Director’s Letter March 2014


Headwinds Out of the Gate

After a poor start to the year, the market rebounded in February with the S&P 500 and Russell 2000 each recovering over 4%. The solid market performance points to an overall positive reaction to this round of corporate earnings and guidance coupled with favorable macroeconomic conditions.

Looking at key macroeconomic statistics, Q4:13 GDP came in at 2.4% versus the consensus estimate of 2.5%. This was down from 4.1% in the 3rd quarter and the advance estimate of 3.2%. While the number looks poor versus these comps, a significant unknown exists in the form of the impact that the unusually cold weather in much of the country had on the number. Market participants will naturally be looking to the Q1:14 estimate to gauge the weather impact although this quarter has also seen several spells of severe cold too.

For February, the S&P 500 was up 4.2%, the Russell 2000 was up 4.4% and the aggregate Singular List was up 2.4%. For trailing twelve months, the S&P was up 22.5%, the Russell 2000 was up 29.6%, and the Singular Research List was up 19.5%.

We initiated coverage on one company during February, Salem Communications (SALM), which we launched on with a BUY and a $13 target price (versus a price at initiation of $8.38).

Our top five performers in February include companies from a variety of industries. The top performer was Edgewater Technology, up 27.6%. The company had a strong earnings report marked by accelerating service revenue and improved gross margins. SELL-rated Angie’s List was down 22.5%in February (for a positive return on our recommendation). The company reported disappointing membership additions and increasing churn. Flexsteel was up 20.5%, also the result of a solid earnings report which noted continued record sales. Bacterin was up 21.2%. Although the company is not due to report earnings until March, management presented at multiple conferences, likely fueling increased interest in the shares. Anika Therapeutics was up 18.3% as its Arthritis drug Monovisc was approved by the FDA.

Our worst performers in February are from a variety of industries and included one of our SELL-rated companies. Despite the adverse moves in the near term, we believe our theses are sound on all of them, offering significant alpha from here. University General Health System was down 36.6%in February. The company reported earnings early in the month while also getting up to date on its financials but the shares faded nonetheless. NetSol Technologies was down 16.1% as the market was disappointed with the company’s earnings report. Orion Energy Systems was also down 16.0% following its Q3:14 earnings report. Aceto was down 14.2%, continuing the trend of companies seeing negative reactions following earnings. SELL-rated Solar City was up 14.6% in February. The company had several announcements which lent a positive bias to the shares.

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.

Sincerely,

Jeremy Hellman, CFA
Chief Operating Officer

 

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