Gap Week

Published on April 16, 2018

Last Week:

The short story is that the S&P 500 gained 1.99%, as easing trade tensions with China, strength in the Energy sector, and the outset of a very strong earnings season provided the backdrop. The long story is that each day exhibited volatile swings, with the market gapping up on the opening Monday, Tuesday, and Thursday, and gapping down on the opening Wednesday and Friday. The pockets of turbulence came from the horrific developments in Syria (on a related note the Russian Ruble posted one of its biggest weekly declines on record), the FBI raid and seizure of documents from President Trump’s lawyer Michael Cohen’s office, ongoing developments in the Mueller investigation, the release of Comey’s tell-all book, and Facebook’s CEO Mark Zuckerberg’s testimony in front of Congress to defend the Company’s business practices (FB shares actually rallied, and the tech sector was the 2nd best performing sector behind energy during the week). Additionally, earnings from the Wells Fargo, Citigroup and J.P. Morgan added to the uncertainty about the health of the economy, as profits were strong, but lending was flat for the quarter.

The yield on the Ten-Year Treasury inched up 5 basis points to 2.82%, which is pretty much in the middle of the narrow 20 basis point range it has traded in over the last 2 months.

The NBA and NHL playoffs have commenced, with no Chicago teams making the cut. I think it is the first winter ever that the Bulls, Blackhawks, and Bears all finished in last place in their divisions. We are believers in reversion to the mean, so it should get better from here.

This Week:

Retail Sales for March will be released on Monday. The consensus is for a 0.4% increase month on month, which would snap a 3-month streak of modest declines. Earnings season will kick into full gear, with 60 S&P 500 companies reporting first quarter results. If companies “beat” the estimates by the normal margin, then composite earnings could post a 20% increase for the quarter!

All the pockets of turbulence from last week are still in the atmosphere, so I would anticipate a continuation of daily (hourly?) volatility.

Stocks in the News:

Simulations Plus, Inc. (SLP) +10.1%: Revenues for the second quarter were up 29%, and income from operations were up 35%. John Kneisel, Chief Financial Officer, said “We saw another strong quarterly revenue growth in our core divisions in Lancaster and Buffalo coupled with new revenues and profits from DILIsym Services acquired in the last quarter of our prior fiscal year.” Simulations engages in the licensing and conducting drug research by pharmaceutical and biotechnology companies. The North Star Dividend Fund holds a 2.2% position in SLP.

Alaska Communications Systems Group, Inc. (ALSK) -9.7%: The Company’s shares declined without any specific news. There are two large shareholders who have expressed their dissatisfaction with the executive compensation structure, and the Company adopted a Rights Agreement that has restricted those holders from acquiring additional shares.  Alaska Communications engages in the provision of telecommunications and network services in Alaska. The North Star Opportunity Fund holds a 1.7% position in ALSK.

American Airlines Group, Inc. (AAL) -8.8%: Fuel costs jumped 20% in the first quarter, creating a headwind for the Company’s financial results, which will be released on April 26. American Airlines is a holding company whose main operating subsidiary provides transportation for passengers and cargo. The North Star Opportunity Fund holds a 2.5% position in AAL.

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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.

Last Week:

It was a turbulent week in what is developing into a volatile year in the stock market. In fact, we have already had more than three times as many days of 1% or more changes in the S&P 500 this year than we had in all of 2017. Additionally, all the major indices are in the red year to date, with the S&P 500 now down 2.59% after declining 1.38% in the last week. There are three high pressure pockets that are contributing to the current bumpy ride. First, there is the trade war rhetoric, which in my opinion is a subset of the general political environment. It is uncertain what results this tariff tweeting strategy will produce. The White House’s directive to find $100 billion worth of Chinese goods to hit with tariffs triggered a round of selling on Friday. The best-case scenario is that some compromises are made which will allow our massive trade deficits to lessen. The worst-case scenario would be a significant inflationary surge combined with a slowdown in exports. Second, there is the impact of rising interest rates on our economy. The Fed is being very clear about its intention to continue to return short-term rates to normal levels, with 2 more hikes planned for 2018. The big sell-off on Friday seemed to have been exacerbated by comments that Fed Chair Jerome Powell made during his interview at the Chicago Economic Club luncheon. Third, there is the possibility that the economy slows down or goes into a contraction. The March jobs report on Friday came in well below expectations, and there has been some modest softening in other economic data.

