Last Week:

The market went into a mini RallyPause that lasted until Thursday morning (remember there are no corrections anymore), but the S&P 500 managed to finish up 0.4% at a new record level by the close of trading on Friday, although Russell 2000 declined 1%. The narrative remains the same, with tax reform progressing, the economy reasonably strong, and a government shut-down averted. Another “Goldilocks” employment number released Friday morning seemed to trigger the buying. Payrolls rose 228,000 in November, but average hourly wages only increased 2.5%. Not too hot as to warrant a quicker pace of interest rate hikes, and not too cold as to generate concern over the health of the economy. The Dollar rallied 1%, while the yield on the Ten-Year Treasury inched up 2 basis points to 2.38%.

While the focus is on Goldilocks, let’s not lose sight of the three bears lurking out there.  Papa Bear would be rising interest rates. There was a coordinated effort by the global central banks to drive down interest rates in response to the financial crisis. We are in the initial stages of those rates normalizing, which will produce a strong headwind for equity prices, which are trading at elevated multiples because of the lengthy period of very low interest rates. TINA (There Is No Alternative to equities) has been the prevailing principal for investors during this historic bull market. Mama Bear would be the unwinding of over $10 Trillion of assets purchased by those central banks. It’s an unprecedented situation, and the potential impact on global economies is unknown. Baby Bear would be geopolitical risk. I’m not an expert in this area, but it sure seems like there is a lot to worry about.

In short, enjoy the porridge, but don’t fall asleep.

This Week:

It will be the last busy news week of the year, with the Alabama senate race on Tuesday, the FOMC decision on interest rates and the CPI on Wednesday, and the December flash PMI on Thursday. In addition, it’s possible that reconciliation wraps up with a tax bill on President Trump’s desk by Friday.

 

Stocks in the News:

Johnson Outdoors, Inc. (JOUT):   Strong on-going marketplace momentum of new products in the Company’s core fishing, diving and camp cook brands drove a 13 percent increase in sales as operating profit grew 99% and net income rose 160 percent year-over-year.  Significantly higher sales in Fishing and profitable growth in Diving led to improved fourth quarter performance. “Johnson Outdoors had an exceptional year, driven by unprecedented growth across our flagship Minn Kota® and Humminbird® fishing brands as demand for the new Ultrex® electric cable steer trolling motor, Helix® Series fishfinders and new-to-world MEGA Imaging sonar technology remained very strong throughout the year.  We also benefitted from our work to revitalize innovation in SCUBAPRO with successful introductions of the new Hydros buoyancy compensator and G2 dive computer.  Conversely, challenging market conditions constrained growth in Watercraft Recreation and Camping brands this year. Looking ahead to next year, we expect a slower pace of growth in our fishing business and topline growth overall,” said Helen Johnson-Leipold, Chairman and Chief Executive Officer.Johnson Outdoors designs, manufactures, and markets outdoor recreational products.

Blue Bird Corporation (BLBD): Total net sales were $312.7 million for the fourth quarter of fiscal 2017, an increase of $26.3 million, or 9.2%, from prior year period. Bus unit sales were 3,608 units for the quarter compared with 3,308 units for the same period last year. Adjusted EBITDA was $25.1 million, or 8.0% of net sales, for the fourth quarter of fiscal 2017, representing an increase of $0.8 million compared with the fourth quarter of the prior year. “We are pleased with our achievements in fiscal 2017 and are well positioned for profit growth in fiscal 2018,” said Phil Horlock, President and Chief Executive Officer of Blue Bird Corporation. “We maintained our strong leadership position in alternative-fuel-powered buses, built a record number of buses in our plant, achieved our highest bus sales in 15 years and put in place key initiatives to drive profit growth. We are pleased to announce our full-year fiscal 2018 net revenue guidance of $1,000 million – $1,030 million, Adjusted EBITDA guidance of $78 – $82 million and Adjusted Free Cash Flow guidance of $36 – $40 million.”  Blue Bird is an American bus manufacturing company. The company operates its business in two segments: Bus and Parts. Its primary business it to manufacture and designs school buses.

