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Kuby’s Commentary

The China Seesaw: Short Shallow Swings

Sep 3, 2019

Last Week:

Once again the market movement seemed to be dictated by the tone of the trade talks. Whereas there were no actual developments, a Chinese request for “calm” in the trade war and the absence of any inflammatory tweets from the White House combined to lift traders’ moods and triggered a 2.8% rise in the S&P 500. The month of August followed the seesaw pattern of the previous 18 months, only in a condensed format, in other words the rallies and sell-offs were shorter and shallower in duration.

It’s worth noting that the market finished August 2019 essentially at the same level as the end of August 2018. The bond market, on the other hand, has seen the yield drop on the Ten-Year Treasury almost in half during the last 12 months. For the week the Ten-Year yield slipped 2 basis points to 1.51%, but before we get caught up in the recession obsession, let’s remember that the yield was at an even lower level in July 2016 without signaling the onset of a recession. The Dollar gained over 1% for the week to reach a multi-year high, signaling that the U.S. is still perceived as the best house on the block.

This Week:

Trade headlines will continue to generate shallow swings in the market. Additional tariffs on $110 billion in Chinese imports came into effect alongside China’s countermeasures over the weekend. The futures market initially declined over 1%, recovered by Monday morning, but then came under pressure again as we approached the opening of trading on Tuesday. Hurricane Dorian will probably be another the top story of the holiday-shortened week. The final rounds of the U.S. Open and the kick-off of the NFL season might also distract traders from the trade war narrative. The key economic release will be the monthly U.S. jobs report on Friday, which is expected to show nonfarm payrolls rose by 158,000 in August, slightly above the prior month’s growth. Any significant divergence from forecasts would factor into the recession concerns and potentially influence Fed policy.

Stocks on the Move:

(MOV) -12.73%: Movado Group Inc designs develop, sources, markets, and distributes fine watches in the United States and internationally. Net sales increased 9.5% to $157.8 million compared to $144.1 million in the second quarter of fiscal 2019. Operating income was $8.8 million compared to operating income of $12.9 million in the second quarter of fiscal 2019. Efraim Grinberg, Chairman and Chief Executive Officer, stated, “Overall, we delivered sales growth of 9.5% and adjusted operating income of $10.3 million in the second quarter, despite an increasingly challenging environment for our category, planned incremental investments and currency headwinds. We are pleased with the market share gains of our licensed brand portfolio both internationally and domestically and saw strong digital sales growth on our site during the quarter. In a difficult marketplace, we are well positioned given the investments we’ve made over the last few years including building out our international markets, acquiring Olivia Burton and MVMT, developing important product innovation and establishing our digital center of excellence. As we look ahead, we will continue to make planned strategic investments across the business to support our brands as we focus on delivering long-term sustainable growth.”  MOV is a 2.71% holding in the North Star Micro Cap Fund and a 0.52% holding in the North Star Opportunity Fund.

(NCMI) +10.66%: National CineMedia Inc is a holding company that operates a digital in-theatre media network across North America. The share price reached a 2019 high on Friday, having rallied steadily since the Company reported quarterly results on August 5 that exceeded expectations.  NCMI is a 2.58% holding in the North Star Dividend Fund, a 2.22% holding in the North Star Opportunity Fund and a 2.78% holding in the North Star Bond Fund.

(ALOT) -22.32%: AstroNova Inc is a player in the technology sector based in the United States. It designs, develops, manufactures and distributes a broad range of specialty printers and data acquisition and analysis systems, including both hardware and software. Revenue totaled $33.5 million, a decrease of 1% from $33.8 million in the second quarter of fiscal 2019, reflecting lower sales in the Test & Measurement segment, partly offset by higher sales in the Product Identification segment. Net income was $1.0 million, or $0.13 per diluted share, versus net income of $1.2 million, or $0.17 per diluted share, in the second quarter of fiscal 2019. “While we continued to make good progress on our long-term strategic objectives, our second-quarter results reflect a confluence of what we anticipate are short-term headwinds affecting both segments,” said Greg Woods, AstroNova’s President and CEO. “In the Test & Measurement segment, the ripple effects of the 737 MAX grounding had a more pronounced impact on revenue and margin mix in the quarter than we had anticipated. This was in part due to new aircraft shipment reductions but also because several retrofit printer upgrade orders for existing aircraft were deferred so that those planes could be kept in service. Our Product Identification segment was affected by some customer-specific weakness in Asia, partly attributable to increased global economic uncertainty. These temporary challenges do not affect our positive long-term view or the strong underlying fundamentals of AstroNova’s business.”  ALOT is a 2.12% holding in the North Star Dividend Fund.

(AMSWA) +13.87%: American Software Inc develops enterprise management and supply chain-related software and services. Revenues were unchanged but EBITDA increased by 26% to $3.0 million for the quarter ended July 31, 2019 compared to $2.4 million for the same period last year. The overall financial condition of the Company remains strong, with cash and investments of approximately $88.0 million and no debt as of July 31, 2019. During the first quarter of fiscal 2020, the Company paid shareholder dividends of approximately $3.4 million. “We are pleased with our 41% growth in Subscription Fees and 54% increase in Cloud Services ACV as these key performance indicators continue to underscore our successful transition to a cloud-first company,” said Allan Dow, president of American Software.  AMSWA is a 2.90% holding in the North Star Dividend Fund and a 1.47% holding in the North Star Micro Cap Fund.

(CLCT) +12.65%: Collectors Universe Inc provides authentication and grading services to dealers and collectors of coins, trading cards, event tickets, autographs and historical and sports memorabilia. In this year’s fourth quarter, revenues increased by 16% to a quarterly record of $19.8 million and operating income increased to a fourth quarter record of $4.5 million as compared to last year’s fourth quarter revenues of $17.1 million and operating income of $2.2 million. In addition to the 16% revenue increase, the improved operating income reflected a higher gross profit margin of 59%. Cash increased to $19.2 million at June 30, 2019 from $15.7 million at March 31, 2019 and $10.6 million at June 30, 2018.  CLCT is a 2.37% holding in the North Star Dividend Fund and a 2.68% holding in the North Star Micro Cap Fund.

(MYE) +11.31%: Myers Industries Inc is a plastic manufacturer of returnable packaging, storage and safety products and specialty molding. The Company announced that it has acquired the assets of Tuffy Manufacturing Industries, Inc., a warehouse distributor of tire repair equipment and supplies. “The acquisition of Tuffy aligns with our strategy to grow in key niche markets and focus on strategic account customers,” said Dave Banyard, President and Chief Executive Officer. “In line with our transformation plan, this acquisition further positions our Distribution Segment as a leader in the growing Commercial Auto and Truck Fleet market and is expected to immediately have a positive impact on the segment’s EBITDA margin. At a mid-single-digit purchase price multiple, this transaction is a great example of how we intend to deploy our capital for acquisitions and create both near-term and long-term value for our shareholders.”  MYE is a 1.36% holding in the North Star Dividend Fund.

(NTN) -13.32%: NTN Buzztime Inc delivers interactive entertainment and innovative dining technology to bars and restaurants in North America. Shares remain under pressure due to the cloud of uncertainty surrounding the Company’s future with Buffalo Wild Wings.  NTN is a 0.48% holding in the North Star Micro Cap Fund.

(PRTS) +16.54%: U.S. Auto Parts Network Inc is an online provider of automotive aftermarket parts and repair information. The combination of better gross margins and a wave of insider purchases has attracted bargain-seeking buying interest in the shares.  PRTS is a 2.67% 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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