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Kuby’s Commentary

The Pump is Primed

Mar 15, 2021

Last Week:

The economic outlook continued to brighten, with the pandemic subsiding and the potent combination of monetary and fiscal policies priming the growth pump. The Big Bad Bond market growled as the 10-year Treasury yield jumped 8 basis points to 1.64%, hitting its highest level since February a year ago. The equity markets showed no fear, instead focused on the significant economic growth anticipated following the signing of the $1.9 trillion stimulus bill and as the White House declared its goal of having every adult eligible for a COVID-19 vaccination by May 1. The data is already showing signs of improvement as weekly new claims for unemployment fell to a four-month low at 715,000, while triple the rate from a year ago, definitely trending in the right direction. Meanwhile, despite the largest gain in producer prices in nearly 2-1/2 years, inflation concerns remained muted as it is thought that the considerable slack in the labor market (the civilian labor force remains more than 4 million below pre-pandemic levels) could make it harder for businesses to pass on the higher costs to consumers.

Against this backdrop, the stock market party heated up, and small-cap stocks continued to be the life of that party as the Russell 2000 surged +7.3%, the S&P 500 added 2.6% to set new records, and the Nasdaq finished 3.09% higher after wild intra-week swings.

What a difference a year makes. Looking back to our March 16, 2020 commentary, our outlook had some hits and misses. Most notably we underestimated the duration of the pandemic while encouraging investors to maintain their discipline and not panic.

“These are confusing times. A global financial markets meltdown has been triggered by a virus that to date has resulted in over 6700 fatalities. It’s a nasty disease that recent data suggests is very contagious and has a much higher fatality rate than known diseases such as the flu. Some media reports are forecasting horrifying worst-case scenarios that suggest the possibility of half the country being infected with 200,000 to 1.7 million deaths.”  

“Let’s call timeout! We don’t know what’s going to happen. It could be now with the government and public taking this health risk seriously that we follow the trajectory of China and South Korea, where aggressive actions led to a relatively short duration of the outbreak.” 

“After a lengthy period of low volatility, we have just experienced the biggest surge since the financial crisis. History would suggest that this volatility will persist for a period of several weeks or months. These are times to make sure your equity allocation is consistent with your risk tolerance, and to make a shopping list to buy great companies if they trade at bargain prices.”

“The news flow could be better or worse than expectations, nobody knows. This crisis will ultimately pass.”

This Week:

On Wednesday The Federal Open Market Committee announces its monetary policy decision. Short-term interest rates will almost certainly remain targeted near zero for the foreseeable future, so the Fed’s monthly bond-buying program might be modified given the recent rise in longer-term rates. The Bank of Japan monetary policy decision on Friday could also impact the dollar exchange rate as well as the U.S. market.

Stocks on the Move:

It was a terrific week with 22 of our portfolio companies advancing double-digits with no double-digit decliners.

+16.6% Acme United Corporation (ACU) supplies cutting, measuring, and safety products for the school, home, office, and industrial markets. The Company produces shears, scissors, rulers, first aid kits, utility knives, manicure products, medical cutting instruments, guillotine paper trimmers, and pencil sharpeners. There was no significant company news last week.

ACU is a 3.5% position in the North Star Micro Cap Fund, a 0.9% position in the North Star Dividend Fund, and a 3.1% position in the North Star Opportunity Fund.

+13.4% The Blackstone Group Inc (BX) operates as an investment company. The Company focuses on real estate, hedge funds, private equity, leveraged lending, senior debts, and rescue financing. Last week, Blackstone announced it would be raising funds for its Blackstone Tactical Fund IV. Blackstone President Jonathan Gray said the firm will be investing in “some of the more dislocated areas.”

BX is a 3.6% position in the North Star Opportunity Fund.

+26.9% ViacomCBS Inc (VIAC) operates as a multimedia company. The Company provides television and radio stations, produces and syndicates television programs, broadcasting, publishes books, and online content, as well as provides outdoor advertising. Last week, the stock rebounded after the much anticipated Oprah Winfrey interview with Meghan Markle and Prince Harry, as well as news that the company “virtually sold out” of advertising slots for “March Madness” – the annual NCAA basketball tournament.

VIAC is a 4.9% position in the North Star Opportunity Fund.

+13.5% Orion Energy Systems Inc (OESX) designs, manufactures, and implements energy management systems for commercial and industrial customers. The Company’s management system is comprised of high intensity fluorescent lighting systems, InteLite intelligent lighting controls, and Apollo Light Pipes. There was no significant company news last week.

OESX is a 3.7% position in the North Star Micro Cap Fund and a 4.6% position in the North Star Opportunity Fund.

+16.2% Sprott Inc (SII) provides investment management services. The Company offers portfolio management, broker-dealer activities, and consulting services to clients. Its offerings primarily involve equity strategies, ETFs, and physical bullion trusts that give institutional and individual investors exposure to precious metals. There was no significant company news last week.

SII is a 1.9% position in the North Star Dividend Fund and a 1.7% position in the North Star Opportunity Fund.

+15.3% Stride Inc (LRN) is a technology-based education company. Its curriculum is offered to public and private schools, blended schools, and individuals who seek to continue their education through supplemental training programs. There was no significant company news last week.

LRN is a 1.4% position in the North Star Micro Cap Fund and a 1.2% position in the North Star Opportunity Fund.

