Pas Mal

Published on April 24, 2017

Last Week:

Strong corporate earnings, solid economic data from China, and a failed missile launch from North Korea, all contributed to a better mood on Wall Street. Corporate earnings continued to exceed expectations, with 75.8% of the 95 S&P 500 companies that have reported earnings this quarter topping analyst forecasts. At this pace, it should be the best growth in earnings since Q4 2011. The second largest economy in the world also provided some good news, with China GDP, industrial production, and retail sales all coming in very positively. The markets snapped out of a two-week losing streak, as the S&P 500 index rose 0.8%, while the Russell 2000 jumped 2.6%. The yield on the Ten-Year Treasury inched up one basis point to 2.24%.

I’m not a Rajon Rondo fan, nevertheless my prediction that the Bulls would upset the Celtics in the first round of the NBA playoffs was looking a lot better before he broke his finger.

I had the opportunity to visit Truett Hurst Winery in Healdsburg, CA last week.  Not only was the wine good but I am glad to see that we got some livestock along with the deal.

 

This Week:

A flurry of earnings reports should dominate trading, with it being the busiest earnings week of the quarter. There could also be market moving news from Washington, as both a major tax plan and another health care reform bill have been promised. The hotly contested French presidential elections might impact global markets. Mohamed El-Erian, Allianz SE’s chief economic advisor, has suggested that a victory by Nationalist Marine Le Pen would destabilize the construct of the European Union. Despite being in the two-person run-off, Bob Aliber points out that Le Pen is “far from winning”. The possibility of a U.S. government shutdown without a funding bill will also provide the news networks with lots of material, though probably not having much impact on the market. Since the Ford administration, there have been 18 federal shutdowns, during those 128 days of shuttered government, the Standard & Poor’s 500 index fell a mere 0.6%, on average. In any event, a shutdown is unlikely. Speaking of unlikely, Trump’s bold comments on Friday have been reduced to a statement of principles and priorities due out this Wednesday.

Stocks in the News:

Rocky Brands, Inc. (RCKY) reported that first quarter net sales increased 9.6% to $63.1 million compared to $57.5 million in the first quarter of 2016, and that first quarter net income was $1.5 million, or $0.20 per diluted share compared to a net loss of $0.2 million, or ($0.03) per diluted share in the first quarter of 2016. Mike Brooks, Chairman and Chief Executive Officer, commented, “Our first quarter results represent a solid start to 2017. We achieved approximately 10% top-line growth by more than doubling our military segment sales to a quarterly record $12 million. Importantly, we were able to fulfill this significant increase in military footwear demand at margins well above the last half of 2016 due to improved efficiencies at our company-operated production facility in Puerto Rico. At the same time, sales trends in our wholesale segment have stabilized, particularly in Work and Western, our two largest categories.

Blackstone Group LP (BX) reported that economic net income per share, which reflects the mark-to-market valuation of Blackstone’s portfolio, more than doubled to 82 cents from 31 cents a year earlier. Additionally, the Company said the sale of assets for top dollar allowed it to pay its second-highest quarterly dividend ever at 87 cents per common unit.

Janus Capital Group Inc. (JNS) reported first quarter 2017 net income adjusted for merger-related costs was $43.8 million, or $0.23 per diluted share. Fourth quarter 2016 net income adjusted for merger-related costs was $37.2 million, or $0.20 per diluted share.  The Company also reported that average assets under management during the first quarter 2017 were $201.4 billion compared with $191.9 billion during the fourth quarter 2016 and $180.2 billion during the first quarter 2016.

Acme United Corporation (ACU) announced that net sales for the quarter ended March 31, 2017 were $27.7 million, compared to $25.3 million in the first quarter of 2016, an increase of 10%. Net income was $659,000 or $0.18 per diluted share for the quarter ended March 31, 2017, compared to $565,000 or $0.16 per diluted share for the comparable period last year, an increase of 17% in net income and 13% in earnings per share. Walter C. Johnsen, Chairman and CEO highlighted the recent acquisition of Spill Magic, Inc. as a driver of continued growth and investment in the near-term. Spill Magic products are leaders in absorbents that encapsulate spills into dry powders that can be safely disposed, helping to avoid slips and falls on our customers’ premises. Mr. Johnsen likes to use the example of someone dropping a pickle jar in a store aisle.

