Singular Research Director’s Letter: May 2016

Small Caps Improve But Still Receive Little Respect

Small cap indexes outpaced the broader market in April but still trail on a YTD basis. There has been a stealth bear market within the small cap arena with the average performance of all stocks with a market cap of under $1 billion in the US down 32.3% in the LTM period. This clearly defines a bear market, yet the Russell 2000 is only down 5.6% in the same time period.


China weakness still spooks the equity market, but domestically, US employment and housing are the economic driving factors.  Concerns remain over when the next Fed interest rate hike will occur.

For the companies on the Singular Research coverage list, Salem Communications (SALM) was the strongest performer. The company operates radio, print and internet media properties that address conservative markets. The presidential election year tends to increase ad sales, the company has committed to reducing leverage, and the stock was far oversold in early 2016. Both SA and TREC have rebounded from early 2016 lows that brought many stocks in the industrial sector well below fair valuation. TREC had a strong contribution from its mine ownership, and SA announced higher reserves after additional drilling. VDSI margins improved in Q1, and IRIX increased its guidance.


In our worst performing list for April, three companies had weaker than expected Q1 reports, while two are fundamentally strong and the price weakness creates immediate opportunities. Topping our worst performers were LAKE and HHS, both of which had company specific negative news. LAKE is impacted by weakness in energy, and HHS decided to discontinue its dividend in its restructuring process, which is anticipated to be complete in 2016. AVID also missed our estimate. STMP is well positioned, and we believe the stock weakness offers a great buying opportunity.  FLXS is beating our expectations.


At Singular Research, we continue to seek out investment ideas that have minimal to no Wall Street coverage. We are tracking several names that we anticipate to launch coverage. Singular Research is sponsoring its first conference in San Francisco on June 9 with many interesting companies presenting. We invite those interested in under-covered small cap companies to attend. We thank our clients for your support of independent equity research.