These periods of uncertainty and volatility are painful, but normal. The last difficult period was the last quarter of 2015 into January of 2016 when energy prices were crashing, and a global recession seemed inevitable. After that turbulence subsided, we had two years of historically low volatility and substantial equity price appreciation.

This Week:

The twists and turns of the trade war story will likely continue to impact the market. President Xi speaks on Tuesday at the Boao Forum in China and should provide additional insight into the state of Washington-Beijing trade negotiations. On Wednesday, the Bureau of Labor Statistics reports inflation data for March.  Keep in mind that the Federal Reserve is raising rates to prevent an escalation in inflation, so any significant deviation from the expected 2.3% increase could impact the markets. First quarter earnings reports will start to trickle in, with seven S&P 500 companies schedule to report results. The earnings growth rate for the S&P 500 is expected to be 17.1% for the quarter, which would mark the highest growth rate in 7 years.

Stocks on the Move:

AMC Entertainment Holdings, Inc. (AMC) +17.1%: The Public Investment Fund of Saudi Arabia (PIF) announced that its wholly owned subsidiary, the Development and Investment Entertainment Company, has signed an agreement with AMC to operate AMC Cinemas in the Kingdom. The Development and Investment Entertainment Company jointly with AMC expects to open 30-40 cinemas in approximately 15 cities in Saudi Arabia over the next five years, and a total of 50-100 cinemas in approximately 25 Saudi Arabian cities by the year 2030. AMC and the Development and Investment Entertainment Company have a goal of establishing an approximate 50 percent market share of the Saudi Arabian cinema industry. After a 35-year ban on cinemas in the Kingdom of Saudi Arabia, the Development and Investment Entertainment Company jointly with AMC will open its first theatre in Riyadh in the King Abdullah Financial District on April 18. AMC’s entry into the Kingdom of Saudi Arabia is in concert with a key objective of Vision 2030, which is to grow the entertainment sector in Saudi Arabia. As a result, the cinema industry is expected to grow to around $1 billion in size over the coming years.  AMC is engaged in theatrical exhibition. It is principally involved in the theatrical exhibition business and owns, operates or has interests in theatres located in the United States. The North Star Opportunity Fund holds a 1.8% position in AMC and the North Star Bond Fund holds a 2.2% position in AMC corporate bonds.

Myers Industries, Inc. (MYE) +10.9%:  The Company’s shares spiked to a 4-year high on heavy volume and no specific news. Meyers manufactures a range of polymer products for industrial, agricultural, automotive, commercial and consumer markets. It also manufactures plastic reusable material handling containers and pallets. The North Star Dividend Fund holds a 3.4% position in MYE.

Pioneer Power Solutions, Inc. (PPSI) -9.8%: The Company announced confusing earnings, as well as a letter of intent to sell its switchgear business the previous week. Pioneer manufactures, sells and services a broad range of specialty electrical transmission, distribution, and on-site power generation equipment for applications in the utility, industrial, commercial and backup power markets. The North Star Opportunity Fund holds a 2.1% position and the North Star Micro Cap Fund holds a 1.2% position in PPSI.

NTN Buzztime, Inc. (NTN) -17.5%:  The Company reversed the gains it experienced the previous week that seemingly were sparked by activist investor Sean Gordon’s open letter to the Board of Directors highlighting the numerous opportunities that he thinks the Company should be pursuing. NTN 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. The North Star Micro Cap Fund holds a 1% position in NTN.

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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.

