Witch Way is Up

Despite a mixed bag of news, investors were treated to a Halloween rally that saw the S&P 500 gain 1.47% to set a new record high. The yield on the Ten-Year Treasury trickled down 7 basis points to 1.73% and the U.S. Dollar held steady. Apparently the same old spooky stories can’t scare the bulls anymore. Corporate earnings continued to modestly exceed the low bar that had been set as the blended (combines actual results for companies that have reported and estimated results for companies that have yet to report) earnings decline for the third quarter is -2.7%, which is smaller than the blended earnings decline of -3.8% as of last week. If -2.7% is the actual decline for the quarter, it will mark the largest year-over-year decline in earnings reported by the index since Q2 2016 (-3.2%). Boo! As expected the FOMC cut rates 25 basis points on Wednesday, but the accompanying statement took a hawkish tilt, after three rate cuts Chairman Powell suggested it was time to pause.  Whereas previously they had pledged to “act as appropriate to sustain the expansion,” they dialed that back to say that they will “assess the appropriate path” of the funds rate.  Powell’s prepared remarks stated that “monetary policy is in a good place,” and is “likely to remain appropriate”. Powell added that it would take a “material reassessment” to change that view. Boo! Boo! According to J.P. Morgan, Chinese officials are casting doubts about reaching a comprehensive long-term trade deal with the U.S. even as the two sides get close to signing a “phase one” agreement. In private conversations with visitors to Beijing and other interlocutors in recent weeks, Chinese officials have warned they will not budge on the thorniest issues, according to people familiar with the matter. They remain concerned about Trump’s impulsive nature and the risk he may back out of even the limited deal both sides say they want to sign in the coming weeks. Boo! Boo! Boo! The economic releases were dressed up as Goldilocks, with the ISM  Manufacturing Index for October missing estimates but improving modestly from September (not too cold) and the Jobs report for October showing better than expected growth of 128,000 with upward revisions for the previous months (not too hot). It was the later report that triggered the rally on Friday that accounted for most of the weekly gain. I have to confess that I didn’t have the stomach to watch the Chicago Bears this weekend. Apparently that was three hours of agony avoided.

This Week:

Earnings season will wind down with 90 S&P 500 companies scheduled to report results for the third quarter. The University of Michigan Consumer sentiment for November on Friday will be among the first data for the month and will be in focus. Despite all the monsters and goblins running amok, the U.S. Consumer has remained confident.

Stocks on the Move:

