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Kuby’s Commentary

Time to Change the Tune

May 15, 2023

Last Week: Negative Spin

Don’t worry, be happy
In every life we have some trouble
But when you worry, you make it double
Don’t worry, be happy
Don’t worry, be happy now

Bobby McFerrin penned those lyrics back in 1988. Today’s grandstanding politicians and attention seeking media outlets have apparently rewritten the lyrics:

Don’t be happy, worry
There is going to be trouble which we will double
When you are happy, you are being sappy
Worry, don’t be happy
Worry, don’t be happy

The economic data and corporate earnings reports provided a reasonable foundation for good cheer, with a continuation of the trends of earnings exceeding (admittedly modest) forecasts and moderating inflation readings. Meanwhile back in the nation’s capital no progress was reported on reaching a deal to increase the debt ceiling other than our elected officials finally agreeing to have face-to-face meetings, thus fostering concerns over a government default. Some politicians have supported the idea of forcing such a default, which would result in permanent significant damage to our economy as warned by Thomas Jefferson in his post-revolutionary insistence that the new nation pay debts to all those who financially-supported the revolution, especially foreign lenders. Another song comes to mind, “The Fool on the Hill”, although a careful analysis of that Beatles classic tune reveals that the “Fool” was actually smart and those calling him a fool were just that.

The other headline dominating storyline was the health of the regional banks. The solvency of almost every business, but particularly financial institutions, is preconditioned by the confidence of their customers. Short-selling speculators with the cooperation of the media can undermine that confidence, and the absence of switching costs and the prevalence of irresponsible social media can lead to a destruction in value at lightning speed. The government could play a stabilizing role here, with actions such as expanding deposit insurance or banning predatory short selling. Instead, the Fed raised rates again, thus exacerbating the pressure on deposits. Let’s be clear, increasing short-term rates at the fastest rate in history is the primary cause of this banking crisis.

If the policy objective is to slow down the economy by creating all these worrisome headwinds, then it is succeeding. On Friday, data showed a decline in consumer sentiment combined with expectations for higher inflation. The University of Michigan’s index of consumer sentiment in May sank to a six-month low while its five-year outlook for inflation spiked to its highest reading in more than a decade. That spike took place the same week when the actual inflation data reached its lowest level since early 2021, with the annual increase in PPI sinking to 2.3%. If PPI is a leading indicator of consumer-level inflation trends as we believe PPI is, then the Fed’s 2% goal is within sight – this seems positive to us, but no doubt someone will find a way to put a negative spin on this development, as well.

The stock market was a mixed bag with the Nasdaq adding 0.4%, the S&P 500 slipping 0.3%, and the small cap Russell 2000 shedding 1.1%. North Star Chief Investment Officer Eric Kuby was quoted in a Reuters article on Friday discussing the underperformance of small caps as it relates to investors’ concerns over the last 18 months of an impending recession. In that article, the bullish case moving forward is also presented, noting, “Small caps, being sensitive to economic fluctuations, tend to shine early in a market recovery.” The article also highlights that in “…the past six bear markets, the Russell 2000 has posted an average total return gain of 44.8% in the six months following a bear market bottom, versus a 32.2% gain for the S&P 500”. Finally, there is the valuation case for small caps which “are also cheap relative to their history” with the small cap S&P 600 is trading at a price-to-earnings ratio of just over 13 times, compared to its 10-year average of 18.2 times. For all those reasons we believe that an allocation to small caps stocks makes sense in this current environment.

An allocation to gold also seems prudent as a hedge, with the precious metal holding near record levels last week, even with the dollar rallying 1.5%. Ultimately, we expect a debt-ceiling increase agreement and that means more U.S. debt, which is supportive for the long-term nominal prices of real assets such as land, commodities, and gold. In the fixed income market, short-term maturities continue to offer the highest yields, with the 10-year Treasury holding steady at 3.46%, the 2-year offering 3.97%, and the T-bill maturing in one month yielding over 5.5% in reaction to the debt ceiling drama. We favor the 3–6-month maturities paying around 5%, under the theory that the economy could be recovering when those notes mature which should result in reinvestment opportunities in higher yields on longer-term bonds.

Resolvable Problems

The song will probably remain the same, with the potential default by the U.S. government unnerving investors, coupled with volatile trading activity in regional banks. We can only hope that the players will tire of that tune and resolve these resolvable problems.

On Tuesday, the Census Bureau reports April retail sales, which are expected to rebound 0.7% after declining 0.4% in March. On Thursday Walmart will report first-quarter results, with analysts expecting a modest increase from the previous year.

Stocks on the Move

Regional Banks…

-13.3% Territorial Bancorp Inc (TBNK)
-23.2% Bank of Hawaii Corp (BOH)

Stocks with no news…

-10.3% Rocky Brands Inc (RCKY)
+10.4% Liquidity Services Inc (LQDT)

Stocks with news…

-23.4% Escalade Inc (ESCA) Last week, ESCA reported a first quarter loss of $0.07 per share and revenue of $56.93M down 21% y/y. Softening consumer demand, excess retailer inventories, and unfavorable weather all contributed to the disappointing earnings report.

+37.6% Blue Bird Corp (BLBD) Last week, BLBD reported very encouraging FQ2 earnings per share of $0.27 which beat estimates by $0.19 and revenue of $299.8M which beat estimates by $50M. The Company sold 2,304 buses during the period and increased FY23 EBITDA and revenue guidance to $60M and $1.1B, respectively, from $43M and $1B.

+16.3% Inc (FLWS) Last week, FLWS reported mixed results with an FQ3 loss of $(0.27) beating estimates by $0.09 and revenue of $417.6M (-11.1% y/y) missing by $8.87M. Gross margin improved 80 bps to 33.6%. The Consumer Floral and Gift segment took the biggest hit on higher commodity costs, promotional activity, and overhead cost deleveraging.

+10.5% Superior Group of Companies (SGC) Last week, SGC reported first quarter earnings per share of $0.06 and revenue of $130.8M. The Company anticipates modest sales growth and a gradually improving inventory position for the remainder of the year.

+10.0% Evolution Petroleum Corp (EPM) Last week, EPM reported FQ3 earnings of $0.42 per share and revenue of $36.87M which beat by $0.10 per share and $2.59M, respectively. The results were attributed to a year-over-year increase in production as well as an increase in the average realized price per barrel of oil equivalent (BOE).

+22.8% NAPCO Security Technologies Inc (NSSC) Last week NSSC initiated a quarterly dividend of $0.0625/share and reported another solid quarter of earnings that beat estimates.

-22.6% Topgolf Callaway Brands Corp (MODG) Last week, shares of MODG dropped despite a Q1 revenue beat and an improved balance sheet, as the Company issued soft Q2 guidance.

-10.9% Paramount Global (PARA) Last week, Paramount announced it would cut its quarterly dividend by 79% to $0.05 per share. Additionally, the Company also announced it would be cutting 25% of its entertainment workforce and rebranding its Showtime TV network as Paramount+ With Showtime.

+11.3% Alphabet Inc (GOOGL) Last week, GOOGL demonstrated its AI capabilities at the I/O developer conference.

The stocks mentioned above may be holdings in our mutual funds. For more information, please visit

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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