Chicago: 312-580-0900 | Suburban: 847-831-8831 | Family Office: 312-338-7788 | Financial Planning: 312-440-5028 | Benefits: 847-831-8831

Kuby’s Commentary

Those Thorny Taxes

Apr 26, 2021

To all of our new subscribers: welcome!

Last Week:

Corporate earnings reports and the economic releases both painted a rosy picture, but investors got a little prick in their portfolios from the thorny issue of how to pay for all the recent and proposed government programs.

On the earnings front, a record 84% of companies have reported actual EPS above estimates, by a record 23.6% amount. The blended earnings growth rate for the first quarter is now 33.8% today, compared to an earnings growth rate of 30.3% last week and an earnings growth rate expectation of 23.8% at the end of the first quarter (March 31). The 33.8% would be the highest year-over-year earnings growth reported by the index since Q3 2010 (34.0%). That record year-over-year growth will almost certainly be dramatically surpassed in the current quarter ending June 30.

The economic releases were extremely strong, led by the initial claims for unemployment. In that report, worker filings for jobless benefits declined to 547,000 last week, a new pandemic low that adds to evidence of a strengthening labor market and overall economic recovery. That decline is likely to continue in the coming weeks and months, hopefully returning to pre-pandemic levels of around 250,000 worker filings. Additionally, data showed U.S. new-home sales rebounding sharply in March to the highest since 2006, and a measure of output at U.S. manufacturers and service providers reached a record high in April.

The party on Wall Street had a sobering moment midweek when news of proposed tax increase by President Biden circulated.  The proposal calls for increasing the top marginal income tax rate to 39.6% from 37%, sources said this week. It would also nearly double taxes on capital gains to 39.6% for people earning more than $1 million. That would be the highest tax rate on investment gains, which are mostly paid by the wealthiest Americans, since the 1920s. The rate has not exceeded 33.8% in the post-World War Two era.

News of the proposal triggered sharp declines for two days on Wall Street, but a rally on Friday recouped most of the losses. For the week the S&P 500 finished -0.13%, while the Small Cap Russell 2000 Index gained 0.41%. The yield on the Ten-Year Treasury was unchanged at 1.57%, gold treaded water at $1,777.00 per ounce, while the dollar continued its recent slide declining 0.75%.

Cryptocurrencies were hit hard, with Bitcoin down over 20% from its recent peak of $64,829. It is worth noting that the recent sell-off still leaves Bitcoin up over 30% YTD and almost 400% over the last twelve months. I embrace the opinion that we should refer to these assets as crypto securities, as they certainly don’t behave like currencies.  There are various theories for the rationale behind the trading that caused the weakness in crypto last weekend and this past week; some of the more plausible theories included: (1) tax-related selling to help fund payments owed on investor gains in trading cryptocurrencies or other securities; and (2) perhaps related to tax-payment related selling, margin calls on currency owned with borrowed funds (commonly known as buying “on margin”).

This Week:

It will be the busiest week of earnings season with 181 S&P 500 companies scheduled to report results for the first quarter.

There will also be several important economic releases, such as Consumer Confidence on Tuesday and Personal Income and Expenditures on Friday. Both of those readings are expected to show a very healthy economy aided by the relief checks from the American Rescue Plan that was enacted in March.

The race between vaccine distribution and COVID-19 new cases will continue to be of the utmost importance. The trend in the U.S. has modestly improved recently, and I was very encouraged but Dr. Scott Gottlieb’s prediction that the next few months should show a sharp drop in new cases, hospitalizations, and deaths.

We can also anticipate for the foreseeable future that there will be extensive media coverage debating the infrastructure bill and the related proposed tax increases.

On a personal note, being fully vaccinated I had the pleasure over the weekend of visiting my daughter and granddaughter for the first time in 6 months. If I can extrapolate my personal experience to the population in general, I believe there will be a surge in economic activity as the pent-up demand for visiting family and generally socializing is extraordinary. The stock market action of travel and leisure companies has certainly signaled this return to activity as that sector (as evidenced by the Fidelity Select Leisure Fund-FDLSX) is trading at an all-time high level. Outside of travel and leisure, there are still quite a few of our portfolio companies which should benefit from the economic tailwinds that are trading below pre-pandemic levels. In that category, we would highlight SCS, BGSF, RGCO, SP, EML, PLOW, and DENN.

Stocks on the Move:

+20.0% 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. Last week, Acme United reported Q1-2021 results of $0.52 per share and revenue of $43.53M (+21.7% Y/Y). The stellar performance was attributed to strong sales of Westcott cutting tools and DMT sharpeners, as well as a record first quarter for the European business unit.

ACU is a 3.8% position in the North Star Micro Cap Fund, a 1.0% position in the North Star Dividend Fund, and a 3.5% position in the North Star Opportunity Fund.

+10.0% 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 released Q1-2021 earnings of $0.96 per share, up from $0.46 per share in the year-ago quarter. Assets under management reached a record of $649B.

BX is a 4.1% position in the North Star Opportunity Fund.

+14.7% 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, Turtle Beach announced it had appointed Yie-Hsin Hung as a new director. Hung currently serves as the CEO of New York Life Investment Management.

HEAR is a 5.0% position in the North Star Micro Cap Fund and a 2.8% position in the North Star Opportunity Fund.

+10.2% Healthcare Services Group Inc (HCSG) provides housekeeping, laundry, linen, facility maintenance, and food services. The Company offers its services to the healthcare industry, including nursing homes, retirement complexes, rehabilitation centers, and hospitals. Last week, Healthcare Services Group reported Q1-2021 earnings of $0.33 per share which beat by $0.06 per share, and revenue of $407.75M which beat by $4.64M. Chief Executive Officer Ted Wahl noted new COVID cases among patients and residents dropped by over 90% in between Q4-2020 and Q1-2021, attributing this stabilization and morale boost to the incredible pace of vaccine rollout.

HCSG is a 2.7% position in the North Star Dividend Fund.

+17.8% AstroNova Inc (ALOT) designs, develops, manufactures, and distributes a broad range of specialty printers and data acquisition and analysis systems, including both hardware and software. Its target markets are apparel, automotive, avionics, chemicals, computer peripherals, and communications. There was no significant news last week.

ALOT is a 0.7% position in the North Star Micro Cap Fund.


Other stocks mentioned:

Steelcase Inc (SCS) is a 1.6% position in the North Star Dividend Fund.

BGSF Inc (BGSF) is a 3.2% position in the North Star Dividend Fund.

RGC Resources Inc (RGCO) is 1.4% position in the North Star Dividend Fund.

SP Plus Corporation (SP) is a 3.7% position in the North Star Micro Cap Fund.

The Eastern Company (EML) is a 2.8% position in the North Star Micro Cap Fund.

Douglas Dynamics Inc (PLOW) is a 3.1% position in the North Star Dividend Fund.

Denny’s Corporation (DENN) is a 1.7% 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.

Sign up to receive a weekly email with Kuby’s Commentary.

    This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

    Recent Kuby’s Commentaries
    Kuby’s Commentary & Quarterly Update Archives