Director’s Letter December 2013

Moving into Year-End Trading Strategy Time

Improving employment, an expanding manufacturing base, and tame inflationary pressures, what’s an equity analyst or portfolio manager not to like? And now the Fed announces the initial tapering moves that are far more tepid than we had anticipated. So is this market attractive due to the expanding global economy, or does the Fed tapering point to a more difficult equity market environment ahead? We hear many different opinions from our client base, and our conclusion is that stock selection will become more important in 2014.

Our view is that the economy can easily withstand Fed tapering, but the equity markets may respond differently. Money velocity has been so low, and combined with stubbornly high unemployment, inflationary pressures remain elusive. A greater yield spread in the coming year is likely to lead banks to lend more to small businesses, an important business creating activity which has been relatively absent in this expansion. And we anticipate more positive surprises in the labor metrics in the next year. We believe the decline in the unit labor cost and increases in productivity point to continual improvements in employment metrics in the next year.

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For November, the S&P 500 was up 2.8%, the Russell 2000 was up 3.9% and the aggregate Singular List was up 2.1%. On a YTD basis through the end of November, the S&P was up 26.6%, the Russell 2000 was up 34.6%, and the Singular Research List was up 28.6%.

We added two new names to the Singular List in November, (Erickson Air-Crane – EAC, and Manitex International – MNTX), and dropped eight names (Anaren – ANEN, Alteva – ALTV, Biolase – BIOL, DXP Enterprises – DXPE, Geospace Technologies – GEOS, PriceSmart – PSMT, TGC Industries – TGE, and Vonage – VG).  Several of these companies have performed very well over the past few years. We dropped Anaren because the company received a buyout offer that closely matched our price target and we do not expect a higher bid. We dropped Alteva due to our lowered outlook for next year. We dropped Biolase because the company has been underperforming fundamentally, and although the company has innovative technologies for healthcare, it needs more effective marketing that is likely to take some time. We dropped coverage of DXP Enterprises because the valuation went beyond our target and we can not justify a higher valuation unless a significant acquisition occurs. We dropped Geospace because of reaching target valuation and we anticipate there could be some soft quarters ahead. We dropped PriceSmart because it had reached our valuation target, and we believe further upside in the next year is likely to be minimal. We dropped TGC Industries because the company has been underperforming fundamentally, and it is unclear as to when a sustainable turnaround will occur. We dropped Vonage because we believe the focus on lower margin new business will constrain profit growth.

For those companies dropped in November that we have followed for several years, we note the performance since initiation was in triple digits, with DXPE, GEOS and PSMT all up approximately 400% or five times. This is the type of return that we strive for in focusing on new companies to cover.

We initiated coverage of Erickson Air-Cranes with a BUY rating. The company is the market leader in the heavy lift helicopter industry and has recently expanded by acquisitions. The heavy lift helicopters are leased out on multi-year contracts for firefighting, timber harvest, utility power lines, infrastructure in remote areas and other construction. Fleet utilization rates have improved due to the improving global economy and a bad fire season. Over 90% of revenues are under contracts that last at least two years, and 40% of revenues are from contracts over 10 years. Leasing an air-crane also includes an experienced crew. The two recent acquisitions expand Erickson’s exposure to the medium lift helicopters and fixed wing aircraft. Both acquisitions had under-utilized aircraft primarily due to less than optimal maintenance programs.  With improved asset management, our analyst believes the margin on these acquisitions can improve from the historical performance. Both acquisitions are accretive, and were priced at 4 – 5x EV/EBITDA.

We initiated coverage of Manitex International with a BUY rating. The company is a leading supplier of specialized lifting equipment for energy, utility and transportation markets. Manitex focuses on the large cranes with capacity of 30 ton or greater, which are mounted on trucks. The company was the first to launch a 50 ton crane in 2007, has started to sell a 70 ton crane and plans to launch a 90 ton crane. The larger crane markets are smaller, but competition is minimal. Commercial and industrial construction markets typically improve with a lag behind the housing market, and the crane replacement cycle points towards positive order flow in the next few years. MNTX has a history of making opportunistic acquisitions; two recent acquisitions expand the product line and provide additional footprint for future European revenue growth.

Our top five performers in November included companies from a variety of industries. The top performer in November was Advanced Emission Solutions, up 35.7%. The company reported earnings that were well above of our analyst’s expectations. Aceto was up 33.6%in November. The company had a strong Q3 with revenues and earnings were well above our analyst expectations. NN, Inc. was up 23.0% in November. The company continues to perform well fundamentally, and is well positioned to benefit from improvements in the worldwide auto industry. Cover-All was up 16.1% in November. The company reported strong new order momentum. Anika Therapeutics was up 14.5% in November. The company reported a very strong quarter that was above expectations and has a new compound that is nearing FDA approval.

Our worst performers in November are from a variety of industries, and we believe they all have significant upside from here. NetSol Technologies was down 35.7%. The company reported that its focus on large license deals means longer lead times to close on new business. The pipeline remains very robust, but quarterly results may become more lumpy. Bacterin was down 31.7% in November. The company recently hired a new CEO with a marketing focus and is re-vamping the sales force. Seabridge Gold was down 26.7%. The company reported more high-grade copper and gold deposits at the KSM project in British Columbia. University General Health Systemswas down 16.1%in November. 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. LSB Industries was down 13.5% in November. The company reported a worse than expected quarter, but noted that production utilization is increasing.

