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Kuby’s Commentary

Two Out Of Three

Aug 9, 2021

What You Need to Know

Reflecting on the major market-moving storylines, the classic 1977 Meatloaf song, “Two Out of Three Ain’t Bad” comes to mind: (1) corporate earnings were great; (2) the jobs report was very strong; and (3) BUT sadly Covid-19 cases are surging.

On the earnings front, 89% of the companies in the S&P 500 have reported actual results for Q2 2021 to date. Of these companies, 87% have reported actual EPS above estimates, which is the highest percentage of S&P 500 companies reporting a positive surprise since FactSet began tracking this metric in 2008. In aggregate, companies are reporting earnings that are 17.1% above estimates, which is amongst the highest percentage surprises on record. That growth rate compares to an expected earnings growth rate of 85.1% last week and an earnings growth rate of 63.0% at the end of the second quarter ended June 30. The combination of this growth in earnings and continued extraordinarily low-interest rates makes the historically high forward 21.1 P/E multiple on the market seem reasonable.

Turning to the employment report, Friday’s headline figure was that employers created nine hundred and forty-three thousand new jobs in July, and the unemployment rate fell from 5.8 percent to 5.4 percent. This improvement reflects the reopening and restaffing of many businesses, particularly the leisure and hospitality sector, which alone created 380,000, or about forty percent of the overall job growth. Other sectors have been adding jobs, too, including transportation, manufacturing, health care, and financial services.

The surge in Covid-19 cases does make me sad, particularly since it seems to have been somewhat avoidable given the availability of vaccines in the United States. Cases peaked at about 250,000 in early January, and bottomed out in June, averaging about 11,000 per day, but six weeks later the number is 107,143. More than 44,000 Americans are currently hospitalized with COVID-19, according to the CDC, up 30% in a week and nearly four times the number in June. The seven-day average for deaths rose from about 270 deaths per day two weeks ago to nearly 500 a day as of Friday, according to Johns Hopkins University. The situation is particularly dire in the South, which has some of the lowest vaccination rates in the U.S. and has seen smaller hospitals overrun with patients. The potential for a spike in Chicago in the aftermath of Lollapalooza over the next few weeks is also of concern. In the short run, renewed restrictions on activity will provide a headwind for the economic rebound, albeit certainly a far less stiff headwind than that experienced when the pandemic hit in 2020.

The stock market embraced “two out of three ain’t bad” and closed out the week with the S&P 500 gaining 0.94% at a record high, while the Nasdaq rose 1.11%, and the Russell 2000 advanced 0.97%. Financials and Utilities were the strongest performing sectors (the North Star Dividend Fund, NSDVX, has a healthy overweight to those sectors). The yield on the Ten-Year Treasury inched up 5 basis points to 1.29%, while the dollar was steady, and gold suffered a 2.86% decline. We still believe that gold has a place in portfolios as a hedge to potential dollar weakness.

What Else is Happening

Earnings season will wrap up, with just twelve S&P 500 companies reporting results for the second quarter. On the economic calendar, The Bureau of Labor Statistics will report the Job Openings and Labor Turnover Survey (JOLTS) for June on Monday. One of the interesting developments following the pandemic has been the record number of job openings at a time when unemployment remains elevated, suggesting that attitudes towards the workplace have been significantly altered. The BLS also reports CPI on Wednesday and PPI on Thursday, both releases will be carefully watched for any indications of the inflationary pressures being as “transitory“ as the Fed has suggested. On Friday, The University of Michigan releases its Consumer Sentiment for August. We believe it is important to monitoring consumer sentiment as a forward-looking indicator of economic activity.

Meanwhile back in the Nation’s Capital, our elected representatives will continue to haggle over the infrastructure bill, which in its current form represents approximately $550 billion in new spending over the next ten years. Following $6 trillion of spending authorized over the last few years, it seems like a relatively modest program.

Stocks on the Move

+15.27% 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, reported outstanding second-quarter earnings with net income of $2.1M or $0.04/share, net sales of $157.5M (+32% Y/Y), and record adjusted EBITDA of $8.3M. Along with the strong results, the Company announced a $30M share repurchase program. The North Star Research Team debriefed with PRTS following the release and feels confident as the company continues to execute growing revenue through distribution center expansion while remaining true to its “Right Part, Right Place, Right Time” strategy.

PRTS is a 5.00% position in the North Star Micro Cap Fund (NSMVX) and a 3.06% position in the North Star Opportunity Fund (NSOIX).

+20.09% Century Casinos Inc (CNTY) operates as an entertainment company. The Company owns casinos, hotels, and luxury cruise vessels. Last week, Century Casinos reported earnings of $0.22/share and revenue of $92.18M for the second quarter; these excellent results were driven by all the U.S. properties being reopened and a more streamlined cost structure.

CNTY is a 1.30% position in the North Star Micro Cap Fund (NSMVX).

-12.92% Hamilton Beach Brands Holding Company (HBB), through its subsidiaries, markets and designs electric household and specialty houseware appliances, as well as commercial products for restaurants, bars, and hotels. Last week, HBB reported Q2 earnings of $0.01/share and revenue of $154.66M. Although the year-over-year results were encouraging, the Company faces severe margin pressure due to higher input, freight, and labor costs.

HBB is a 0.86% position in the North Star Micro Cap Fund (NSMVX).

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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