Singular Research Director’s Letter : February 2015

Bouncy Ride Continues

January saw the market under pressure as participants focused on the year ahead and the impact of factors such as commodities prices, European Union issues, and currency impacts.  US companies with substantial overseas operations, typically larger companies, must grapple with the impact of a stronger dollar which makes their products less attractive to foreigners on a price basis while also reducing the translated US dollar revenues when the books are closed.  Conversely, smaller companies tend to have less of this exposure, not because they don’t desire to expand their reach overseas but often simply due to their lack of ability to do so at their current size and scale.  This dynamic is a key reason many pundits look for small caps to outperform larger caps in 2015.

An additional factor influencing share prices is that of commodity prices, specifically oil and natural gas.  Natural gas prices are a key cost for many businesses, especially industrials, as natural gas is used to run things like furnaces.  With the gas decline occurring a bit after the oil decline we expect the financial impact to be felt more in Q1 and beyond.  Oil prices have a significant impact on the price of gasoline and we have all seen the dramatic drop in gas prices as oil fell.  This has translated into more money in the pocket of consumers although that has yet to manifest into growth in retail sales as December figures surprised to the downside, which likely played a part in the lack of direction in the market in January.  For many, declining gasoline prices appeared to be a cinch to spur retail sales.  Where this hasn’t been the case, the market finds itself a bit confused.

For January, the S&P 500 was down 3.1%, the Russell 2000 was down 3.2% and the aggregate Singular List was down 5.5%.  For the trailing twelve months, the S&P was up 11.5%, the Russell 2000 was up 3.1%, and the Singular Research List was down 4.2%.

As most small caps don’t begin to report earnings until later in the cycle, January was a light month in terms of corporate news with respect to the Singular Research coverage universe.  As our table shows, the top performing company on the Singular List was Comstock Resources (LODE).  The company announced an expanded operating permit early in the month along with additional favorable news in concert with its earnings at the end of the month.  Our analyst is optimistic that the company will reach profitability in Q1:15, which is earlier than previously expected.

As with our top performers, our worst performers in January were also from a variety of industries and with a range of reasons for the declines.  In particular, ADES continued to experience significant issues with its financials as the company changed auditors yet again.  With no end in sight to the ongoing issues here we terminated coverage.

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 continue to track with an eye on helping our clients gain an edge.  We thank our clients for your support of independent equity research.

Sincerely,

Jeremy Hellman, CFA
Director of Research/Chief Operating Officer