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Kuby’s Commentary

Wag the Dog Rally

Jan 21, 2019

Last Week:

The market continued its recent rebound, as the narrative has shifted to include a more dovish Fed policy as well as a positive resolution of the trade war with China. The momentum-based trading models (are there any other trading models these days?) all flashed “buy, buy, buy!” leading to a 2.9% gain for the week and a 6.5% rise for 2019, which is its best start since 1987. For those with short memories, let’s remember that December 2018 was one of the worst months for the market ever. This recent volatility recalls the famous quote from Benjamin Graham “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” Those words written 60 years ago seem even more true now than ever before.

Speaking of voting machines, I watched “Wag the Dog” last night. You could do an interesting remake by substituting China and trade for Albania and military. In any event, it’s not a new phenomenon that it’s hard to get to the truth. For the overall market, the (likely) good news is that it is time to declare victory in the “trade war”, particularly with the March 1 deadline looming in which tariffs are scheduled to increase to 25% on $250 billion of goods imported from China. Let’s just say that the voting machine would be quite unhappy if those costs came to fruition. Additionally, we will get a dose of the truth in the form of the upcoming 4th quarter earnings season. With about 11% of the S&P 500 companies reporting results through Friday, the overall blended EPS growth consensus for the S&P 500 inched up to 10.8% from 10.6% a week ago. That includes an estimated 6.8% boost to earnings from the recent corporate tax cut, according to Credit Suisse analyst Jonathan Golub. The expected growth is also down from the 16.3% that was expected at the end of the third quarter, as concerns over the negative effects of a strengthening U.S. dollar, rising input costs and worries over a trade the trade war with China have pulled down analyst projections. Aristotle stated, “to say of what is that it is, and of what is not that is not, is true”, although GAAP for earnings hadn’t been developed back in ancient Greece.

The yield on the Ten-Year Treasury increased 8 basis points to 2.78%, its highest level since Christmas, and exactly equaling its yield from ten years ago.

At least looking backwards, we now know that one could have comfortably plugged in 2.75% as an appropriate risk-free rate, which might help explain why equities have done so well over the last decade.

This Week:

The U.S. markets are closed on Monday in observance of Martin Luther King Jr. Day. Corporate earnings will be in focus with many high-profile companies from a broad spectrum of sectors reporting results starting on Tuesday. The economic calendar is also robust, with housing data early in the week and manufacturing surveys later both expected to show evidence of a modest slow-down.

The partial government shutdown – the longest in history, will be entering its 32nd day on Tuesday when the market opens. Dr. Seuss taught us about the consequences of this type of behavior in the classic tale of the Zax, in which the South- Going Zax and the North-Going Zax bump into each other and both stubbornly refuse to step to the left or right to continue their journeys. Let’s hope that our “Zaxiticians” in Washington will resolve this most recent stand-off before any additional damage is done to the economy.

Stocks in the News:

Alaska Communications Systems Group, Inc. (ALSK) +13.1%: Announced it refinanced its credit agreements, thereby negotiating a reduction in its interest rates, extending the term, increasing capacity for shareholder friendly actions, resetting and widening key covenant thresholds and establishing incremental flexible capacity for success-based capital expenditures. Alaska Communications provides integrated communications services in Alaska. It provides local, long-distance, and wireless telephone services, Internet access, and data services to residential and business customers. ALSK is a 0.16% holding in the North Star Micro Cap Fund and a 2.23% holding in the North Star Opportunity Fund.

Bank of America Corporation (BAC) + 12.6%: Fourth-quarter results topped analysts’ estimates as Chairman and Chief Executive Brian Moynihan gave an upbeat view of the U.S. economy. The company reported diluted earnings per share of $0.70 above expectations for $0.63. Revenue came in at $22.74 billion, topping consensus of $22.36 billion. Bank of America Corporation is a bank holding and a financial holding company. The company provides financial products and services to people, companies and institutional investors. BAC is a 2.82% holding in the North Star Opportunity Fund.

Gannett Co., Inc. (GCI) +16.2%: MNG Enterprises, Inc. (“MNG”), owner and operator of one of the largest newspaper businesses in the U.S., with approximately 200 publications, announced that its board of directors has sent a letter proposing to acquire Gannett for $12.00 per share in cash. The proposed transaction would represent a cash premium of 41% to the Gannett stock price as of December 31, 2018, and MNG has asked Gannett to enter into discussions with MNG immediately about a strategic combination. MNG also requested that Gannett immediately commence a review of strategic alternatives to maximize shareholder value, commit to a moratorium on the acquisition of any additional digital assets, and commit to a feasible, strategic and financial path forward before hiring a new CEO. Gannett Co., Inc. operates as a multi-platform news and information company. It spreads the news all over the USA and UK through digital, mobile, and print products. GCI is a 2.28% holding in the North Star Dividend fund, and GCI Corporate bonds are a 2.75% holding in the North Star Bond Fund.  GCI is a 2.14% holding in the North Star Opportunity Fund and GCI corporate bonds are a 1.07% holding in the North Star Opportunity Fund.

