Director’s Letter January 2014

A New Year Brings a New Equity Market

After a strong finish to 2013, the equity markets initially took pause at the beginning of the year, and have recently begun to sell off more indiscriminately. Has the world changed that quickly? We don’t believe so, but perceptions change, and valuations metrics did not describe much upside to the market averages in 2014 even as Wall Street strategists were bullish. We anticipate more volatile equity markets this year but not an end to the bull market. US economic growth is poised to lead the world, and small cap companies with a focus on the US are likely to perform well in 2014.

The employment data for December took a respite from its strong performance in prior months, but we do not perceive this as a harbinger of weakening growth. We anticipate the Fed will continue to cut back on quantitative easing, driven by its belief the US economy is healthy enough to stand on its own. We do not believe the reduced monetary stimulus will be detrimental to the US economy, but equity markets typically respond to such policy changes with more volatility. The underlying strength of the US economy is evident by the positive US Manufacturing PMI and general health in retail sales.

 

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For December, the S&P 500 was up 2.4%, the Russell 2000 was up 1.8% and the aggregate Singular List was up 4.2%. For calendar 2013, the S&P was up 29.6%, the Russell 2000 was up 37.1%, and the Singular Research List was up 33.9%.

We changed the rating on one name in December. We increased our rating on Hudson Technologies (HDSN) to BUY from BUY-LT as a result of the proposed EPA rulings for virgin R-22 allocations for 2015 through 2019. The proposal was far more favorable for HDSN than we had expected, and our analyst has increased the price target.

Our top five performers in December include companies from a variety of industries. The top performer in December was LSB Industries, up 27.9%. The company has noted that production utilization is increasing and the stock is rebounding after reporting a weak Q3. Reed’s was up 22.8%in December. The company has announced agreements with additional retail chains in the past few months that significantly broaden distribution of its premium products. Bacterin was up 21.9% in December. The company recently hired a new CEO with a marketing focus and is re-vamping the sales force. Arabian American Development was up 21.6% in December. The company reported a strong Q3 and our analyst has increased estimates for 2014. Newtek Business Services was up 19.9% in December. The company has exceeded its previous goal for loan servicing assets in 2013.

Our worst performers in December are from a variety of industries, and we believe they all have significant upside from here. University General Health Systems was down 17.0%in December. The company missed its self-imposed target to complete its tardy SEC filings, but outlined healthy trailing EBITDA and growth prospects in a recent conference call. Angie’s List was down 16.4% as a short. The stock has bounced after a strong decline and news about the partial nature of its web based information is expected to drive higher membership churn rates. Rocky Mountain Chocolate Factory was down 13.4% in December. The company has reported good quarters recently and international licensing activity is improving. Nymox Pharmaceutical was down 13.3%. The company recently completed the first half of its Phase 3 clinical trials for BPH, but information from this study may not be released until the second half is completed in April 2014. INTL FCStone was down 11.1% in December. The company benefits from greater volatility in agricultural commodities and metals, which is likely to increase in the coming quarters.

As we move into the 2014, 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. With the Fed tapering in 20104 and concerns about growth in China, we anticipate 2014 to be a stock pickers market. We thank our clients for your support of independent equity research.

Sincerely,

Greg Garner, CFA
Senior Equity Analyst

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