Murphy USA (MUSA) provided guidance on several metrics for 2017.  While the company does not typically discuss full-year guidance on a quarterly basis, weaker-than-expected first quarter results will reduce the likelihood of achieving some of the company`s full-year guidance metrics. “The first quarter is typically a period of lower earnings for the company, but a variety of market conditions along with regulatory and political events have converged that will result in short-term underperformance versus historical Q1 results,” said President and CEO Andrew Clyde.  “In our 20 year history, we have weathered a wide variety of challenging market conditions, which eventually experience mean reversion and we expect that this year will be no different.“

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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:

Rising geopolitical tensions, soft economic data, and fading hopes for the passage of pro-business policies from Washington all contributed to a subdued mood on Wall Street despite a strong start to earnings season.

The geopolitical headlines remain quite troubling, with the mess in Syria, the elections in France, the bellicose statements from North Korea, as well as the U.S. dropping a monster bomb in Afghanistan topping the list.

As for the economy, both retail sales and consumer inflation came up short in March. Despite another uptick in the University of Michigan’s preliminary April reading, retail sales fell 0.2% in March. It was the second straight monthly decline after February’s revised drop of 0.3%, which originally was estimated as a 0.1% increase. The curious disconnect between consumer confidence and consumer spending might be partially explained by delayed tax refunds and a later Easter than last year (April rather than March). Lower gas prices also contributed to lower retail sales numbers, but should have spurred spending in other areas. Additionally, there was a 0.3% decline in the consumer price index for March, a huge miss compared with forecasts of a flat reading. Excluding food and energy prices, the so-called core CPI was down 0.1% last month, its first drop in seven years.

Meanwhile back in Washington, there is no evidence of any progress on tax reform; instead, there seems to be an unexpected pivot back to addressing health reform. A government shutdown also looms, with just two weeks until the April 28 funding deadline lawmakers are locked in negotiations over a bill that would likely provide government budget funding until the end of September.

Earnings season got off to a strong start, with solid results from both JP Morgan and Citibank, but the Financial sector still led the market lower (down 1.7%) as the S&P 500 lost 1.1%, and the Russell 2000 shed 1.4%. The yield on the Ten-Year Treasury fell 11 basis points to 2.32%, the low end of its trading range since the election, while both gold and oil continued their recent advances.

This Week:

There is a slew of March economic reports, including Housing Starts, Industrial Production, and Leading Indicators. First quarter earnings reports are scheduled for 64 S&P 500 companies, with blended growth of 9.2% now expected on 7.1% sales growth. If achieved, those would be the best readings in over 5 years, which would be the reason for optimism in face of all the uncertainties that have been highlighted.

Stocks in the News:

Health Care Services Group, Inc. (HCSG) reported that revenues for the three months ended March 31, 2017 increased approximately 5% to $404.5 million. Net income for the three months ended March 31, 2017 was $22.0 million, or $0.30 per basic and diluted common share, compared to the three months ended March 31, 2016 net income of $18.6 million, or $0.26 per basic and diluted common share. The Company also announced that it has entered into new service agreements with expected annualized revenues of over $160 million, to begin during the second quarter of 2017.

Jana Partners disclosed that it had taken an 8.8% stake in Whole Foods Market, Inc. (WFM) and wants the company to consider “strategic alternatives” or an exit strategy.

Simulations Plus, Inc. (SLP) reported that in its second quarter of fiscal year 2017, net income increased 4.4% to $1.20 million, or $0.07 per share, compared to $1.15 million, or $0.07 per share in 2QFY16 and revenues increased 10.5%, or $542,000, to a record $5.71 million from $5.16 million. John Kneisel, chief financial officer of Simulations Plus, said: “We continue our trend of consistent revenue and earnings growth. As of today, cash remains in excess of $8.5 million after our two quarterly dividend distributions totaling over $1.7 million this fiscal year.”

