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Kuby’s Commentary

Small Caps Exit Shelter

May 26, 2020

Last Week:

In our May 18 Kuby’s Commentary (Happy Birthday Brooke Kuby) we noted the extraordinarily difficult year small cap stocks were having, posting more than double the S&P 500’s decline. In an attempt to “accentuate the positive”, we suggested that “when the gloom lifts, look for a nice rebound by this historically outperforming asset class”. The gloom vaporized Monday morning after biotech company Moderna reported that a phase one study of a vaccine candidate showed great promise, and the Russell 2000 rallied 6.1% in response. The rest of the week was uneventful, but the market did work its way higher with the Russell 2000 finishing up 7.84% and the S&P 500 posting a 3.2% gain. It is worth noting that Moderna’s stock was only up 3.4% , which suggests that the market was expressing renewed confidence in the development of a vaccine, not necessarily in the one specific vaccine.

The sun was not shining on the foreign relations front as Sino-U.S. relations continued to deteriorate after China proposed sweeping legislation into Hong Kong law criminalizing criticism of China and the ruling party. Secretary of State Mike Pompeo called the measure a “disastrous proposal” and indicated that it could lead the U.S. to reconsider Hong Kong’s special trade status. China Foreign Minister Wang Yi warned that some in America were pushing relations to a “new Cold War”.

The currency markets were quiet, with the Dollar inching down 0.5%, while the yield on the Ten-Year Treasury remained essentially unchanged.

As of this week all 50 states have begun reopening to some extent. So far no obvious pattern of new cases has been discernible. It is evident that many people are ignoring the social distancing protocol as noted by the Washington Post: “Inhibitions — and masks — have been shed across America, as crowds flooded newly reopened beaches and videos from Missouri’s Lake of the Ozarks showed packed pools and patios, where revelers ignored social distancing guidance. White House coronavirus coordinator
Dr. Deborah Birx said Sunday that she is “very concerned” about people neglecting to maintain a safe, six-foot distance.”

Whereas those concerns seem warranted, it is worth noting that the number of COVID-19 deaths over the holiday weekend were the lowest three-day total since the end of March.

This Week:

I hope everyone enjoyed their Memorial Day holiday. No parades, Indy 500, MLB, NBA play-offs, little league….2020 certainly has been an unusual year. Memorial Day weekend is always a national holiday of mixed feelings, when we generally celebrate the beginning of summer amidst somber and respectful ceremonies of reminder that recognize those who paid a great price so that we can. This Memorial Day was certainly one of such thanks, perhaps extended as well to those directly fighting the current challenge.

It’s only a four-day trading week ahead. Economic reports (largely ignored) include updates on new home sales, mortgage applications, consumer confidence, trade, and jobless claims. COVID-19 developments will continue to be the primary driver of market activity; however, the geopolitical front, with the rising tensions between Washington and Beijing, could spill over into the markets again with Hong Kong in focus.

The tone going into trading Tuesday morning was upbeat as stock futures rallied sharply amid more signs of economies reopening as Japan ended its nationwide state of emergency and German business expectations rose.

Stocks on the Move:

Before the COVID-19 wild market swings we focused on the handful of our portfolio companies whose share prices changed more than 10% during the week. Last week 28 out of the 89 combined small cap companies in the North Star Micro Cap Fund and the North Star Dividend Fund, and 9 out of the 41 companies in our balanced North Star Opportunity Fund advanced more than 10%. The biggest winners were the advertising-based publishing companies such as Meredith Corp. (MDP) + 29.3% and Lee Enterprises (LEE) + 42%. We believe that as the country reopens for business that companies will want to ramp up advertising spending to reconnect with their customers.

Final Thoughts: (A little Grateful Dead meshed with Simon and Garfunkel)

What a long strange few months it’s been. Periods of restless dreams and the sounds of silence. Now we are eager to get out of the door and get going. After all, you got to play your hand, because the cards ain’t worth a dime if you don’t lay ‘em down.

In addition to the human tragedy of approximately 100,000 U.S. lives lost, the economic damage to the country of the shutdown has been staggering with a record surge in unemployment and a minimum of $3 trillion of additional national debt. Unlike a card game, we can’t fold and wait for the next hand. Let’s hope for the best with the cards we were dealt.

Keep breathing, but not on anyone.

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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