Singular Research Director’s Letter: October 2016

What Does the Equity Market Tell us About the Presidential Election?

 

The equity markets took a swoon in early September, with a quick recovery right after the first presidential debate. Does this tell us something about how the equity market is voting? In a most unusual presidential election season that focuses on blaming the opponent for being “un-presidential,” one may easily make varying interpretations on how the equity market is voting. One thing is for certain, equity markets do not like uncertainty. What we perceive as certain is the steady pace of slow economic growth. The flow of econometric data describe an economy that appears to be picking up steam at times only to portray slow steady growth in the following months. Labor stats were very strong in June and July only to demonstrate slower growth in August and September. The forward-looking ISM Manufacturing Indexes took a surprisingly sharp decline in July, only to recover above expectations in August (latest available). The ISM Non-Manufacturing Index, representing a larger component of US GDP, was well above expectations in September after a weaker August. A mixed bag of econometric data is what describes our slow growth economy. We expect this to continue with a propensity to push the economic growth rate higher in the coming quarters. For this reason we still anticipate the Fed will raise interest rates by the end of the year.

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For the companies on the Singular Research coverage list, several in the top performing group were either new initiations, or rebounding from being oversold. Amyris (AMRS) was the strongest performer in September and was a new initiation.  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. EBS rebounded from a tough Q2 that had several cross currents. Supreme Industries (STS) is a new initiation that is undergoing strong revenue growth and expanding margins in serving the truck manufacturing market. Century Casinos (CNTY) had a tough Q2 but is executing on its growth strategy. INTL FCStone (INTL) reported strong operating profit which drove the large earnings beat in Q2.

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The worst performing group of the Singular coverage list during September has several that missed Q2 estimates but also have good performance potential in the coming quarters. The worst performing stock of the coverage list, IGXT, was a very strong performer in August, and has several new products that will likely come to market in the next 24 months. 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. MGIC reported Q2 that was below analyst’s expectations. GDDY missed EPS expectations, and as a short this can typically drive outperformance. Wall Street analysts are supporting the company driven by the potential for investment banking business, in our opinion. Our analyst anticipates significant dilution in the coming year as the majority holders, which have several inherent conflicts of interests with common shareholders, sell stock while the valuation is at lofty levels that the fundamentals do not support. SALM beat earnings expectations but slow revenue growth in Broadcast during the election year was disappointing.

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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 three new names in September, while dropping coverage on others. We thank our clients for your support of independent equity research.

The 11th Annual Singular Research Conference, the Best of the Uncovered’s, was held in Los Angeles in late September. Our focus on quality companies with attention on 1-on-1 meetings for corporate management and institutional investors was demonstrated. Our conferences are not for the masses, our focus is on serving our institutional clients, and feedback from the conference is very positive. If you missed the conference or missed meeting one of the presenting companies, please contact your Singular Research representative for information. Many of the presentations were recorded.