Singular Research Director’s Letter : December 2016

December 2016 Post-Election Euphoria

 

Following a weak October, the US equity markets roared back to life after the US presidential elections. What had previously been viewed as uncertainties from a potential Trump administration during the campaign season turned into a vote of confidence for an administration that is more business friendly. It’s not hard for equity investors to favor lower corporate and capital gain taxes along with a simpler personal income tax code. But are more favorable tax rates enough for a bull rally to continue? We believe there is more to the recent equity rally. Campaign rhetoric about the current state of the economy from the president-elect was not accurate, in our opinion. The US continues to lead the world in this economic expansion – employment metrics, retail sales, and the ISM data all describe the healthiest economy since the Great Recession. Adding fiscal stimulus in the next few years from infrastructure spending and military budgets will juice up this expansion. Oh, and that potential for higher interest rates – it’s still here. We expect the first of several tightening moves by the Fed in the next year to occur quite soon. That may stall the rally, but only temporarily. Small and micro cap stocks are rebounding with a vengeance after underperforming the broader indexes for a few years. Our takeaway is the US economy and US equity markets can weather Fed tightening during 2017, particularly when it occurs when confidence is high for lower tax rates and increasing fiscal stimulus.

For the companies on the Singular Research coverage list, most of the top performing group in November reported a Q3 that was above expectations, and some of the names responded strongly after a few months of rather weak performance. State National Companies (SNC) reported a very impressive Q3, with strong revenues and good expense controls. The company is valued at a significant discount to the industry, despite its unique and favorable business lines. NV5 Global (NVEE) rebounded strongly after a few weak months. Our analyst forecasts strong revenue and earnings growth in 2017. Encore Wire (WIRE) also rebounded strongly after a few weak months and a better than expected Q3. Trecora Resources (TREC) had a weaker than expected quarter but it was mainly driven by the mining investments, and the petrochemicals business rebounded from Q2 weakness. Kulicke & Soffa (KLIC) performed well after another positive earnings surprise.

The worst performing group of the Singular coverage list during November have several hidden gems that we anticipate will perform well in the next year. The worst performing stock of the coverage list, AMRS, was a new initiation for Singular in September, and the stock performed exceptionally well in October. The company has several products in the pipeline with favorable long-term implications and our analyst remains very bullish on AMRS. SA released two very favorable reports critical to mineral development. Both the Preliminary Feasibility Study and a Preliminary Economics Assessment demonstrated improved project economics on its mining assets. HBIO was a new initiation in November, and the company has met earnings expectations. CTRP was down as a short. The stock has been weak and the market rebound caused the stock to stall in its decline. EBS reported much better than expected revenues and earnings, and the stock has rebounded after month end.

We initiated coverage of Harvard Bioscience (HBIO) in November. HBIO develops and markets scientific equipment and consumables that are used in medical research. The company’s products have strong brand name recognition in the industry, and the company is well positioned to benefit from planned increases in NIH spending. New products and recent acquisitions are expected to support revenue growth while improvements in operational efficiencies, including implementation of an ERP system, are anticipated to support margins.

At Singular Research, we continue to seek out investment ideas that have minimal to no Wall Street coverage. We are working on several new names that we anticipate coverage will be launched very soon. We thank our clients for your support of independent equity research. And we wish you and your families the best during this Holiday Season.

Sincerely,
Singular Research