Small Caps Give Up June’s Gains
The Russell 2000 index gave up June’s gains and then some, sliding 6.01% for the month and 2.3% on the last day alone. With the close of July we are midway through earnings season, with many larger companies having already reported while smaller companies have yet to do so. Where companies have posted strong results, especially with upward guidance, shares have bucked the downward trend in the market. Those with less-rosy outlooks have not fared so well.
The headline print for advanced Q2 GDP of 4% gave the market an initial round of optimism as those blaming poor weather for Q1 weakness appeared proven correct. However, in parsing the details the Q2 report also showed a rise in inventories. The bear camp latched on to this item as a cause for Q3 pessimism, while bulls might point to a restocking following Q1. On the heels of the GDP report, July 31 saw a Chicago PMI reading of 52.6 versus an expected range of 61 to 65, likely fueling the significant drop in the market. Noted in the report was some weakness due to geopolitical concerns, pointing to continued issues in Gaza and Ukraine as beginning to have some impact globally.
For July, the S&P 500 was down 1.51%, the Russell 2000 was down 6.01% and the aggregate Singular List was down 3.91%. For the trailing twelve months, the S&P was up 18.2%, the Russell 2000 was up 13.5%, and the Singular Research List was up 14.1%.
Our top five performers in July include companies from a variety of industries and are all BUY rated ideas, proving that quality stock picking still matters, even in a negative tape. As our table shows, the top performing company on the Singular List in June was REX. We increased our price target on the shares from $75 to $99 during July as we expect the company to report good results for the quarter ended July 31. The two primary cost of goods sold items for REX are corn and natural gas, both of which saw prices slides substantially in recent months. At the same time, ethanol prices have remained relatively stable, implying REX will deliver very healthy gross margins.
As with our top performers, our worst performers in July were also from a variety of industries and with a range of reasons for the declines. Looking at ISSC, for example, the shares slid following earnings as deliveries on the new Delta contract have been pushed out due to a delay at the FAA. The company expects this to be resolved without issue and thus we think this initial reaction constitutes a buying opportunity.
At Singular Research we continue to seek out investment ideas that have minimal to no Wall Street coverage. There are a number of uncovered and under-covered names we have been investigating, and we plan to launch coverage on several names in the coming weeks. We thank our clients for your support of independent equity research.
Jeremy Hellman, CFA
Chief Operating Officer