products and specialty molding. The Company declared its normal quarterly dividend. MYE is a 3.01% holding in the North Star Dividend Fund.

The Eastern Company (EML): +11.06: The Eastern Co is a manufacturer of industrial hardware, security products, and metal castings. It operates in three business segments: Industrial Hardware, Security Products, and Metal Products. There was no company specific news last week. EML is a 3.83% holding in the North Star Micro Cap Fund.

NAPCO Security Technologies, Inc. (NSSC): +15.83%: NAPCO Security Technologies manufactures security products, encompassing access control systems, door-locking products, intrusion and fire alarm systems and video surveillance products. The Company made an upbeat presentation at the annual William Blair Growth Stock Conference.  NSSC is a 3.23% holding 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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