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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:

Poor auto sales, hawkish FOMC minutes, missile strikes in Syria, pessimistic talk from Paul Ryan about tax reform, and a confusing jobs report made for a very noisy news week. Curiously, the market yawned, with the S&P 500 slipping 0.3% and the Russell 2000 sliding 1.54%. The yield on the Ten-Year Treasury inched down 3 basis points to 2.37%, while both Gold and Crude Oil rallied modestly. The alarming headlines were softened by the body of the story. Poor auto sales, yet 2016 was a record year. Hawkish FOMC minutes, but that shows faith in the economy. Missile strikes in Syria, but contained and not reflective of a policy change. Pessimistic tax reform talk, but that’s just politics. Confusing jobs report, but influenced by warm weather in February and storms in March. In short, market participants don’t seem to be itching to find a reason to sell.

This Week:

The first quarter earnings season kicks off with JP Morgan Chase, Citigroup, Wells Fargo, and PNC Financial Group all reporting on Thursday. Geopolitics might drive markets, as an American aircraft carrier was diverted to North Korea and U.S. Secretary of State Rex Tillerson is scheduled to meet in Moscow on Wednesday. Government funding expires on April 28, which gives Congress very little time to pass a spending bill or face a Government shutdown. The markets will be closed for Good Friday.

 

Stocks in the News:

BG Staffing, Inc. (BGSF) announced that it completed the acquisition of substantially all the assets of Zycron for approximately $20 million. Since 1991, Zycron has been a leading regional provider of IT temporary staffing talent to companies throughout the southeastern U.S. region and selected markets across the country both with Fortune 500 companies and governmental entities. Zycron had revenues of approximately $38.3 million for the year ended December 31, 2016.

Landec Corporation (LNDC) reported a 5% increase in fiscal third quarter revenues, and operating income of $4.3 million versus an operating loss in the year earlier period. “Landec is focused on innovating new products at both Apio and Lifecore and shifting our product mix to higher value items to increase gross margin over time. For the third quarter, our consolidated gross margin increased 730 basis points to 17.2% compared to 9.9% in the third quarter of fiscal 2016, demonstrating the benefits of our ongoing commitment to innovation which drove a record quarter for Lifecore, Landec’s biomaterials business,” commented Molly Hemmeter, Landec’s President and CEO. “During the third quarter, Apio, Inc., Landec’s food business, experienced an improved operating environment that led to an increase in its gross margin.  We also launched several significant strategic initiatives that will advance our long-term strategy to broaden our offerings beyond produce into higher margin and less volatile natural products.”              

Cowen Group, Inc. (COWN) announced the acquisition of Convergex Group, LLC from private equity firm GTCR, Bank of New York Mellon, and other shareholders, for a total consideration, less certain closing adjustments, of $116 million in cash and Cowen common stock. Convergex is a leading agency-focused global brokerage and trading related services provider with a deep client base of 2,500 hedge funds, asset managers, broker-dealers, trusts and exchanges.

Movado Group, Inc. (MOV) announced a streamlining of its organization in which President, Ricardo Quintero, will depart from the Company. Mr. Quintero’s responsibilities will be assumed by members of the senior management team and he will remain with the Company through April 30, 2017 to ensure a smooth transition. The Company also affirmed its fiscal year 2018 outlook described in its March 20, 2017 quarter and fiscal year 2017 earnings release, based upon the assumptions described therein.

The Eastern Company (EML) announced that it has reached an agreement to acquire 100% of the outstanding shares of Velvac Holdings , the premier designer and manufacturer of proprietary vision technology for commercial vehicles. Velvac recorded net sales of $58.7 million for fiscal year 2016. We are delighted to add Velvac to our portfolio of businesses,” said August Vlak, President & CEO of Eastern. “Velvac represents an excellent fit for Eastern and helps us expand our presence in the truck and motorhome markets. This transaction also adds a new growth platform, with significant potential to expand margins in the future.”

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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.