+11.8% Turtle Beach Corporation (HEAR) operates as a sound technology company. The Company designs and markets audio peripherals for video game consoles, personal computers, and mobile devices. Last week, videogame sales hit yet another monthly record with $4.6B in February. North Star’s research team met with Turtle Beach last week at the D.A. Davidson Consumer Growth Conference and felt encouraged by the Company’s strong 2020 performance as well as favorable market trends within the e-sports and virtual reality spaces.

HEAR is a 4.6% position in the North Star Micro Cap Fund.

+26.1% A.H. Belo Corporation (AHC) prints and publishes newspapers. The Company offers marketing solutions, niche publications, commercial printing, and direct mail services. Last week, AHC announced Q4-2020 results with revenue of $40.8M despite a particularly challenging year.

AHC is a 1.1% position in the North Star Dividend Fund.

+10.9% ABM Industries Incorporated (ABM) is a facility services contractor. The Company provides air conditioning, engineering, janitorial, lighting, parking security, and other outsourced facility services to commercial, industrial, and institutional customers. Last week, ABM Q1-2021 results with GAAP EPS of $1.10 and revenue of $1.49B. The Company highlighted the acceleration of higher margin work orders for virus protection and cleaning services.

ABM is a 1.3% position in the North Star Dividend Fund.

+13.6% Flexsteel Industries Inc (FLXS) manufactures and sells wooden and upholstered furniture for the retail, contract, and recreational vehicle (RV) furniture markets. The Company’s products are sold to furniture dealers, department stores, and RV manufacturers. There was no significant company news last week.

FLXS is a 2.6% position in the North Star Dividend Fund.

+11.4% Steelcase Inc (SCS) designs and manufactures products used to create high performance work environments. The Company offers products such as office furniture, furniture systems, interior architectural products, technology equipment, seating, and related products and services. There was no significant company news last week.

SCS is a 1.9% position in the North Star Dividend Fund.

+13.9% Telephone and Data Systems Inc (TDS) is a diversified telecommunications company. The Company operates primarily in the cellular (U.S. Cellular), local telephone, and personal communication services markets. There was no significant company news last week.

TDS is a 2.9% position in the North Star Dividend Fund.

+12.0% Unitil Corporation (UTL) conducts a combination electric and gas utility distribution operation in north central Massachusetts and electric utility operations in the seacoast and capital city areas of New Hampshire. The Company is also involved in energy planning, procurement, marketing, and consulting services. There was no significant company news last week.

UTL is a 1.0% position in the North Star Dividend Fund.

+10.2% Weyco Group Inc (WEYS) imports and distributes men’s footwear, including mid-priced leather dress and casual shoes, sold under the Florsheim, Nunn Bush, and Stacy Adams brands. It also offers casual footwear for women and children under the BOGS and Rafters labels. Last week, the Company announced Q4-2020 results with GAAP EPS of $0.52 and revenue of $61.97M.

WEYS 0.7% position in the North Star Dividend Fund.

+16.2% Allied Motion Technologies Inc (AMOT) designs, manufactures, and sells motion control products into applications that serve various industry sectors. The Company supplies precision motion control components that incorporated into a number of end products, including high-definition printers, barcode scanners, surgical tools, robotic systems, wheelchairs, and weapon systems. Last week, AMOT announced a three-for-two stock split after reporting Q4-2020 GAAP EPS of $0.28 and revenue of $93M. The Company achieved records orders and record backlog, as well as paid down nearly $17M in debt during the full year 2020.

AMOT is a 1.0% position in the North Star Micro Cap Fund.

+24.6% ARC Document Solutions Inc (ARC) provides large format document reproduction and printing services, mainly to architectural, engineering, building operator, and construction firms. There was no significant company news last week.

ARC is a 1.1% position in the North Star Micro Cap Fund.

+15.8% Build-A-Bear Workshop Inc (BBW) is an interactive and entertainment mall-based retailer that invites guests of all ages to create their own customized stuffed animals with clothing, shoes, and accessories through a bear-making process. BBW rallied last week after announcing Q4-2020 GAAP EPS of $0.57 and revenue of $93.66M. North Star’s research team also met with the Company at the D.A. Davidson Consumer Growth Conference; Build-A-Bear is undergoing dramatic digital transformation and broadening its customer base by becoming a branded house of Intellectual Property with specialty retail and content creation as its main revenue streams.

BBW is a 1.3% position in the North Star Micro Cap Fund.

+17.5% Century Casinos Inc (CNTY) operates as an entertainment company. The Company owns casinos, hotels, and luxury cruise vessels. CNTY announced Q4-2020 GAAP EPS of $0.22 and revenue of $84.8M. Temporary closures of the Company’s facilities worldwide negatively impacted results; however, CNTY is taking the appropriate measures to manage its real estate portfolio of entertainment facilities.

CNTY is a 1.0% position in the North Star Micro Cap Fund.

+12.9% Ethan Allen Interiors Inc (ETH) designs, manufactures, sources, sells, and distributes a range of home furnishings and accessories. Through its portfolio of ten furniture factories, one sawmill, one lumberyard, as well as 300 Ethan Allen Stores, the Company offers a variety of products including beds, dressers, tables, chairs, buffets, entertainment units, home office furniture, and wooden accents. There was no significant company news last week.

ETH is a 1.7% position in the North Star Micro Cap Fund.

+10.7% Lawson Products Inc (LAWS) sells and distributes expendable maintenance, repair, and replacement products to OEM’s. The Company’s products include fasteners, screws, nuts, rivets, hoses, lubricants, cleansers, adhesives, files, drills, and welding products. Lawson also supplies automotive electrical wiring, exhaust, and other automotive parts. There was no significant company news last week.

LAWS is a 1.0% position 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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