The disconnect between business conditions and trading activity is rarely as dramatic as it was last week. Corporate earnings continued to surpass expectations, with blended earnings growth for the fourth quarter now up to 14% on 8% sales growth. Positive earnings surprises were reported by companies in multiple sectors, with the highest percentage of positive surprises since FactSet began tracking the data in 2008. The global economy is growing at its fastest pace since 2010, which is particularly benefitting U.S. companies with higher global exposure. The U.S. Dollar stabilized, and the yield on the Ten-Year Treasury declined 2 basis points to 2.83%. The St. Louis Fed Financial Stress Index showed a modest increase but is still a long way from indicated any warnings signs.
On the other hand, there was quite a bit of stress on the trading floors, as the S&P lost 5.16%, with volatility more than tripling by lunch on Tuesday.
As the chart above shows, these volatility spikes have been short-lived in the past 6 years. The last significant episode came at the end of 2015 and into early 2016 and was sparked by concerns over global economic weakness. The next two years were a remarkable period of calm, as the not too hot and not too cold economic data soothed investors. The somewhat hot 2.9% increase in wage inflation from the January employment report seems to have at least temporarily changed the narrative. Goldilocks has left the house, but she may return. Hopefully, sooner rather than later.
Given the recent concern over inflation, Wednesday’s release of January CPI will be in focus for traders. Forecasts call for a 1.9% annualized rate. Anything over 2% will be viewed as “too hot”. Earnings season will continue in full swing, with 59 S&P 500 companies reporting results. After the recent decline in prices combined with the increase in earnings, the forward 12-month P/E ratio is now down from 18.2 to 16.3, which is right between the 15-year average (15.2) and the 20- year average (17.2). That valuation strikes me as being not too hot and not too cold.
Stocks on the Move:
Perry Ellis International, Inc. (PERY): +10.9% Confirmed that it has received an unsolicited, conditional proposal from founder and director George Feldenkreis addressed to the Board of Directors to acquire the Company for $27.50 per share in cash. The Non-Executive Chairman of the Board of Directors intends to recommend that the Board form a special committee of its non-executive, independent directors to, consistent with its fiduciary duties and in consultation with its financial and legal advisors, carefully review and evaluate the Proposal and determine the course of action that it believes is in the best interest of the Company’s shareholders. Perry Ellis is a designer, manufacturer and distributor of men’s and women’s apparel, accessories and fragrances in the United States under its own brand names or via licensed brands including Original Penguin and Perry Ellis. The North Star Micro Cap Fund hold a 3% position in PERY and the North Star Bond Fund holds a 1.7% corporate bond position.
Motorcar Parts of America, Inc. (MPAA): -13.6% Net sales for the fiscal 2018 third quarter were $100.1 million compared with $112.6 million for the same period a year earlier. Adjusted net income for the fiscal 2018 third quarter was $6.7 million, or $0.34 per diluted share, compared with $11.7 million, or $0.60 per diluted share, in the same period a year earlier. “We were disappointed in our results for the quarter, especially since we continued to gain market share across all of our product lines. While we incurred additional expenses related to new business wins, we did not realize the full benefit of the associated revenues during the quarter. This was due to various factors, including reduced customer orders, which industry observers attribute to mild weather which seems to have reversed in our current fourth quarter. In addition, the business was impacted by customer inventory reduction initiatives. As a result, we were negatively impacted by under-absorption of overhead costs. We are now pleased to see a return to positive momentum in the marketplace. We expect the colder winter conditions across the majority of the country to further increase demand.” said Selwyn Joffe, chairman, president and chief executive officer. Motorcar Parts of America is a manufacturer, remanufacturer, and distributor of aftermarket automotive parts for import and domestic cars, light trucks, heavy duty, agricultural and industrial applications. The North Star Micro Cap Fund holds a 2.3% position in MPAA.
Janus Henderson Group, PLC (JHG): -11.2% Diluted earnings per share on an adjusted basis of US$0.73 increased 30% compared to US$0.56 in the third quarter 2017 (fourth quarter 2016 pro forma: US$0.46). Fourth quarter 2017 adjusted revenue of US$505.3 million increased 11% from US$454.6 million in the third quarter 2017, driven by strong performance fees. According to co-CEOs Dick Weil and Andrew Formica, “Investment performance is strong, which is a testament to the quality of our investment teams and an endorsement of our commitment to active management. Despite outflows in 2017, we continue to see strong levels of engagement and support from our clients globally and remain encouraged by developing relationships. In 2017, we delivered substantial growth in profitability, top-line results and cash flow generation, and we are pleased that we are on track to deliver cost savings greater than originally promised. Janus Henderson is an investment management company. It invests in equities, fixed income, property, and private equity. The North Star Opportunity Fund holds a 2.3% position in JHG.
Healthcare Services Group, Inc. (HCSG): -10.1% Reported that revenues for the three months ended December 31, 2017 increased to $499.4 million compared to $398.6 million for the same period in 2016. Net income for the three months ended December 31, 2017 was essentially unchanged at $20.2 million, or $0.27 per basic and diluted common share. According to Ted Wahl, President and CEO, “2018 marks our 42nd year of business, and the demand for our services has never been greater as the provider community continues to face regulatory challenges, as well as reimbursement uncertainties.” Healthcare Services Group provides management, administrative and operating expertise and services to the housekeeping, laundry, linen, facility maintenance and dietary service departments of the health care industry in United States. The North Star Dividend Fund holds a 2.3% position in HCSG.Tagged: Chicago, Chicago Investment Management, Eric Kuby, finance, financial commentary, Fund Fact, Gold, HCSG, JHG, Kuby's Commentary, Market Commentary, MPAA, North Star, North Star Financial Services, North Star Investment Management, NSIMC, Oil, PERY, Russell 2000, S&P 500, Stocks In the News, VIX, Wealth Management.
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