Lee Enterprises, Inc. (LEE): Operating revenue for the 13 weeks ended September 24, 2017 totaled $140.2 million, a decrease of 5.4% compared with a year ago. Income attributable to Lee Enterprises, Incorporated for the quarter totaled $3.2 million, compared with income of $0.4 million a year ago. “The company continues to aggressively reduce debt,” said Treasurer and Chief Financial Officer Ron Mayo. “Debt reduction in the September quarter was $20.1 million and totaled $68.8 million for the fiscal year, resulting in reduced interest expense of $6.7 million, or 10.4%, in the past twelve months.” Lee Enterprises is a premier publisher of local news, information and advertising in midsize markets, with 48 daily newspapers and a joint interest in four others, rapidly growing online sites.

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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:

Enthusiasm over holiday shopping reports and progress on tax reform helped drive the major indexes to new highs through Thursdays close. Those gains were erased Friday morning, as reports of a guilty plea from President Trump’s former advisor Michael Flynn, as well as a trillion-dollar hiccup in the tax reform plan, threw cold water on the rally. An afternoon rally restored most of the gains (“Flynn is old news”, and “something will get done with taxes”), leaving the S&P 500 ahead by 1.53% by the weekly closing bell. The Dollar Index and the yield on the Ten-Year Treasury were both essentially unchanged, while the St. Louis Fed Financial Stress Index reached -1.67, its lowest level on record. Constructed from 18 data series, the St. Louis Fed Financial Stress Index tracks the degree of stress in the financial market. The average of the index is 0. A value above zero indicates increased financial stress while a value below zero signals market conditions that are less stressful than average. The Index went above zero in August 2007, 12 months before the market declined, and has stayed negative during this 8-year market rally. Whereas we find the chart below comforting, it also highlights how quickly things can change for the worse once there is a disruption.

This Week:

Stocks will have a good start, as investors celebrate the Senate’s passage of the tax bill Saturday morning. Washington will continue to dominate the news, with the tax reconciliation process under way on Monday, as well as work on a temporary resolution to avoid a shutdown as the government spending authority expires on Friday. The November Nonfarm Payroll report will be out of Friday, with the consensus calling for the unemployment rate to remain at 4.1%, reflecting an overall strong economy.

Stocks in the News:

Perry Ellis International Inc.(PERY): Total revenue for the fiscal third quarter was $199 million, a 2.5% increase, and net income was $3.2 million, or $0.21 per diluted share, compared to a net loss of $5.2 million, or $0.34 per diluted share, in the prior year period. The Company’s financial position continues to be strong. Cash and investments at the end of the third quarter of fiscal 2018 totaled $52 million and the Company’s net debt to total capitalization stood at 10.5% at the end of the third quarter of fiscal 2018 as compared to 17.9% at the end of the third quarter of fiscal 2017.  Oscar Feldenkreis, Chief Executive Officer and President, commented, “Our powerful portfolio of global brands combined with the disciplined execution of our growth strategies by our team led to another strong quarter at Perry Ellis International, continuing our positive momentum from the first half of the year.  The third quarter was highlighted by strength across key financial metrics with increased revenues, expansion in gross margin and expense leverage, which drove a 165% increase in adjusted pre-tax income versus the prior year.  On the topline, we saw strength across our core brands including Perry Ellis, Original Penguin, Nike swim, Golf, as well as Rafaella. 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.

American Software Inc. (AMSWA): Total revenues for the quarter ended October 31, 2017 were $26.3 million, an increase of 1% over the comparable period last year. GAAP net earnings for the quarter ended October 31, 2017 increased 502% to $2.5 million or $0.08 per fully diluted share compared to $0.4 million or $0.01 per fully diluted share for the same period last year. “We are pleased with our second quarter fiscal year 2018 results which reflect our continued progress on our strategic plan to transition from a perpetual licensing to a software-as-a-service (SaaS) engagement model for our Logility Voyager Solutions, Demand Solutions and NGC Andromeda platforms,” said Allan Dow, president of American Software. “Consistent with the previous two quarters, the trend towards SaaS subscriptions as a preferred engagement method for new customers is accelerating and is positively highlighted by our 210% growth in SaaS subscription revenue. American Software develops enterprise management and supply chain related software and services. Its solutions consist of global sourcing, workflow management, customer service applications, and ERP solutions.

