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Kuby’s Commentary

The Sun Also Rises

Jul 20, 2020

Last Week:

Earnings season produced no surprises with 9% of the S&P 500 companies having reported results which were consistent with forecasts for a 44% decline in profits for the quarter. If -44.0% is the actual decline for the quarter, it will mark the largest year-over-year decline in earnings reported by the index since Q4 2008 (-69.1%). It will also mark the fifth time in the past six quarters in which the index has reported a year-over-year decline in earnings. All 11 sectors are reporting (or are predicted to report) a year-over-year decline in earnings, led by the Energy, Consumer Discretionary, Industrials, and Financials sectors. Despite this earnings recession, the S&P 500 continued to move higher posting a 1.25% gain for the week to move into positive territory for 2020. Incredibly since the beginning of 2019, during those six quarters of declining earnings, the market has delivered over 30% of total return. We embrace the principle that the market reflects the future not the past, so we look forward to sunny skies in the global economies. The near-term forecast is quite a bit cloudier, as governments frantically attempt to adopt policies to combat the devastation of the COVID-19 pandemic. Zero percent interest rates and helicopter money remain in fashion as our national debt seems likely to grow by as much as a staggering $7 trillion this year. With so much slack in the economy, inflation remains tame, as June CPI showed a modest 0.6% increase year-over-year, with food and gas prices accounting for most of the rise.

The bond market showed more caution than the equity markets this past week. The ‘benchmark’ 10-year U.S. Treasury yield declined slightly from 0.643% to 0.623%. This decline, albeit modest, suggests ongoing caution with regard to the outlook for economic growth. Investor willingness maintain large balances of low-yielding investment positions, suggests ongoing trepidation to some degree. Central banks around the world are playing a major role in suppressing bond yields, but short-term movements in benchmark yield (U.S. 10-Year Treasuries, German Bunds, etc. . . ) are still worth watching with regard to possibly confirming or contrasting economic growth sentiment reflected in the equity markets.

The Dollar eased 0.7% and now is slightly lower than at the beginning of the year, while Gold continued to climb, topping $1800/ounce for the first time since 2012. We added Gold to our ETF model portfolio earlier got his year on concerns over the debasement of the Dollar and all other global currencies. COVID-19 is presenting a significantly more extreme health challenge in the U.S. than in most of the rest of the world, which increases the domestic economic risk. As a result, the case for adding non-dollar denominated investments has growing appeal.

Once again it was promising news on the COVID-19 vaccine front that lifted stocks, particularly the economically sensitive shares, during the week. The Technology sector saw a modest decline of 1.82%, while Basic Materials and Industrials sectors exhibited strong performance. It was the worst relative performance week for tech stocks in several years….could a rotation be underway? Financial sector stocks eked out a gain, as the biggest banks reported mixed earnings with robust trading activity but large increases in loan loss reserves and skimpy net interest margins.

Small Cap stocks were the stars of the week with the Russell 2000 gaining 3.56%. Both of our Small Cap Value Funds (NSMVX and NSDVX) participated in the rally, and we believe that great bargains remain in the Small Cap Value universe following a multi-year period of underperformance.

This Week:

The debate on the Government’s plan for additional stimulus and the daily details on the pandemic’s spread and related drug developments will continue to move markets. In Europe, leaders appeared close to reaching an agreement on a rescue package providing strength to the euro.

Earnings season will be in full swing causing company specific movements, but probably not affecting the overall market.

The economic calendar is light with the weekly initial jobless claims likely to be in focus. The surge in coronavirus cases could lead to a second wave of initial applications in the hot spots.

Stocks on the Move:

ACU +12.6%: Acme United Corp is a U.S.-based company engaged in the supply of cutting devices, measuring, first aid, and sharpening products. It primarily offers these products to school, home, office, hardware, sporting goods, and industrial markets. Despite many Covid-19 related obstacles, Acme released strong quarterly earnings last week and is prepared to maintain newly gained market share through manufacturing efficiencies and new product releases. ACU is a 0.82% holding in the North Star Dividend Fund, a 3.63% holding in the North Star Micro Cap Fund, and a 2.19% holding in the North Star Opportunity Fund.

LRN +37.3%: K12 Inc is an American online educational company. The company offers alternative programs to traditional on-campus schooling. K12 also operates state-funded virtual charter schools around the United States. The company’s contractual agreements with various school districts to offer its curriculum programs provide a majority of the company’s revenue. The stock saw big gains last week due to K12’s updated platform in time for the school year that includes a mobile-friendly platform; students using this online school (OLS) will be able to study independently from anywhere. Included in the OLS will be ClassLink LaunchPad, a platform that gives students access to apps, libraries, and school resources and gives teachers the ability to track engagement with those resources. LRN is a 3.92% holding in the North Star Micro Cap Fund and a 1.92% holding in the North Star Opportunity Fund.

HCSG +11.8%: Healthcare Services Group Inc is a provider of housekeeping and facility-management services to the healthcare industry. The company operates two business segments: housekeeping, laundry, and linen services, and dietary department services. Its clients are primarily nursing homes, retirement complexes, rehabilitation centers, and hospitals. There was no news last week that contributed to the price increase. HCSG is a 2.96% holding in the North Star Dividend Fund.

BSET + 15.8%: Bassett Furniture Industries is a manufacturer, importer, and retailer of home furnishing products in the United States. It operates through the wholesale, retail, and logistical segments. Last week, the company reinstated their dividend and outlined a new outdoor furniture strategy that includes the debut of new private label designs. BSET is a 1.25% holding in the North Star Micro Cap Fund.

FLWS +21.6%: 1-800 Inc is a provider of gourmet food and gift baskets, consumer floral, and BloomNet wire service. The company provides fresh flowers, fruits, popcorn, and specialty treats through brands like Harry & David, the Popcorn Factory, Cheryl’s, Fannie May, and more. Growing optimism and increased earnings’ estimates accounted for the stock’s performance last week. FLWS is a 4.46% holding in the North Star Micro Cap Fund.

Final Thoughts:

Time is passing really quickly as the days blend together. Sunrise, sunset, sunrise, sunset. It seems likely that we face a difficult trek over the next few months, but the buoyant market suggests optimism over the not too distant future.

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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