Singular Research Director’s Letter: November 2016

The Presidential Election Will End, But Will Washington Change?

The US equity markets were weak in October even as economic metrics convey a US economy that continues to grow slowly and it may be picking up some momentum. Listening to some of the presidential election rhetoric may cause one to believe the US economy is headed for a decline, but the economic metrics just do not support such commentary. Concerns over the impact of rising interest rates appear to be driving the recent equity market weakness – we fully expect the Fed to notch up interest rates by year end. The US economy can bear this, but equity markets may become choppier in the short-term. Both presidential candidates have mentioned the importance of infrastructure oriented spending. Such a fiscal stimulus is welcome, in our opinion, since it has been relatively absent since the stimulus spending that was needed in the wake of The Great Recession. We believe economic growth would receive a boost for a few years with such a move, which would also justify further interest rate increases. In the long term, greater economic growth and higher interest rates puts the Fed in a better position by revitalizing its monetary levers. But will congress approve of infrastructure spending? Can the two-party rhetoric and positioning get much worse? We certainly hope that regardless of the outcome of the elections, Washington DC can go through a phase of reconciliation and move towards more compromise as opposed to inflexible positioning. A non-functioning congress does not support US economic growth.

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For the companies on the Singular Research coverage list, several in the top performing group were either new initiations, or had strong quarterly reports. Amyris (AMRS) has been the strongest performer since our initiation in September. Our analyst is expecting very strong revenue growth from the new products including cosmetic ingredients and performance polymers for tires. The AMRS product pipeline is developed through partnerships with future customers. Newtek Business Services (NEWT) has seen improving results and made an acquisition recently that our analyst expects will support dividend growth. Ctrp.com (CTRP) was up as a short. China’s slowing growth and reports on excesses in real estate and monetary policy are weighing on the lofty valuation. Acme United (ACU) had a strong earnings beat in Q3:16 driven by strong margins. Stamps.com (STMP) reported a strong revenue and earnings beat in Q2.

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The worst performing group of the Singular coverage list during October includes a few companies that have lowered guidance. The worst performing stock of the coverage list, STS, reported a very strong Q3, above our analyst’s expectations, but guidance was weaker than anticipated. VDSI lowered guidance due to higher deferred revenue from European banks. EBS has been volatile as the stock is carving out a bottom, and appears very oversold. GTN reported earnings below our analyst expectation in Q2 but exhibited good cost controls, and is a likely benefactor of increased advertising revenues in Q3. HAYN has been experiencing pricing pressures.

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At Singular Research, we continue to seek out investment ideas that have minimal to no Wall Street coverage. We recently launched coverage on several companies in the past few months, while dropping coverage on others. We thank our clients for your support of independent equity research.