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Kuby’s Commentary

This Rally is No Joke

Apr 5, 2021

Last Week:

The S&P 500 crossed over the 4,000 threshold on April Fools’ Day to set another record, finishing up +1.14%. Small caps were not joking around, with the Russell 2000 gaining +1.46%, and the Tech sector pranked its detractors by bouncing +3.15%. Trading volume was extremely light, reaching its lowest levels of 2021 on Monday and again on Tuesday. The dollar and gold were both essentially unchanged, while the yield on the Ten-Year Treasury inched up 6 basis points to 1.68%.

The most significant economic release was the jobs report, which was reported on Friday when the stock market closed for the holiday. It was a very strong number, showing that nonfarm payrolls rose 916K in March, representing the strongest job creation since August. Leisure and hospitality added 280K jobs, with 176K coming from food services and bars. Those generally lower-paying jobs contributed to a 0.1% decline in average hours earnings for the month, compared with an expected rise of 0.1%. Possibly most positive is the almost 350,000 people who returned to the workforce in March 2021 compared to February 2021; this is an encouraging sign, especially that the increase in the workforce comes despite relatively generous unemployment benefit extensions in many states and at the federal level in March.  Whereas wage inflation still remains muted, it is worth noting that the average hourly workweek rose 0.3 hours to 34.9 hours, suggesting employers are pushing current workers, which could set the table for higher wages in the not-too-distant future. The other economic release of note was the March ISM manufacturing index, which came in at its highest level since 1983.

President Joe Biden unveiled his $2.3 trillion American Jobs Plan on Wednesday, with accompanying anticipated tax increases that will have a difficult time winning bipartisan support. If passed, the bill will provide tremendous support for companies involved in rebuilding our steadily deteriorating infrastructure. Whereas the stocks of the obvious beneficiaries have generally already appreciated significantly, there has been a pullback in PBW (WilderHill Clean Energy Index ETF) and some of our favorite small-cap utilities still seem to offer good value.

This Week:

The race between the variants and the vaccine will remain of the utmost importance in the battle against the pandemic. Saturday marked the first time the country reported more than four million Covid-19 vaccine doses in a single day. Nearly a third of the U.S. population has received at least one dose of a Covid-19 vaccine as more states expand eligibility and production ramps up. Whereas the number of new cases, hospitalizations, and deaths is far below their January peak, the average number of newly reported cases has risen 19 percent over the past two weeks. Cases are increasing significantly in many states, particularly in the Midwest and the Northeast, as variants spread.

Earnings season is right around the corner, and analysts have increased estimates during the first quarter for S&P 500 earnings by 6% to $39.86, marking the largest increase in the bottom-up EPS estimate during a quarter since FactSet began tracking the quarterly bottom-up EPS estimate in 2002. The previous record was 5.4%, which occurred in Q1 2018 after tax reform was passed. There have also been a record 61 companies issuing revised positive guidance for the quarter. Expectations are now for more than 20% quarterly earnings growth, led by projections for earnings in the energy sector to more than double.

The economic calendar is light, but the producer price index for March is worthy of monitoring since the free money game won’t work if inflationary pressures intensify. We had the opportunity over the last few weeks to meet with the CEOs of numerous consumer products and industrial companies. Almost without exception, they indicated that there were significant cost pressures and that they believe that they could pass those costs on to consumers. If the inflationary pressures do intensify, then interest rates are likely to rise to create a headwind for the equity markets.

Stocks on the Move:

+15.8% CarParts.Com Inc (PRTS) retails automobile parts online. The Company offers mirrors, engines, headlights, brakes, interior and exterior accessories, tools, wheels, lighting, bumpers, and other aftermarket autobody parts in its network of over 1.2 million SKUs. Last week, the Company announced the acquisition of all Precise Fuel Delivery Systems inventory from Premium Gard. The system and its assets will be added to the Company’s existing premium fuel pump brand, “DriveMotive,” and will increase the online retailer’s vehicle application coverage by more than 50%. Terms of the acquisition were not disclosed, and the transaction is expected to close during CarParts.Com’s 1Q-2021.

PRTS is a 4.0% position in the North Star Micro Cap Fund and a 2.6% position in the North Star Opportunity Fund.

+16.5% Rocky Brands Inc (RCKY) designs, develops, manufactures, and markets men’s and women’s footwear. Its footwear brands, which are sold in retail sporting goods and outdoor stores, include Rocky, Georgia Boot, Creative Recreation, Durango, Lehigh, and licensed brand Michelin. There was no significant company news last week.

RCKY is a 4.6% position in the North Star Micro Cap Fund and a 6.4% position in the North Star Dividend Fund.

+10.8% Blue Bird Corporation (BLBD) designs and manufactures school buses and commercial buses for school districts, large national fleets, businesses, government agencies, and non-profit organizations. There was no significant company news last week.

BLBD is a 2.1% 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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