Last Week:

A rally on Thursday capped off a volatile holiday-shortened week, and left the equity indices in the green, with the S&P 500 posting a 2.03% gain. Technology stocks drove most of the swings, as the debate raged between the the sector sell-off being “overdue” or “overdone”. Facebook attracted most of the media attention, as the company came under fierce attacks for their data practices. Nevertheless, the Company’s shares managed to eke out a small gain for the week. The yield on the Ten-Year Treasury dropped 9 basis points to 2.74%, its lowest level since February 6th, which was one week after the strong wage growth number that triggered a rise in rates and a decline in stocks from their all-time highs.

This Week:

The Bureau of Labor Statistics posts the March employment report on Friday. The January report seemed to trigger the volatility in the market, while the February report calmed the inflation hawks. Consensus estimates are for a rise of 180,000 jobs and average hourly wages rising 2.7% year over year. Too hot a number could create a repeat of the spike in rates and sell-off in stocks that followed the January report, while too cold a number could possibly lead to a yield curve inversion and empower the recession Casandras.

Stocks on the Move:

Movado Group, Inc. (MOV) +20.2%: Efraim Grinberg, Chairman and Chief Executive Officer, stated, “We are pleased with our strong end to the year highlighted by fourth quarter sales growth of 14.1%, adjusted operating income growth of 93.5% and an increase in adjusted EPS to $0.52. The strength of our owned and licensed brands continued to drive our performance in the fourth quarter, buoyed by accelerated growth in our subsidiaries in the UK, France and Germany, and the contribution from Olivia Burton. We were also very pleased to record a 6.4% increase in comparable sales for our Movado Company Stores for the quarter. Our fourth quarter performance continues to demonstrate the power of our brands around the world and the strength of our organization. As we focus on expanding our online presence given an evolving retail landscape, we are encouraged by the progress made in the quarter with our digital initiatives in support of our global portfolio.” Mr. Grinberg concluded, “Given our strong balance sheet, including $214.8 million of cash, combined with the expected benefit from tax reform, we are pleased that today our Board approved an increase in our regular quarterly dividend to $0.20 per share.” Movado designs, sources, markets and distributes fine watches. Its brands include Coach Watches, Concord, Ebel, ESQ Movado, Scuderia Ferrari Watches, HUGO BOSS Watches, Juicy Couture Watches, Lacoste Watches, Movado, and Tommy Hilfiger Watches. The North Star Micro Cap fund holds a 3.5% position in MOV.

NAPCO Security Technologies, Inc. (NSSC) +15.8%: Announced that Pepperdine University has ordered over 400 Trilogy Networx Locks for use on its campus in Malibu, CA. Pepperdine University has recently placed the order for these locks and installation in currently ongoing. The university has previously completed the installation of NAPCO products in its student dormitories as well as its library and administration buildings. Over the past few years Pepperdine has now installed NAPCO products in three different projects, which demonstrates the university’s commitment to school safety as well as the very positive opinion they have with respect to the performance of NAPCO products in protecting the students and staff on its campus. Richard Soloway, CEO of NAPCO commented, “Our relationship with Pepperdine University continues to be a very positive one and we are excited that for the third time they have chosen to use our products in their campus buildings. NAPCO is committed to the effort of making our schools safe for both students and the staff. Our school safety product offering has something that can fit every school’s budget, whether a university such as Pepperdine or a small elementary school. The school safety vertical continues to be a paradigm shift for the Company and we expect it to continue in the future years ahead.” NAPCO is engaged in manufacturing of security products, encompassing access control systems, door security products, intrusion and fire alarm systems and video surveillance products. The North Star Micro Cap fund holds a 1.2% position in NSSC.

Other companies experiencing large price movement, without any specific news, were Alaska Communication Systems, Inc. (ALSK) -11.8%, Flexsteel Industries, Inc. (FLXS) +13%, and NTN Buzztime, Inc. (NTN) +21.9%.

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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.