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Kuby’s Commentary

The Ebb and Flow of the TIDE

May 8, 2018

Last Week:

We are coining a new acronym, “TIDE” (Trade, Inflation, Debt, Earnings), to describe the movement in the market. Trade continued to be a powerful force, triggering a steep sell-off on Thursday as the delegation to China made little progress. Inflation concerns abated on Friday, as wage growth moderated in April, leading to a handsome rally that erased the losses from earlier in the week. In terms of earnings, the highest percentage (78%) of S&P 500 companies are reporting actual EPS above estimates since FactSet began tracking this metric in Q3 2008. The blended (combines actual results for companies that have reported and estimated results for companies that have yet to report), year-over-year earnings growth rate for the first quarter is 24.2% today, which is higher than the earnings growth rate of 23.2% last week, primarily thanks to a strong report from Apple. This surge in corporate earnings is the key ingredient to support the somewhat inflated overall level of equity prices.

On the other hand, government debt is the key cause for concern in the longer term. I had lunch with Professor Aliber on Tuesday, who recently wrote “A Catechism on Fiscal Deficits and Debt”, in which he cautions that the “U.S. government is on a non-sustainable trajectory for the increase in its indebtedness: the primary fiscal deficit is extraordinarily large, and the secondary deficit will become larger as U.S. government debt on the hands of the public and interest rates on the indebtedness both increase.” He concludes that “the paradox is that taxes would have to be increased in the recession to convince investors that the U.S. Treasury securities are a good investment. There would be a lot of economic pain for a year or two, much like the pain after the surge in rates at the end of 1979.”

For the time being, the debt crisis remained on the back burner, as the yield on the Ten-Year Treasury trickled down one basis point to 2.94%, basically unchanged for the last 3 months.

This Week:

Trade issues will continue to be in focus, as China imports/exports will be released Tuesday morning, as well as more details about last week’s China summit are likely to be disclosed. Inflation hawks will be paying attention to the PPI data on Wednesday as well as the CPI data on Thursday. Earnings season will be winding down, with 44 S&P 500 companies reporting first quarter results.

The NBA conference finals will get underway, with the most likely match-ups being the Cavaliers and the Celtics in the East, and the Warriors and the Rockets in the West. Shockingly, I am beginning to entertain the possibility that LeBron James is the greatest player of all time (forgive me MJ).

Stocks on the Move:

A.H. Belo, Corp. (AHC) -11.5%: Total revenue was $49.5 million in the first quarter of 2018, a decrease of $11.4 million, or 18.8 percent, when compared to the first quarter of 2017, while the Company posted a slightly smaller net loss from the year earlier period. The paid digital subscriber base grew by 8,036 subscribers, or 44.2 percent, over the first quarter 2017, ending the first quarter 2018 with 26,206 paid digital subscribers.  A.H. Belo is a local news and information publishing company with commercial printing, distribution and direct mail capabilities, as well as expertise in emerging media and digital marketing. The Company’s primary publication is the Dallas Morning News. We are talking to management this week to better understand their digital transition. The North Star Dividend Fund and the North Star Micro Cap Fund each have a 3.1% position in AHC.

Alamo Group, Inc. (ALG) -12.2%: Reported record first quarter results, with net sales increasing 10.5% to $238.1 million, and net income increasing 19.9% to 12.2 million. The Company benefitted from a lower corporate tax rates, as well as the effects of the acquisitions of Santa Izabel and Old Dominion Brush Company, which were both completed in June 2017, and R.P.M. Tech, which was completed in August 2017. Alamo is engaged in the design and manufacturing of agricultural equipment and infrastructure maintenance equipment. Its products include tractor-mounted mowing and other vegetation maintenance equipment, among others. The North Star Micro Cap Fund has a 2.1% position in ALG.

BG Staffing, Inc. (BGSF) +13.3%: Reported record first quarter results, with revenues increasing 17% to $66.9 million, and net income increasing 89% to $2.5 million. Solid performance from their recent acquisitions, combined with their disciplined approach to cost control, contributed to the record earnings BG Staffing provides temporary staffing services in the U.S. in Multifamily, Professional, and Commercial. Its temporary staffing services consist of on-demand or short-term staffing assignments, contract staffing, & on-site management administration. The North Star Dividend Fund has a 2.6% position in BGSF

Brooks Automation, Inc. (BRKS) +11.1%: Revenues grew 22% to $207 million, and adjusted net income advanced 51% for the Company’s second quarter. Both the Semiconductor Solutions Group and the Life Sciences Division delivered outstanding results. Bookings remained particularly strong, leading the Company to forecast robust growth ahead. Brooks Automation is a provider of automation and cryogenic solutions for multiple applications and markets. The company serves the semiconductor capital equipment market and sample management market for life sciences. The North Star Dividend Fund has a 1.7% position in BRKS.

Johnson Outdoors, Inc. (JOUT) +13%: Posted record second quarter results, with an 11% increase in sales to $165.8 million, and a 54% increase in net income to $21.6 million. Strong performance in the Company’s Fishing and Diving groups fueled the exceptional results. Additionally, the balance sheet improved to a net cash position of $51.1 million versus $24.4 million a year earlier. Johnson Outdoors is a global manufacturer and marketer of branded seasonal, outdoor recreation products. It offers products under Watercraft, Diving, Marine Electronics and Outdoor Gear. The North Star Micro Cap Fund has a 3.2% position in JOUT.

KKR & Co, LP (KKR) +10.3%: Reported strong first quarter results and, announced a change in their corporate structure from a partnership to a corporation effective July 1. The Company reduced its dividend to account for the tax change, and expanded its stock repurchase plan. KKR is a global investment firm which invests across multiple asset classes including private equity, energy, infrastructure, real estate, growth equity, credit and hedge funds. The North Star Opportunity Fund has a 3.1% position in KKR.

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