Singular Research Director’s Letter : April 2017

All Rallies Come to an End

The US equity markets have been on a consistent bullish run since the early November 2016 lows. It is normal to have a correction after such a run and in the face of rising interest rates during 2016, we are happy this equity market is taking a breather. We expect some digestion of recent gains in the coming months. Our read of the economic signposts point to slightly expanding GDP growth in 2017 that can easily withstand higher interest rates.

For the top performing companies in March on the Singular Research coverage list, a common theme is strong revenue and earnings growth in recently reported quarters. Century Casinos (CNTY) was the strongest performer in March. The company has casino operations in a diverse set of venues including cruise ships and horse racing. CNTY reported a strong Q4 with adjusted EBITDA up 40%. Acme United (ACU) provides innovative cutting devices, measuring instruments and safety devices for the school, home and industrial markets. The company reported a strong Q4:16 with much higher than anticipated revenues. Lakeland Industries (LAKE) makes safety garments for industrial and public protective clothing markets. The company is performing well, and the stock rebounded from a recent dip. Gray Television Networks (GTN) owns television stations and digital assets in many US markets. GTN reported stronger than expected revenue growth and the stock has been on a rebound since the November lows. Seabridge Gold (SA) is a development stage company that explores and acquires gold properties. The company announced a resource expansion as a result of recent drilling and also made an acquisition.

The worst performing group of the Singular coverage list during March have several hidden gems that we anticipate will perform well in the next year. The worst performing stock of the coverage list, Iridex (IRIX), posted a loss in Q4:16 driven by higher expenses associated with a new product platform. Our analyst expects strong revenue and earnings growth over the next two years. Arotech (ARTX) provides innovative defense and security solutions for government agencies and commercial users. The company reported lower than expected revenues in Q4:16. ClearOne (CLRO) provides audio/video conferencing tools for Fortune 500 companies. The company has developed new products that are expected to drive growth in 2017, but during the product transition Q4:16 was below expectations. IntelGenx Technologies (IRIX) reported a strong Q4:16 and has favorable licensing opportunities. Stealthgass (GASS) provides seaborne transportation for LPG. The company reported an uptick in contract rates for its vessels. There are very few industry builds coming online in the next two years which will likely lead to higher day rates.

We initiated coverage on one new company, and dropped coverage on another in March. We initiated coverage of Arotech (ARTX) with a BUY rating. ARTX operates two divisions to serve the defense and security markets. The Training and Simulation division provides simulation equipment and services for the military and law enforcement markets. The Power Systems division provides portable energy solutions for the military, aerospace and industrial customers. ARTX customer list includes Boeing, Raytheon, other defense and aerospace companies, and the US military. The company signed new multi-year contracts in 2016, and our analyst expects the increasing need for highly trained security personnel worldwide will support revenue growth. We dropped coverage of Nova Measuring Instruments (NVMI) because the stock had reached its target valuation. We may revisit NVMI at another time if the valuation parameters become favorable.
We continue to work on new ideas in the small and micro cap space. At Singular Research, we continue to seek out investment ideas that have minimal to no Wall Street coverage. We thank our clients for your support of independent equity research.