Last Week:

Earnings season got off to a reasonably good start, with 81% of the 28 S&P 500 companies exceeding estimates. Almost half of the companies discussed the impact of the hurricanes on the quarter, which has resulted in a reduction in the expected growth rate for the quarter to 2.1% from 6.0% prior to the storms. Auto sales, largely replacements in the hurricane ravaged areas, contributed to a nice jump in retail sales for September. Inflation remained contained, and the yield on the Ten-Year Treasury edged down 9 basis points to 2.28%. The equity market continued its remarkably quiet and low volatility advance, with the S&P 500 gaining 0.2% to reach new record highs.

Fires ravaged Northern California, causing at least 40 deaths, burning hundreds of thousands of acres, and resulting in billions of dollars of losses.

In biblical times, the string of darkness (solar eclipse), hurricanes, and fire, probably would have been interpreted as a sign. I will go with Stevie Wonder on this one: “When you believe in things you don’t understand, then you suffer, Superstition ain’t the way.”

This Week:

56 of the S&P 500 companies will be reporting results. There will be a lot of economic data out of China, which kicks off its National Congress, and media reports suggest that North Korea could fire some missiles during the week (an act of defiance?). Recently, the market has been immune to news from China and North Korea. The US tax process continues, with a budget resolution vote scheduled for Thursday. Given the contentious tone in Washington, it’s not clear that any compromises can be reached on any issues.

It’s the 30th anniversary of the 1987 market crash. Barron’s cover article “Echoes of the 1987 Crash” highlights the risk of a similar downturn. I think they published a similar article on the 25th anniversary as well.

Stocks in the News:

Truett-Hurst, Inc. (THST): Reported a modest decline in 4th quarter earnings and revenues. “Fiscal year 2017 was a year of significant change for our company, “commented President and CEO Phillip L. Hurst. “We moved our wine production to a new custom crush facility and purchased state of the art winemaking equipment”. The company also provided an update of the impact of the fire, stating “At this time, our Estate and Tasting Room in Dry Creek has been spared by the fire…..our Kenwood facility has gone without power thereby reducing much needed cooling and ventilation. We haven’t had access to the winery, so we don’t know the fate of the 2017 vintage.”

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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:

Following up on the board game theme from two weeks ago (“Free Parking”), let’s draw an analogy between the current stock market and Chutes and Ladders. Equity prices keep moving higher, sometimes imperceptibly, sometimes climbing the ladder for more dramatic gains. Investors nervously examine the game board, and roll the dice, hoping not to land on the chutes out there that could cause swift declines. So far, so good. The S&P 500 set new record highs again, advancing 1.2% for the week, and has now gone 332 days without a 5% drop. If we don’t land on a chute next week, it will be the longest period without such a sell-off on record. The narrative supporting this calm remained in place, as the economic releases (ISM, jobless claims, durable goods) all pointed to steady expansion. Friday’s payrolls report showing an unexpected drop of 33,000 jobs in September, ending the longest stretch of job growth on record, contained signs of underlying strength if you adjust for the impact of the hurricanes. The Dollar Index and the yield on the Ten-Year Treasury both advanced for the fourth consecutive week.

This Week:

The third quarter earnings season will get underway, with 12 S&P 500 companies (including 1 Dow 30 component) scheduled to report results. The estimated earnings growth rate for the S&P 500 is 2.8%. Seven sectors are expected to report earnings growth for the quarter, led by the Energy sector. Over the last month, the expected growth rate has been reduced significantly, primarily because of declines in the Insurance industry. If the Insurance industry were excluded, the estimated earnings growth rate for the S&P 500 for Q3 2017 would improve to 4.9% from 2.8%. The estimated revenue growth rate is 4.9%, with ten sectors expected to report growth in revenues, led by the Energy, Materials, and Information Technology sectors. The only sector that is expected to report a decline in revenues is the Telecom Services sector.

The Fed Presidents will be on the speaking circuit, with the minutes from the last meeting scheduled for release on Wednesday. A rate hike in December now seems almost certain, barring an unexpected shock between now and then. The economic releases on Friday, September CPI and Retail Sales, as well as October Michigan Sentiment, are forecasted to continue the slow and steady narrative.

The Mitch Trubisky era kicks off at Soldier Field Monday night versus the Minnesota Vikings. The draft day trade to secure his selection seemed ill-conceived (roster lacks depth, plus Deshaun Watson who looked terrific leading the Clemson Tigers to two consecutive national championship games, was clearly going to be available), but Trubisky did look great in moments in pre-season. Bear down Chicago Bears!