The Wendy’s Co. (WEN): Wendy’s announced that it is partnering exclusively with DoorDash, the technology company that connects customers with the best local businesses through door-to-door delivery. With delivery from Wendy’s serving 48 major markets nationwide and growing, Wendy’s lovers can get their fix just about anywhere, anytime. Wendy’s and DoorDash piloted a partnership earlier this year in Columbus, Ohio, and Dallas across 135 restaurants, which resulted in highly rated customer satisfaction scores. While Wendy’s staples – the Baconator and Frosty – proved to be popular menu items during the test, fans will be able to choose from a variety of menu items. Between shopping on-line, streaming video, and food delivery of burgers and shakes, soon the average American will never get up off the couch. Perhaps that’s the reason for the strength in both technology and health care stocks. Wendy’s operates, develops and franchises quick-service restaurants. It offers hamburger, sandwiches and filet of chicken breast sandwiches, chicken nuggets, chili, french fries, baked potatoes, salads, soft drinks, Frosty desserts and kids meals.

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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:

After two weeks of “RallyPause”, the market resumed its ascent, with the S&P 500 gaining 0.91% and the Russell 2000 advancing 1.76%. Volume was extremely light during holiday-shortened trading. The Dollar reached its lowest level in the last two months, while the yield on the Ten-Year Treasury was essentially unchanged. The shopping malls were busy as U.S. consumers displayed their insatiable appetite for electronics and clothes (I just wish the Kuby household’s appetite was a bit less robust). Bitcoin jumped 18% on Friday to approach $10,000. It certainly looks and smells like a bubble, but perhaps crypto currencies are the next transformational change in the economy,

This Week:

The Senate could pass its tax plan by Friday; however, reconciliation could still be an enormous challenge as substantive differences exist between the House and Senate versions. Whereas the market seems to be rising and falling in response to the prospects for corporate tax cuts, the companies that would benefit most from that reform have been underperforming for the last year.

 

 

 

If a corporate tax cut becomes reality, then it would seem logical that shares of those higher tax paying companies would enjoy a nice period of outperformance. That rally could be even more pronounced for small cap value stocks, who in general pay the highest tax rates, and whose shares have dramatically underperformed this year.

Stocks in the News:

AstroNova, (Inc.) (ALOT): Reported total revenue of $28.8 million for the fiscal 2018 third quarter ended October 28, 2017, up from $23.3 million for the same period a year earlier. Third-quarter 2018 net income was $1.4 million, or $0.21 per diluted share, compared with net income of $1.2 million, or $0.15 per diluted share, in the year-earlier period. “Healthy demand from both our Product Identification and Test and Measurement segments drove record revenue for AstroNova in the third quarter,” said AstroNova President and CEO Greg Woods. AstroNova designs, develops, manufactures and distributes specialty printers and data acquisition and analysis systems that acquire, store, analyze and present data in multiple formats.

Movado Group, Inc. (MOV): Announced total sales of $190.7 million for the fiscal third quarter ended October 3, 2017, up 6% from the year earlier period. Adjusted diluted earnings per share increased to $1.04 from $0.91. Efraim Grinberg, Chairman and Chief Executive Officer, stated, “Our powerful portfolio of brands combined with the strength of our innovation pipeline and solid execution of our strategies by our team led to a productive quarter, highlighted by increased sales and growth in adjusted diluted EPS. This performance was delivered even as the U.S. retail environment remains challenged. International sales growth led our performance with particular strength in Europe, Latin America, China and the Middle East. We were very pleased by the initial performance of our newest brand to our portfolio, Olivia Burton. 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.

Truett-Hurst, Inc. (THST): For the three months ended September 30, 2017, net sales increased $300,000 or 5%, while posting a loss of $293,000, largely due to increased staffing to accommodate the expected growth in the business in the current fiscal year. Truett-Hurst produces and sells premium, super-premium, and ultra-premium wines made generally from grapes purchased from California-based growers.

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.