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Has the Market Pendulum Found a Resting Place?

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Last Week:

Inertia: a property of matter by which it remains at rest or in uniform motion in the same straight line unless acted upon by some external force.

With no changes to the narrative to motivate traders, the stock market pendulum has recently found a resting place. Fed Chair Jerome Powell’s communications provided support to current expectations that the rate hike cycle was on pause for the foreseeable future. A China trade compromise remains likely, as the March 1 deadline was extended and a Trump-Xi signing ceremony could occur before the end of March. Corporate earnings growth for the fourth quarter remained unchanged at 13.1% with 96% of the companies having reported. The U.S economic data was mixed, with GDP coming in slightly ahead of expectations. The S&P 500 gained 0.4% to cross over 2800, with the entire gain coming Friday afternoon for the second straight week. The yield on the Ten-Year Treasury rose 10 basis points to 2.75%, while Gold and Crude Oil declined 2.9% and 2.6% respectively.

This Week:

The economic calendar is busy, with construction spending, PMI, non-manufacturing ISM, new home sales, durable goods, and trade balance earlier in the week, leading up to the carefully watched job report on Friday. Recently, Goldilocks has a taste for slightly cold porridge, as it keeps the big bad Fed from getting too aggressive.

Stocks on the Move:

Kewaunee Scientific Corp. (KEQU) -19.55%: Sales for the quarter were $32,372,000, a 15.2% decrease from sales of $38,190,000 in the prior year third quarter. Pre-tax earnings for the quarter were $35,000 compared to $2,484,000 for the prior year period.  Pre-tax earnings were impacted by the year-over-year decline in sales, increases in raw material costs and the previously mentioned foreign exchange impact.  “The third quarter is traditionally the Company’s softest quarter as it falls around customers’ calendar year-end as well as the holidays. This quarter was especially challenging as expected orders were delayed, resulting in our facilities being under-utilized. The quarter was also impacted by substantially higher raw material costs in steel and resin as compared to the prior year third quarter. There still remains a significant amount of activity for our products and services both domestically and abroad; however, economic and geopolitical uncertainty have caused many customers to postpone awards as well as the start of new projects,” said David M. Rausch, Kewaunee’s President and Chief Executive Officer. “Looking forward, we anticipate these trends will continue through the remainder of the fiscal year and are making the necessary adjustments to return to profitability in the fourth quarter.” Kewaunee Scientific Corporation is engaged in the design, manufacture, and installation of laboratory, healthcare, and technical furniture products.  KEQU is a 2.82% holding in the North Star Dividend Fund.

McGrath Rentcorp (MGRC) +12.06%: Revenue increased 9% to $133.1 million and adjusted EBITDA jumped 16% to $57.6 million for the fourth quarter 2018. The Company also increased their quarterly dividend by 10%, marking their 28th consecutive year of dividend increases. Joe Hanna, President and CEO commented, “We finished our fourth quarter on a very good note with the business delivering impressive rental revenue and profit growth.  The Company’s 31% operating profit increase was driven by an overall increase in rental revenues of 10% and a 22% increase in rental gross profit.” 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). MGRC is a 1.84% holding in the North Star Dividend Fund.

Related: Forecast: The Predictable Pattern Persists

ARC Document Solutions, Inc. (ARC) -11.28%: Net sales were $98.4 million, a 1.3% increase compared to the fourth quarter of 2017. “ARC delivered overall revenue growth of 1.6% for 2018, driven by more than a 3% increase in sales from CDIM,” said K. “Suri” Suriyakumar CEO of ARC Document Solutions. “Considering that our primary strategic objective has been to protect print revenue in the face of declining volume, driving company-wide sales growth from print with the help of our technology initiatives is a remarkable achievement. We also capitalized on our growth by posting significant year-over-year improvements in gross margin, beating our own estimates for cash flow from operations and exceeding our earnings per share expectations. Our performance also contributed to ARC achieving its target of annual adjusted EBITDA of $53.4 million despite our higher-than-usual medical costs,” Mr. Suriyakumar continued. “Absent those expenses for the year, annual adjusted EBITDA would have been nearly $3 million higher than our 2017 results. I’m very proud of our team.” The Company provided guidance for 2019 that suggested results similar to those achieved in 2018. It’s not clear to us why the market didn’t share Suri’s enthusiasm over these results. ARC Document Solutions Inc is a global document solutions provider. The company’s service offerings include managed print services (MPS), offsite services, archive and information management (AIM), specialized color printing, Web-based document management applications, and equipment and supplies sales. ARC is a 0.75% holding in the North Star Micro Cap Fund.

The Eastern Company (EML) +11.56%: Reported net income for the fourth quarter of 2018 was $4.4 million or $0.70 per diluted share, compared to a loss of ($0.2) million, or ($0.03) per diluted share, for the fourth quarter in 2017, on revenue of $56.6 million versus $54.1 in the year-earlier period. Mr. August Vlak, President and CEO, stated that “The fourth quarter of 2018 represents the fourth consecutive quarter of earnings per share growth.” He continued “The increase in sales for the full year and fourth quarter of 2018 compared to the same periods in 2017 reflects sustained growth of demand for our products and the launch of significant new programs across both our Industrial Hardware and Security Products business segments.” The Eastern Co is a manufacturer of industrial hardware, security products, and metal castings. It operates in three business segments: Industrial Hardware, Security Products, and Metal Products. EML is a 3.95% holding in the North Star Micro Cap Fund.

Portfolio holdings are subject to change and should not be considered investment advice.
North Star Investment Management Corp. is the Advisor for the North Star Family Mutual Funds.
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