A bagful of earnings, economic data, and tweets, left investors to digest whether these were tricks or treats. By Friday’s close the verdict was primarily treats, as the S&P 500 snapped its losing streak to finish +2.42%. Nevertheless, there were a few rotten fruits in the bag, most notably Apple’s weaker than expected guidance for the fourth quarter. Friday’s blockbuster payroll report, showing that the U.S. added 250,000 jobs in October, also left a sour taste in the mouth of those investors that are fixated on the increasingly hawkish tone from the Fed, as the odds of another rate hike in December increased. The yield on the Ten-Year Treasury advanced 14 basis points to 3.21%, matching its highest level since May 2011. Earnings season has been viewed as mildly disappointing, despite a 24.9% increase in EPS and 8.5% revenue growth. Much focus has been placed on the 1.1% reduction in the consensus forecast for the fourth quarter, which now stands at 15% growth of earnings on 6.8% revenue growth, with much attention being placed on the rising labor and material costs that companies are experiencing. It is worth noting that it is normal for next quarter forecasts to moderate, and in fact the reductions in the upcoming quarter are less than the average for the last 5, 10, and 15 years. Nevertheless, it is indisputable that the those rising costs, combined with the rising rates, and the uncertainties surrounding global trade and supply chains, have resulted in a much cloudier forecast for 2019 and beyond.
The tastiest treat of the week was President Trump’s tweet on Thursday that he had a “very good conversation” with China President Xi Jinping, fostering optimism that an agreement might be reached at the G20 summit later this month.
Third quarter earnings season will wind down, but with most of the big names having already reported, the impact will probably be more company specific rather than market moving. The mid-term elections will be the major macro focus, with the Democrats expected to capture a small House majority and the Republicans holding on to the Senate. Historically that breakdown of a Republican President with a split in Congress has been favorable for the stock market. An unlikely Democratic sweep would most likely unnerve the market. The “he tweeted, Xi said” trade banter will probably intensify as the G20 summit approaches.
Stocks on the Move:
Advanced Micro Devices, Inc. (AMD) +20.6%: Shares bounced back following a severe sell-off the previous week after the Company reported disappointing earnings. Advanced Micro Devices designs and produces microprocessors and low-power processor solutions for the computer, communications, and consumer electronics industries. AMD is a 2.71% holding in the North Star Opportunity Fund, and AMD corporate bonds are a 2.64% holding in the North Star Bond Fund.
American Airlines Group, Inc. (AAL) +11.44%: Strong earnings the previous week triggered a rally off of a 52-week low. American Airlines Group operates over 6,000 flights per day to more than 300 destinations across the world from hubs in Charlotte, Chicago, Dallas/Fort Worth, Los Angeles, Miami, New York, Philadelphia, Phoenix and Washington, D.C. AAL is a 3.09% holding in the North Star Opportunity Fund.
BG Staffing, Inc. (BGSF) + 12.01%: The Company reported record revenues and earnings for the quarter and nine months. Beth A. Garvey, President and CEO, stated, “We are pleased with the Company’s performance through the third quarter of the year as we continue to increase our gross profit and adjusted EBITDA percentage. Our third quarter growth was fueled by tremendous quarter-over-quarter increases in the Real Estate and Light Industrial segment revenues. Favorable economic trends, a robust job market, and positive business sentiment among our client base contributed to the strong quarter. BG Staffing provides temporary staffing services in the U.S. in Multifamily, Professional, and Commercial. Its temporary staffing services consist of on-demand or short-term staffing assignments, contract staffing, and on-site management administration. BGSF is a 3.21% holding in the North Star Dividend Fund.
Denny’s Corp (DENN) + 16.33%: The Company reported solid quarterly earnings and announced that it was going to sell its remaining company-owned stores over the next 18 months, generating approximately $30 million of additional earnings. Our refranchising and development strategy will enable us to further evolve as a franchisor of choice that provides more focused support services, all while yielding a higher quality, more asset-light business model,” CEO John Miller said in a statement. Denny’s Corp operates as a full-service restaurant chain. The Company through its wholly-owned subsidiary owns and operates the Denny’s restaurant brand. DENN is a 2.44% holding in the North Star Opportunity Fund.
