The Stock Market Rally Interrupted

The stock market party was disrupted as the Coronavirus upset the apple cart. Corporate earnings reports were strong and interest rates moved lower, but the S&P 500 declined 1.03% and the Russell 2000 fell 2.2%. It was the biggest one-week drop in the market since August, with most of the damage coming on Friday.Positive earnings surprises recorded by companies in the Information Technology sector were mainly responsible for a decrease in the projected overall earnings decline for the quarter to -1.9% from -2.4% during the week. The yield on the Ten-Year Treasury fell 16 basis points to 1.68%, its lowest level since early October. Crude oil and Energy sector stocks had a particularly difficult week, with WTI sliding 7.4% and the industry shares posting a 4.43% loss. The Dollar and Gold both inched up modestly.Concerns over the outbreak of the Coronavirus emanating from China dominated the headlines. Local authorities in China announced a series of lockdowns and travel restrictions as the number of confirmed cases spiked to over 1000 with the death toll rising to 56 and outbreaks reported in four continents. The timing of the outbreak compounds the economic and containment problems as Lunar New Year is a very important travel and shopping period in China.The Impeachment trial of President Trump and the World Economic Forum in Davos captured the media’s attention, but seemed to have no impact on the markets .

This Week:

Earnings season will be in full bloom with 147 S&P 500 companies (including 14 Dow 30 components) scheduled to report results for the fourth quarter. Amazon, Apple and Facebook will headline the show.The Fed statement after the FOMC meeting on Wednesday will probably be “steady as she goes”. 2020 could prove to be a year with minimal movement in the Fed Funds rate if the current consensus economic forecasts prove accurate. GDP for the fourth quarter is expected to have picked up from 2.1% to 2.2%, while inflation moderated further with Core PCE slipping back to 1.6% from 2.1%.The Coronavirus will continue to be in focus, both in terms of the health and economic impacts. The Chinese government has closed all theme parks, concert venues, and movie theaters in addition to issuing a travel ban that affects 35 million people.

Stocks on the Move:

PETS -11.2%: PetMed Express, Inc. announced its financial results for the quarter ended December 31, 2019. Net sales for the quarter ended December 31, 2019 were $59.9 million, compared to $60.1 million for the quarter ended December 31, 2018. Net income was $6.8 million, or $0.34 diluted per share, for the quarter ended December 31, 2019, compared to net income of $7.8 million, or $0.38 diluted per share, for the quarter ended December 31, 2018, a 10% decrease in diluted earnings per share. Whereas year-over-year results were down, there was sequential improvement. Menderes Akdag, CEO and President commented: “We were encouraged with improvements to our average order size, and gross and net income margins during the quarter. Gross margins improved by 90 basis points from 28.6% in the September quarter to 29.5% in the December quarter. Net income margins improved 180 basis points from 9.6% in the September quarter to 11.4% in the December quarter. The gross margin increase can be attributed to our success in obtaining direct purchasing relationships with all the major manufacturers, and the implementation of the minimum advertised price (MAP) policy by those manufacturers. We anticipate MAP pricing to stabilize pet medication prices throughout the online channel.Additionally, the Board of Directors declared a quarterly dividend of $0.27 per share on the Company’s common stock, which represents a 4.46% yield at the current share price. The balance sheet remains stellar, with $92 million in cash and no debt. PETS is a 2.20% holding in the North Star Dividend Fund. BSET -15.8%: Bassett Furniture Industries, Inc., is a leading manufacturer and marketer of high-quality home furnishings. With 103 company- and licensee-owned stores at the time of this release, Bassett has leveraged its strong brand name in furniture into a network of corporate and licensed stores that focus on providing consumers with a friendly environment for buying furniture and accessories. The company reported quarterly earnings of $0.07 per share, missing the Zacks Consensus Estimate of $0.16 per share. This compares to earnings of $0.17 per share a year ago. “There are several disruptive trends in the marketplace today that threaten the traditional furniture industry and retail in general,” observed Rob Spilman, Chairman and CEO. “Ongoing deflation in key categories, the seismic shift to digital marketing and online commerce, tariffs on Chinese made goods, evolving generational consumption behavior, and the tight labor market and the aging of the core baby boomer workforce are factors that must be dealt with – both for today and for the future. In fiscal 2019 and in our fourth quarter, across all three of our business segments – wholesale, retail, and logistics, we proactively executed our plan and developed new strategies to address the changing environment in which we operate.” BSET is a 1.96% holding in the North Star Micro Cap Fund. LAKE +25.3%: Lakeland Industries, Inc. Is a leading global manufacturer of protective clothing for industry, healthcare and to first responders on the federal, state and local levels. Whereas there are many issues that are negatively being affected by the coronavirus outbreak, such as airlines, cruise and gaming, a few, like hazmat suit maker Lakeland have benefited. LAKE is a 3.80% holding in the North Star Micro Cap Fund. PCOM +12.4%: Points International LTD provides loyalty e-commerce and technology solutions to the world’s top brands to power innovative services that drive increased loyalty program revenue and member engagement. Currently, the Company has a growing network of nearly 60 global loyalty programs integrated into its unique Loyalty Commerce Platform. Points reported record preliminary results for 2019 in advance of their March 4,2020 earnings release. “We are very pleased to have closed out 2019 with an exceptional fourth quarter and expect to report quarterly records in both gross profit and adjusted EBITDA,” said CEO Rob MacLean. “We continue to drive this performance by executing on our three core growth drivers – building robust pipelines and signing new partnerships, up-selling and cross-selling existing partnerships, and driving growth in existing services through advanced data analytics and automated marketing initiatives. To further accelerate growth over the mid-term, we remain focused on additional initiatives to expand into new geographies and verticals, while actively pursuing strategic partnerships or appropriate acquisitions to complement and enhance our already robust capabilities.” PCOM is a 2.14% holding in the North Star Micro Cap Fund.

Related: The Punch Bowl is Still Full as the Financial Party Rages On