Last Week:

Just when it looked like the bears had finally devoured Goldilocks, she made a miraculous comeback with a new heat tolerance, and the nine-year bull market resumed. After dropping 10.16% from its all-time high, the S&P 500 gained 5.9%, including 4.3 % last week, its best weekly showing in more than five years. That rally came despite a hot bowl of porridge in the form of a 0.5% monthly gain in the CPI in January. Speaking of hot, corporate earnings continued to beat expectations, with the blended growth rate for the 4th quarter rising to 15.2% on 7.9% sales growth. Additionally, 2018 earnings estimates have increased 7%, the largest EPS estimate increase since FactSet began tracking the data in 1996. The forward P/E ratio for the S&P 500 is now 17.1, which is slightly higher than the historical average. The yield on the Ten-Tear treasury reached its highest level in 4 years, closing the week up 5 basis points to 2.88%.

In other words, the market now seems to be able to absorb slightly higher levels of inflation and interest rates without creating a selling panic. The St. Louis Fed Financial Stress Index did show a sizeable increase the previous week, although it remains comfortably below zero, indicating that market conditions are still less stressful than average.

This Week:

The economic calendar is light, with Wednesday’s release of the February flash PMI report perhaps in focus. Earnings season will enter its final innings, with 53 S&P 500 companies scheduled to report.

Stocks on the Move:

Under Armour Inc. (UAA) +26.25%: Fourth quarter net sales were $1.37 billion, up 5% from the prior-year period and ahead of the consensus, while adjusted earnings per share were $0.00, in-line with estimates. “After years of rapid growth and building a globally recognized brand, the dynamic landscape of 2017 was a catalyst for us to begin strategically transforming Under Armour into an operationally excellent company” said Chairman and CEO Kevin Plank. “A year into this journey, our fourth quarter and full year results demonstrate that the tough decisions we’re making are generating the stability necessary to create a more consistent and predictable path to deliver long-term value to our shareholders.” Under Armour, Inc. is a developer, marketer and distributor of branded performance apparel, footwear and accessories.  The North Star Opportunity Fund holds a 1.3% position in UAA and The North Star Bond Fund holds a 1.7% position in UAA corporate bonds.

Zoetis Inc.  (ZTS) +12.16%: Fourth quarter revenues were $1.5 billion, up 14% from the prior-year period, and adjusted net income increased 47% to $341 million. “We finished off 2017 with strong revenue and income growth, while almost doubling our operating cash flow for the year” said Glenn David, Executive Vice President and Chief Financial Officer. “For full year 2018, we expect operational growth of 5-7% in revenue and 20-26% in adjusted net income, while we continue to improve our working capital and fund investments that will support our ability to create long-term value for our shareholders.” Zoetis is a developer and manufacturer of drugs providing medicines for animal health and vaccines for livestock and companion animals. The North Star Opportunity Fund holds a 2.4% position in ZTS.

Build-A-Bear Workshop, Inc. (BBW) +8.98%: Fourth quarter revenues were $107.6 million compared to $110.3 million in the prior-year period, while adjusted net income grew to $6.8 million from $5.0 million. Sharon Price John, President and CEO commented, “During fiscal 2017, we advanced our strategy as additional groundwork was laid to further leverage the power of the Build-A-Bear brand while we simultaneously improved the profitability of our retail channel highlighted by the expansion in retail gross margin, which contributed to pre-tax income that exceeded guidance.” Build-A Bear Workshop is a specialty retailer which offers “make your own stuffed animal” interactive entertainment experience. The North Star Micro Cap Fund holds a 2.7% position in BBW.

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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:

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.

This Week:

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.

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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 is halftime in the earnings season, and so far they have been terrific, which to borrow from Super Bowl halftime performer Justin Timberlake, is “Not a Bad Thing”. Traders, on the other hand, finally decided that good news in the economy was indeed bad news for asset prices, as the Ten-Year Treasury rate reached its highest level in four years, and equity prices plummeted. The S&P 500 declined 3.85%, erasing over half of the previous gains for the year, while the Russell 2000 dropped 3.78%, leaving it only up 0.77% year to date. Even after these declines, the market still has gone a record 404 days without a 5% pullback.

Besides the rising interest rates, there was other news that affected equity prices. The market was down sharply on Monday and Tuesday, with the health care stocks suffering the worst damage, seemingly triggered by an announcement of a new disruptive initiative by Amazon.com, Berkshire Hathaway, and JP Morgan Chase to cut health care costs for their employees. There were also concerns that the State of the Union speech could spark new controversies. Those concerns proved largely unjustified, and the market held steady until Friday morning’s jobs report, that came in stronger than expected. Wage inflation seems to finally be on the rise, with average hourly earnings for private sector workers rising 2.9% in January, the biggest annual increase since 2009. Once again, in the big picture “Not a Bad Thing”.

