The market continued to rebound fueled by better than expected corporate earnings, hope for another round of helicopter money from the government, and optimism over COVID-19 vaccines and therapeutics development.
1) Second quarter earnings are tracking to post the largest decline since the financial crisis at -33.8%. Third quarter earnings will also drop double-digits from 2019 levels.
2) The bipartisan support that enabled the swift passage of the $2.2 trillion CARES Act in March has evaporated, which means it may not be raining money in August. Over the weekend President Trump signed executive orders on economic aid as stimulus talks stalled, however the impact and legality of those orders are questionable.
3) The timetable for a vaccine and effective therapeutics remain in question. The U.S. has surpassed five million virus cases with over 160,000 deaths and no signs of the spread abating, although the number of new daily cases did slide from its recent peak during the week.
On the other hand, TINA, There Is No Alternative, continues to provide support to the equity markets with the Ten-Year Treasury yielding 0.56% and short-term rates stuck at essentially zero. Small cap stocks were the biggest winners last week with the Russell 2000 surging 6%, while the S&P 500 gained 2.45% leaving it just 1% below its pre-pandemic peak reached In February. We still believe that there are bargains in the small cap value universe. The Morningstar Small Value Index is still down 22.2% for 2020.
Gold continued to rally, surpassing $2,000/ounce, while the dollar held steady near its lowest level since mid-2018.
The jobs data on Friday showed that nonfarm payrolls rose by 1.763 million in July, which was slightly better than the median forecast. Despite that improvement there still are 12.86 million less people on payrolls than there were in February.
The narrative will continue to be dominated by COVID-19 news and “help” from Washington. On the economic calendar, Friday’s release of the University of Michigan Consumer Sentiment Index for August will give us a read on the confidence of the country. Expectations are for a reading of 72, substantially below the record readings of over 100 earlier in the year, and roughly unchanged from July. At North Star we pay attention to the spread between consumers view of present conditions versus future expectations. The recent readings have been well below historical highs but are likely being propped up at least somewhat by consumer hopes for further economic stimulus until higher visibility on the vaccine production timeline emerges.
The TikTok Tech Tussle between China and the U.S. could escalate into something worse, as relationships between the two largest economies in the world continue to fracture.
Stocks on the Move:
It was a terrific week for small cap stocks with 18 of our holdings posting double digit percentage gains. Unless otherwise noted there was no company specific news.
PLOW +11.6%: Douglas Dynamics is a manufacturer and upfitter of commercial vehicle attachments and equipment. The product line includes snowplows, sand and salt spreaders for light trucks, and turf-care solutions. These products are sold under the Blizzard, Fisher, Snowex, Western, Turfex, and Sweepex brands. PLOW is a 3.66% holding in the North Star Dividend Fund.
ESCA +14.3%: Escalade Inc. manufactures and distributes sporting goods for activities like archery, table tennis, basketball, trampoline, billiards, and other outdoor games. This past week the company reported solid earnings and increased their dividend by 12%. ESCA is a 5.56% holding in the North Star Micro Cap Fund and a 6.24% holding in the North Star Dividend Fund.
GEF +12.3%: Greif Inc. is a producer of industrial packaging products and services with manufacturing facilities. It offers a comprehensive line of rigid industrial packaging products, such as steel, fiber, and plastic drums, rigid intermediate bulk containers, closure systems, transit protection, and reconditioned industrial containers. The company also operates in segments such as filing, logistics, and warehousing. GEF is a 0.99% holding in the North Star Dividend Fund.
OESX +20.2%: Orion Energy Systems Inc. is a developer, manufacturer, and seller of lighting and energy management systems. Despite reporting a tough quarter, the Company increased its forward guidance as their largest customer resumed installations and multiple new projects commenced. OESX is a 3.66% holding in the North Star Micro Cap Fund and a 3.42% holding in the North Star Opportunity Fund.
KEQU +14.8%: Kewaunee Scientific Corp. is engaged in the design, manufacture, and installation of laboratory, healthcare, and technical furniture products. The domestic business segment specializes in scientific and technical furniture, including steel and wood cabinetry, fume hoods, laminate casework, flexible systems, work surfaces, workstations, work benches, and computer enclosures. KEQU is a 1.54% holding in the North Star Dividend Fund.
LYTS +14.2%: LSI Industries Inc. provides corporate visual image solutions to the petroleum and convenience store industry. It generates the most from its lighting segment which manufactures and markets outdoor and indoor lighting controls. LYTS is a 1.80% holding in the North Star Dividend Fund.