CLCT -14.45%: Collectors Universe Inc. provides authentication and grading services to dealers and collectors of coins, trading cards, event tickets, autographs, and historical and sports memorabilia. Revenues in the first quarter were up year-over-year, $20.2 million from $17.5 million, a 16% increase from a year ago. Despite the record results, the shares retreated from their recent highs; however, CLCT remains up 130.6% for the year. CLCT is a 2.14% holding in the North Star Dividend Fund and a 2.49% holding in the North Star Micro Cap Fund. FLXS +18.1%: Flexsteel Industries Inc. is a United States-based company that manufactures, imports and markets residential and commercial upholstered wooden furniture products. The products offering include sofas, loveseats, chairs, rockers, desks, tables, convertible bedding units, and bedroom furniture. Net sales decreased 11.6% to $100 million during the first quarter, with residential business accounting for the biggest shortfall due to continued soft demand related to the price increases imposed by the 25% tariff. Flexsteel has significant exposure with approximately 42% of its sales sourced from China. President and CEO Jerald K. Dittmer commented, “Since our fourth quarter and fiscal 2019 year-end call, we have been busy executing the restructuring plan that we set forth last April to drive transformation and business simplification. During the first quarter of fiscal year 2020, we continued to make progress on all fronts. That said, the only material event to report in quarter 1 was the completed sale of the Riverside, California facility and other capital assets for net proceeds of $18.9 million. This monetization was a timely and important capital infusion that we will use to continue driving Flexsteel’s transformation.”  FLXS is a 1.20% holding in the North Star Dividend Fund.  SP +16.5%: SP Plus Corp. provides parking management, ground transportation, and other ancillary services to commercial, institutional and municipal clients in urban markets and airports across the United States, Canada, and Puerto Rico. Its services include a comprehensive set of on-site parking management and ground transportation services. In addition, the company also provides a range of ancillary services such as airport and municipal shuttle operations, valet services, taxi, and livery dispatch services and municipal meter revenue collection and enforcement services. The Company reported solid third-quarter results. President and CEO G. Marc Baumann reported, “Gross profit increased 30% year-on-year in the third quarter, representing 9% organic growth, with the remainder attributable to Bags. Gross profit from existing business or the same operating locations increased by 3.4% in the third quarter and was up 4.6% year-to-date. This year-on-year growth was broad-based across most key verticals and was led by our Airports and Municipal groups. Additionally, it represented overall positive year-on-year performance across the geographies we serve. Adjusted EBITDA increased 23% in the third quarter and 26% year-to-date, despite absorbing higher G&A costs mainly associated with performance-based compensation.” SP is a 3.51% holding in the North Star Micro Cap Fund. USLM + 13.4%: United States Lime & Minerals Inc. is engaged in the business of manufacturing lime and lime products with interests in natural gas. Revenues in the third quarter 2019 were $43.6 million, compared to $35.3 million in the third quarter 2018, an increase of $8.3 million, or 23.5%. The Company’s gross profit was $13.5 million in the third quarter 2019, compared to $7.2 million in the third quarter 2018, an increase of $6.3 million, or 87.4%. “We are pleased with the improvement in our third-quarter results compared to the comparable 2018 quarter, especially with the increased demand from our construction customers; however, our outlook is tempered somewhat by the decrease in demand from our steel customers and a slowing of our construction demand heading into the fourth quarter,” said Timothy W. Byrne, President and Chief Executive Officer.  USLM is a 2.84% holding in the North Star Micro Cap Fund. MGRC +10.9%: McGrath RentCorp is a rental company. It is comprised of four reportable business segments: modular building and portable storage segment (Mobile Modular), electronic test equipment segment (TRS-RenTelco), containment solutions for the storage of hazardous and non-hazardous liquids and solids segment (Adler Tanks) and classroom manufacturing division selling modular classrooms in California (Enviroplex). The company generates its revenues primarily from the rental of its equipment on operating leases with sales of equipment occurring in the normal course of business. Total revenues for the quarter ended September 30, 2019 of $173.6 million, an increase of 21%, compared to the third quarter of 2018.  The Company reported net income of $32.5 million, or $1.32 per diluted share, for the third quarter of 2019, compared to net income of $24.8 million, or $1.01 per diluted share, for the third quarter of 2018. Joe Hanna, President and CEO of McGrath RentCorp, made the following comments regarding these results and future expectations: “The third quarter underscored the benefit of our diverse portfolio as companywide total revenues increased 21%.  Mobile Modular, TRS-RenTelco, and Enviroplex delivered significant operating profit growth compared to a year ago, contributing to the Company’s overall 30% operating profit increase.  Our operating profit growth was driven by strong gross profit increases in both rental operations and sales. MGRC is a 2.36% holding in the North Star Dividend Fund. PETS -10.8%: PetMed Express Inc. along with its subsidiaries is a leading nationwide pet pharmacy. The company markets prescription and non-prescription pet medications, health products, and supplies for dogs and cats, direct to the consumer. The company generates its revenue by selling pet medications and pet supplies primarily to retail consumers. This week, the shares retreated from a previous gain. PETS is a 2.02% holding in the North Star Dividend Fund. TACT +10%: Transact Technologies Inc. is a United States-based develops and sells software-driven technology and printing solutions. The company’s software is sold under AccuDate, Epic, EPICENTRAL, Ithaca, and Printrex brand names. It also provides supplies and consumables used in the printing and scanning activities to restaurant and hospitality, banking, retail, casino and gaming, the point of sale automation, lottery, medical, mobile, oil, and gas markets. The Company will be reporting earnings on November 6th.  TACT is a 1.84% holding in the North Star Dividend Fund. AMOT +21.7%: Allied Motion Technologies Inc. designs, manufactures and sells precision and specialty motion control components and systems. The firm primarily caters to the vehicle, medical, aerospace and defense and electronics and industrial, pumps and robotics sectors. Net income fell to $0.49 per share in Q3 from $0.52 per share a year earlier, outpacing analysts’ estimates of $0.40 per share in a Capital IQ poll. Adjusted EPS rose to $0.57 in Q3 from $0.52 over the same period. Revenue rose to $96.63 million from $80.09 million a year ago, also exceeding the $92.14 million consensus.  AMOT is a 1.34% holding in the North Star Micro Cap Fund. Related: Bad Week for the Bears