This Week:

The second half of earnings season will kick off with 91 S&P 500 companies reporting results. Not only have the earnings been strong, but composite revenues have shown 7.5% growth, with a record percentage of companies exceeding estimates. Of course, the big question will be whether the sell-off will be viewed as a healthy buying opportunity or mark the end of the nine-year bull market.

Stocks on the Move:

Johnson Outdoors, Inc. (JOUT): Total Company net sales in the quarter rose 24 percent to $116.6 million compared to net sales of $93.7 million in the prior year quarter. Total Company operating profit for the first fiscal quarter was $7.0 million, a $6.6 million improvement over $0.5 million in the prior year first quarter. “We’re pleased by the strong start to the year, particularly pre-season performance in Fishing and Diving which highlight the importance of our ongoing focus on innovation that delivers bigger, better new product success.  Continued progress in our work to reposition Eureka® for the future and taking actions to strengthen efficiency in Watercraft Recreation are key priorities in the face of very challenging market conditions,” said Helen Johnson-Leipold, Chairman and Chief Executive Officer. Johnson Outdoors is a global manufacturer and marketer of branded seasonal, outdoor recreation products. It offers products under Watercraft, Diving, Marine Electronics and Outdoor Gear. The Company’s share price was +20.42%. The North Star Micro Cap Fund holds a 3.2% position in JOUT.

Boot Barn Holdings, Inc. (BOOT): Net sales increased 12.7% to $224.7 million from $199.4 million in the prior-year period. Net sales increased due to an increase of 5.2% in same store sales, the sales contribution from seven new stores opened over the past twelve months and the four stores acquired from Wood’s Boots, and sales from the Country Outfitter site that was acquired in February 2017. Net income was $20.1 million, or $0.73 per diluted share. Excluding the impact of the change in federal tax law that generated approximately $0.24 per share of tax benefit from the revaluation of deferred tax liabilities and $0.03 of tax benefit from a lower effective tax rate, net income per diluted share was $0.46, compared to $0.39 per diluted share, in the prior-year period. Jim Conroy, Chief Executive Officer, commented, “We experienced solid sales growth during the third quarter and through January driven by the combination of a healthier consumer environment and solid execution across the company. Boot Barn Holdings 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. The Company’s share price was +10.67%. The North Star Micro Cap Fund holds a 1.8% position in BOOT.

WisdomTree Investments, Inc. (WETF): Reported adjusted net income of $5.2 million versus $4.2 million in the year earlier period. WisdomTree CEO and President Jonathan Steinberg said, “2017 was a transformative year for WisdomTree with the announcement of a strategic acquisition, considerable improvement in net flow breadth and the rollout of technology-enabled solutions to help financial intermediaries thrive in an evolving industry landscape.  These successes are a direct result of the investments we’ve made in our people, products, geographies and technology capabilities. Coming off a record 2017 for the ETF industry, the best is still ahead and WisdomTree is one of the few global ETP sponsors with a broad suite of differentiated products and technology solutions to fully capitalize on the tremendous global opportunity.” WisdomTree Investments is an exchange traded fund (ETF) and exchange traded product (ETP) sponsor and asset manager. It offers Equity ETFs, International Hedged Equity ETFs, Currency ETFs, and Fixed Income ETFs. The Company’s share price was -12.81%. The North Star Opportunity Fund holds a 3.7% position in WETF.

Meredith Corp. (MDP): Announced that it completed the acquisition of Time, Inc., and reported fiscal 2018 second quarter earnings per share of $1.14 excluding special items. This compares to earnings per share excluding special items of $1.30 in the prior-year period. As expected in an off-election year, Meredith recorded $38 million, or $0.52 per share, less of high-margin incremental political advertising revenues in the second quarter of fiscal 2018 than in the prior year. “We were quite pleased to report record earnings per share for a non-political second quarter and first half, driven by strong growth in non-political advertising revenue in our Local Media Group, along with record digital performance and solid expense discipline in our National Media Group,” said Chairman and CEO Stephen M. Lacy. Additionally, Meredith raised its annual dividend 4.8 percent to $2.18 per share, the 25th straight year it has raised its dividend. Meredith has now paid a dividend for 71 consecutive years. Meredith is a media company operating in America. The company focuses on publishing and marketing entertainment content which include home, family, food and lifestyle. The Company’s share price was -12.55%. The North Star Opportunity Fund holds a 1.8% position in MDP.

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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.