Stocks in the News:

Rocky Mountain Chocolate Factory, Inc. (RMCF): In the second quarter, total revenues decreased 3.9%. Adjusted EBITDA was $2,014,000 versus $2,019,000. Net income came in at $928,000 versus $975,000 last year. Diluted earnings per share were $0.16 in the current quarter and in the prior year quarter. The Company opened 5 stores during the 3 months ended in August, 3 Cold Stone co-branded stores, one domestic Rocky Mountain Chocolate Factory store and one international store. They finished the quarter with $5.7 million in cash, and paid, on September 15, the company’s 57th consecutive quarterly cash dividend to shareholders in the amount of $0.12 per share. Rocky Mountain Chocolate Factory is an international franchiser of gourmet chocolate, confection and self-serve frozen yogurt stores and a manufacturer of an extensive line of premium chocolates and other confectionery products.

Simulations Plus, Inc. (SLP): Total preliminary revenues for 4QFY17 increased 58.3% to $6.3 million, a new fourth quarter record, compared to $4.0 million reported for 4QFY16. Newly acquired DILIsym Services, Inc., accounted for approximately $1.2 million of the in revenue in the quarter. Mr. John R. Kneisel, chief financial officer of Simulations Plus, stated: “This quarter represents the first quarter where we’re reporting preliminary consolidated annual and fourth quarter revenues that include three divisions – Simulations Plus (Lancaster, CA), Cognigen (Buffalo, NY), and the newly acquired DILIsym Services, Inc. (Research Triangle Park, NC), which acquisition was completed on June 1, 2017. Net income will not be released until we complete our annual audit and review of our Annual Report on Form 10-K. We expect to file our 10-K with the U.S. Securities and Exchange Commission on or before the November 14, 2017, deadline.” Simulations Plus is a developer of drug discovery and development software for mechanistic modelling and simulation and machine learning based technologies. It also explores the application of machine learning technologies in other industries.

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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.

Reflation

Published on October 2, 2017

Last Week:

The “reflation trade” picked up steam last week, specifically on Wednesday, seemingly in response to the unveiling of the Republican tax plan. Here is the definition of “reflation” according to Wikipedia: Reflation, which can be considered a form of inflation (increase in the price level), is contrasted with inflation (narrowly speaking) in that “bad” inflation is inflation above the long-term trend line, while reflation is a recovery of the price level when it has fallen below the trend line.” For those with short memories, the reflation trade spurred a powerful rally in small-cap stocks and the dollar, accompanied by a steep sell-off in bonds after Donald Trump was elected president back in November. For most of 2017, the reflation trade has been considered dead, as the prospects for the pro-growth policies of tax reform and deregulation waned. The latest phase of the reflation trade kicked off three weeks ago, encouraged along the way by firmer global inflation readings. During those three weeks the yield on the Ten-Year Treasury has increased from 2.06% to 2.32%, the dollar index has risen over 2%, and the Russell 2000 has surged 6.5% dramatically outperforming the S&P 500’s gain of 2.4%.

Peter and I attended the B. Riley and Sidoti conferences last week, and saw presentations from companies in a wide range of consumer oriented businesses, from apparel to theme parks. The tone was uniformly upbeat about the global economies, with very little mention of government , and lots of talk about working with Amazon, rather than belly-aching about being “amazoned”.

This Week:

The focus will be on the September employment report on Friday, which is expected to be soft (consensus estimate of an increase of 75,000 jobs) because of the hurricanes. The ISM manufacturing index, due out Wednesday, could also offer some information as to the strength of the economy. Otherwise it should be a pretty quiet news week, as investors turn their interest to the upcoming earnings season that will be in full force in two weeks.

Stocks in the News:

Trinity Industries, Inc. (TRN): Won a reversal of a $663 million judgment that was awarded in a whistle-blower lawsuit alleging the company defrauded the U.S. government with a faulty highway guardrail safety system. A federal appeals court in New Orleans Friday overturned the 2015 judgment that followed a Texas jury’s finding that the company cheated the U.S. by selling its ET Plus guardrail system without disclosing changes made in 2005. Trinity Industries is a diversified industrial company. The Company owns businesses providing products & services to the to the energy, transportation, chemical, and construction sectors.

Landec Corporation (LNDC): Consolidated revenues in the first quarter of fiscal 2018 decreased $9.0 million, to $123.4 million, compared to $132.4 million in the year-ago quarter. Consolidated net income in the first quarter of fiscal 2018 decreased $1.2 million, or 35%, to $2.1 million, or $0.08 per share, compared to $3.3 million, or $0.12 per share, in the year-ago quarter. Despite the slow start to their fiscal year, the Company reiterated their fiscal 2018 guidance for consolidated annual revenues to increase 2% to 4% compared to fiscal 2017 based on Eat Smart salad products growing low double digits, Lifecore growing 6% to 8% and O Olive increasing revenues by $5 to $6 million. Landec Corp and its subsidiaries design, develop, manufacture and market differentiated products in food and biomaterials markets and license technology applications to partners.

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.