Orion Energy Systems, Inc. (OESX) +13.4%: Announced that it has secured a letter of intent with an existing customer to retrofit a number of the customer’s locations with Orion’s state-of-the-art LED lighting solutions. Orion expects to realize revenue of approximately $11 million under the letter of intent. The customer selected Orion because of its unique ability to design, develop and install customized, highly energy-efficient, U.S.-manufactured LED lighting solutions that include state-of-the-art wireless control systems on a turnkey basis. The project involves initial energy audits, custom design, production, logistics, wireless control systems commissioning and full project management through installation at a number of the customer’s locations nationwide. A significant portion of the installations are expected to be completed in Orion’s fiscal 2019 fourth quarter ending March 31, 2019. Orion remains confident in achieving its fiscal 2019 revenue growth goal of 5-10% communicated in its Q2’19 quarterly release. Orion researches, develops, designs, manufactures, markets, sells and implements energy management systems consisting of energy efficient commercial and industrial interior and exterior lighting systems and related services. OESX is a 1.02% holding in the North Star Opportunity Fund.

Transact Technologies, Inc (TACT) +11.6%:  There was no specific news to account for the rebound in the share price from its depressed level. Transact Technologies, Inc. is engaged in developing and selling software-driven technology and printing solutions for restaurant, POS automation and banking, casino and gaming, lottery, mobile and oil and gas. TACT is a 1.28% holding in the North Star Dividend Fund.

Bassett Furniture Industries, Inc. (BSET) -11.4%: Net income excluding special items was $1.8 million or $0.17 per diluted share versus $5.0 million or $0.46 per diluted share for the prior year quarter. “As we have discussed throughout 2019, in recognition of the rapidly changing environment surrounding our sector and retail in general, we began 18 months ago to study and implement a number of measures to transform our business and to ensure a solid future for our 116 year old company,” commented Rob Spilman, Chairman and CEO.  “We are currently in the midst of the executional phase of several of these initiatives.  The expense involved with building for the future coupled with less than expected sales in our corporate stores adversely affected our financial results in 2018; particularly in the 4th quarter.  Bassett is a manufacturer, importer and retailer of mid-priced home furnishings. The company’s business segments are Wholesale, Retail and Logistical services. BSET is a 1.61% holding in the North Star Micro Cap Fund.

Boot Barn Holdings, Inc. (BOOT) +17.8%: Announced impressive preliminary fiscal third-quarter 2019 results. More specifically for Boot Barn’s third quarter of fiscal 2019, net sales climbed 13% year over year to roughly $254 million, helped by a 9.2% increase in same-store sales. On the bottom line, that translated to net income of $0.66 per diluted share, up from adjusted earnings of $0.46 per share in the same year-ago period. By comparison, Boot Barn’s latest guidance (provided in October) called for lower same-store sales growth of 5% to 7% and earnings per share in the range of $0.56 to $0.60. Boot Barn operates specialty retail stores that sell western and work boots and related apparel and accessories. The Company operates retail locations throughout the U.S. and sells its merchandise via the Internet. BOOT is a 2.31% holding in the North Star Micro Cap Fund.

Build-A-Bear Workshop, Inc. (BBW) + 17.6%: Modestly lowered revenue guidance for fiscal 2018. Sharon Price John, Build-A-Bear Workshop Chief Executive Officer commented, “We believe that fiscal 2018 had several anomalies that converged to negatively impact our business. The shortfall in our year’s results are largely attributed to the persistent and significant revenue and profitability challenges in the UK as unresolved issues related to Brexit negatively impacted consumer confidence and currency exchange rates and new privacy laws, known as GDPR, impeded our marketing communications. Other factors included: a decline in licensed product sales due to significantly fewer family-centric, character-based movies; the continuation of overall declines and changing composition of mall traffic; the closure of a flagship store location that represented over $7 million in North American revenue; liquidation of one of the largest global toy retailers; and a number of accounting and tax changes that negatively affected both top and bottom line results. Build-A-Bear is a specialty retailer which offers “make your own stuffed animal” interactive entertainment experience in which guests visit a variety of stations to make and customize a stuffed animal. BBW is a 2.0% holding in the North Star Micro Cap Fund.

NTN Buzztime, Inc. (NTN) +31.4%: “Trivia for Cash” proved to be a big success for the Company. On Saturday and Tuesday evenings in December, registered Buzztime players competed in 30-minute games of Countdown trivia – each worth $1,000. The competition tapped the Buzztime Nation of 10 million players and delivered results for its over 2,600 locations. In December 2018, gameplay increased by 102% on Saturdays and 125% on Tuesdays, as compared to Tuesdays and Saturdays in all of 2018.  “We launched Trivia for Cash and achieved a trifecta of objectives: engaged existing players, attracted new ones, and boosted business at our partner locations. As this exciting competition moved the needle on all three fronts, we’ve launched a similar promotion for January: Sunday Funday,” said Ram Krishnan, NTN Buzztime CEO. NTN Buzztime provides interactive entertainment and dining technology to bars and restaurants in North America. Its main products are Buzztime, Playmaker, Mobile Playmaker, BEOND Powered by Buzztime and Play Along. NTN is a 0.41% holding in the North Star Micro Cap Fund.

Truett-Hurst, Inc. (THST) +21.3%: Announced today that it commenced a self-tender offer to purchase up to 1,000,000 shares of its Class A common stock, including shares issued upon exchange of limited liability company interests of its subsidiary H.D.D., LLC, or such lesser number of shares of its Class A common stock as are properly tendered and not properly withdrawn, at a price of $2.40 per share of Class A common stock, to the seller in cash, less any applicable withholding taxes and without interest (the “Offer”).  Truett-Hurst produces and sells premium, super-premium, and ultra-premium wines made generally from grapes purchased from California-based growers. THST is a 1.11% holding 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.

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