1-800-Flowers.com Inc. (FLWS) + 28.07%: For the first quarter of 2019, total consolidated revenues increased 7.7 percent to $169.5 million, compared with total consolidated revenues of $157.3 million in the prior year period. Adjusted EBITDA was a loss of $13.9 million compared with an Adjusted EBITDA loss of $10.1 million in the prior year period. The higher loss reflects the lower contribution margin in the Company’s Gourmet Foods and Gift Baskets segment, due primarily to the adoption of ASC 606, as well as the timing of certain shipments in this segment, partially offset by the increased contribution margins in the Company’s Consumer Floral and BloomNet segments. Chris McCann, CEO of 1-800-FLOWERS.COM, Inc., said “The strong revenue growth that we achieved in the fiscal first quarter was driven by double-digit increases in our 1-800-Flowers and BloomNet businesses. These results reflect the continuation of several positive trends, particularly the further expansion of the 1-800-Flowers brand’s leadership position in the consumer floral space and the significant order volume growth in our BloomNet business. These trends reflect the investments we have been making to take advantage of market conditions to drive sustainable, accelerated growth.” 1-800-Flowers.com is a U.S. based provider of gourmet food and gift baskets, consumer floral, and BloomNet wire service. FLWS is a 4.01% holding in the North Star Micro Cap Fund.
McGrath RentCorp (MGRC) +13.16%: %: Reported total revenues for the quarter ended September 30, 2018 of $143.1 million, an increase of 6%, compared to the third quarter of 2017, and net income of $24.8 million, or $1.01 per diluted share for the third quarter of 2018, compared to net income of $16.8 million, or $0.69 per diluted share, in the third quarter of 2017. The Company also increased the dividend rate by 31%. McGrath RentCorp is a rental company offering modular building & portable storage, electronic test equipment, containment solutions for the storage of hazardous & non-hazardous liquids & solids; & also manufactures and sells modular classroom buildings. MGRC is a 1.47% holding in the North Star Dividend Fund.
Owens & Minor, Inc. (OMI) -31.4%: %: Reported revenues of $2.46 billion, representing an increase of 8.5% when compared to revenues of $2.27 billion in the second quarter of 2017. Quarterly revenue growth included contributions from Byram Healthcare of $128 million and two months of revenue contribution from Halyard S&IP of $168 million (before eliminations of $31.1 million). Adjusted consolidated operating income (non-GAAP) for the second quarter was $46.6 million compared to $41.4 million for the same period last year. Adjusted net income (non-GAAP) was $19.4 million, or $0.32 per share, compared to $0.43 per share in last year’s second quarter. The Company significantly reduced its forecast for the fourth quarter and slashed its quarterly dividend leading to the steep sell-off in the share price. Owens & Minor is a healthcare logistics firm distributing low-tech, consumable medical supplies to acute-care hospitals. The company distributes products to healthcare service providers under various brands such as MediChoice and ArcRoyal. OMI is a 1.03% holding in the North Star Dividend Fund.
Under Armour, Inc. (UAA) +30.29%: Revenue was up 2 percent to $1.4 billion and adjusted net income was $112 million or $0.25 per diluted share versus $0.25 in the year earlier period. “Our third quarter results demonstrate that our multi-year transformation is on track,” said Under Armour Chairman and CEO Kevin Plank. “As we work through this chapter, we are staying sharply focused on our brand by connecting even more deeply with our consumers while delivering industry-leading, innovative products and premium experiences. Coupled with increasingly greater business discipline and resulting efficiencies, we continue to gain confidence in our long-term path and ability to deliver for our consumers, customers and shareholders.” Under Armour is a developer, marketer and distributor of branded performance apparel, footwear and accessories for men, women and youth. It markets its products under the brand name of Under Armour, Heatgear, Coldgear, and Allseasongear. UAA is a 2.79% holding in the North Star Opportunity Fund and UAA corporate bonds are a 1.73% holding in the North Star Bond Fund.
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