RGP +10.6%: Resources Connection Inc. provides consulting and business initiative support services. The company offers transformation and improvement, financial reporting and analysis, strategy development, and project management services. The company declared a $0.14 dividend (4.89%) this week, which was consistent with analyst projections. RGP is a 0.58% holding in the North Star Dividend Fund.
AMOT +13.4%: Allied Motion Technologies Inc designs, manufactures, and sells precision and specialty motion control components and systems. The firm primarily caters to the vehicle, medical, aerospace and defense, and pumps and robotics sectors. The company reported optimistic earnings that surpassed previous revenue estimates. AMOT is a 1.27% holding in the North Star Micro Cap Fund.
BOOT +22.1%: Boot Barn Holdings operates specialty retail stores that sell western and work-related footwear, apparel, and accessories. The Company reported quarterly results that exceeded reduced expectations and showed significant positive monthly improvement from April through June. BOOT is a 2.56% holding in the North Star Micro Cap Fund.
CENT + 12.8%: Central Garden & Pet Co. is a marketer and producer of branded products. The company makes and distributes to third-party pet and lawn supply industries. CENT reported better than expected results, benefitting from strong organic growth and gains from recent acquisitions. CENT is a 0.97% holding in the North Star Micro Cap Fund.
CNTY +16.4%: Century Casinos Inc. is a US-based international casino entertainment company. The company principally engaged in the development and operations of gaming establishments as well as related lodging, restaurant, and other entertainment facilities. Along with its land-based casinos, it also operates ship-based casinos on Oceania Cruises, TUI Cruises, Windstar Cruises, and Regent Seven Seas Cruises. CNTY entered into a definitive agreement to sell the casino operations of Century Casino Calgary on positive terms. Earnings were also reported and were challenged as expected. CNTY is a 0.92% holding in the North Star Micro Cap Fund.
CNSL +11.8%: Consolidated Communications Holdings Inc. provides communication services for business and residential customers across various states in the US. Its business product suite includes data and internet solutions, voice, data center services, security services, managed and IT ser ices, and an expanded suite of cloud services. This week, the company announced an $18M investment in their New Hampshire Broadband segment of their business. Including $3.5M in grand money, Consolidated Communications will bring the state enhanced services to more than 2,500 residents and businesses. CNSL is a 1.77% holding in the North Star Micro Cap Fund. CNSL corporate bonds are a 3.84% holding in the North Star Bond Fund and a 1.72% holding in the North Opportunity Fund.
EML +18.9%: The Eastern Co. is a manufacturer of hardware, security products, and metal castings. The company announced a significant reorganization involving the combination of their two largest business segments: Eberhard Manufacturing and Illinois Lock Company. EML is a 3.27% holding in the North Star Micro Cap Fund.
GLDD + 15.0%: Great Lakes Dredge & Dock Corp. is a provider of dredging services, or waterway enhancement services, across the coastal United States. GLDD reported second quarter earnings that were not “dredgeful”, as it continued working as a federally designated critical infrastructure company. GLDD is a 0.92% holding in the North Star Micro Cap Fund.
LAWS + 20.2%: Lawson Products Inc. is an industrial distributor of maintenance and repair supplies. The company offers fastening systems, hand tools, battery maintenance products, electrical products, fluid power products, safety products, abrasives, and specialty chemicals. LAWS reported better than expected earnings the previous week. LAWS is a 0.99% holding in the North Star Micro Cap Fund.
SGC + 10.8%: Superior Group of Companies Inc. designs, manufactures, and distributes uniforms to major domestic retailers, foodservice chains, transportation, and other service industries. It provides customer-specific uniform e-Stores, custom image apparel, corporate identity apparel, as well as remote staffing solutions for call centers in the medical and health fields. SGC is a 1.82% holding in the North Star Micro Cap Fund.
BBSI +10.0%: Barrett Business Services Inc. is a provider of payroll administrative and staffing services. BBSI reported quarterly earnings that were in line with expectations. BBSI is a 1.02% holding in the North Star Micro Cap Fund.
PRTS -10.9%: Our best performing stock of 2020, CarParts.com Inc., was our only double-digit decliner. PRTS will be reporting second quarter results on Monday after the market close. PRTS is a 6.94% holding in the North Star Micro Cap Fund and a 2.85% holding in the North Star Opportunity Fund.