We want to express our gratitude to all of our clients who have supported the independent equity research provided by Singular Research. We believe the next year will be full of long and short opportunities as the worldwide economy slowly expands, and we anticipate the Fed tapering is likely to lead to a stock pickers market. We have many names we are reviewing for coverage and expect to launch coverage on several new names in the weeks ahead. We wish all of our clients a wonderful holiday season, and we look forward to providing more alpha with the Singular Coverage list in the 2014.
Sincerely,

 

Greg Garner, CFA
Senior Equity Analyst


November 2013 Performance

Research Calls (as of 12/01/2013)

Company Ticker ResearchCall ReleasedDate 6-12Month
Target
Nov-12Price Current Price NovReturn
Performance
NovRussell
2000
Performance
Advanced Emissions Solutions ADES Buy 06/22/13 $ 62.00 $ 42.72 $ 57.99 35.74% 3.88%
Aceto Corp. ACET Buy 11/22/11 $ 24.00 $ 16.11 $ 21.53 33.64% 3.88%
NN, Inc. NNBR Buy 07/20/12 $ 20.00 $ 16.22 $ 19.95 23.00% 3.88%
Cover-All Technologies COVR Buy 09/10/10 $ 2.00 $ 1.24 $ 1.44 16.13% 3.88%
Anika Therapeutics ANIK Buy 06/27/12 $ 38.00 $ 30.00 $ 34.35 14.50% 3.88%
VOXX VOXX Buy 09/10/13 $ 22.50 $ 15.60 $ 17.84 14.36% 3.88%
Arabian American Development ARSD Buy 09/01/11 $ 15.00 $ 9.06 $ 10.32 13.91% 3.88%
Alteva ALTV Buy 01/17/13 $ 15.00 $ 7.64 $ 8.65 13.22% 1.77%
Bolt Technologies BOLT Buy 04/11/11 $ 17.00 $ 17.89 $ 20.19 12.86% 3.88%
Anaren Inc. ANEN Buy 08/26/09 $ 28.00 $ 24.98 $ 27.75 11.09% 0.74%
TESSCO Technologies TESS Buy 12/31/12 $ 40.00 $ 35.52 $ 39.41 10.95% 3.88%
Manitex MNTX Buy 11/20/13 $ 16.00 $ 12.06 $ 13.32 10.45% 3.77%
Erickson Air-Crane EAC Buy 11/09/13 $ 26.00 $ 17.22 $ 18.91 9.81% 3.90%
GSI Group GSIG Buy 01/09/12 $ 13.00 $ 10.00 $ 10.98 9.80% 3.88%
Mulit-Color LABL Buy 07/30/13 $ 42.00 $ 34.60 $ 37.91 9.57% 3.88%
PriceSmart, Inc. PSMT Buy 08/01/07 $ 98.00 $ 111.50 $ 121.95 9.37% 1.09%
Angie’s List ANGI Sell 08/21/13 $ 11.00 $ 14.20 $ 13.02 8.31% 3.88%
Orchids Paper Products TIS Buy 01/27/11 $ 36.50 $ 30.50 $ 32.74 7.34% 3.88%
Edgewater Technology EDGW Buy 12/17/12 $ 7.00 $ 6.74 $ 7.21 6.97% 3.88%
Global Ship Lease GSL Buy 08/30/13 $ 6.30 $ 5.02 $ 5.36 6.77% 3.88%
Atlas Financial AFH Buy 10/24/13 $ 16.00 $ 12.21 $ 13.02 6.63% 3.88%
Rock Mountain Choc Factory RMCF Buy 05/29/12 $ 16.00 $ 12.72 $ 13.40 5.35% 3.88%
DXP Enterprises DXPE Buy 12/20/07 $ 84.00 $ 92.14 $ 95.60 3.76% 1.77%
Balchem Corp. BCPC Buy 02/14/08 $ 41.00 $ 57.26 $ 59.15 3.30% 3.88%
Nova Measuring Instruments NVMI Buy 05/09/12 $ 14.00 $ 8.81 $ 9.05 2.72% 3.88%
SolarCity SCTY Sell 05/31/13 $ 30.00 $ 53.49 $ 52.28 2.26% 3.88%
Banco Latinamericano de Exportaciones BLX Buy 04/03/08 $ 30.00 $ 26.37 $ 26.94 2.16% 3.88%
INTL FCStone INTL Buy 05/27/11 $ 27.00 $ 20.53 $ 20.79 1.27% 3.88%
Geospace GEOS Buy 04/10/07 $ 113.00 $ 97.80 $ 98.68 0.90% 1.77%
Viad Corp. VVI Buy 08/01/13 $ 38.00 $ 26.89 $ 27.00 0.41% 3.88%
Reed’s REED Buy 10/23/13 $ 9.50 $ 6.49 $ 6.50 0.15% 3.88%
Biolase BIOL Buy 06/27/11 $ 4.00 $ 1.86 $ 1.86 0.00% 0.12%
Acme United Corp. ACU Buy 09/29/04 $ 16.00 $ 14.81 $ 14.74 -0.47% 3.88%
Nymox Pharmaceutical NYMX Buy 06/22/10 $ 18.00 $ 7.09 $ 7.00 -1.27% 3.88%
TGC Industries TGE Buy 06/19/12 $ 15.00 $ 7.43 $ 7.32 -1.48% 0.31%
KB Home KBH Sell 09/05/13 $ 10.50 $ 17.03 $ 17.53 -2.94% 3.88%
Flotek FTK Buy 05/05/11 $ 24.00 $ 21.59 $ 20.94 -3.01% 3.88%
Sparton Corp SPA Buy 07/16/13 $ 28.00 $ 26.68 $ 25.76 -3.45% 3.88%
Vulcan Materials VMC Sell 06/12/13 $ 25.00 $ 53.87 $ 56.37 -4.64% 3.88%
PhotoMedex PHMD Buy 12/06/11 $ 19.50 $ 12.81 $ 12.18 -4.92% 3.88%
Vonage VG Buy 03/28/13 $ 4.15 $ 3.65 $ 3.46 -5.21% -0.14%
LSI Industries LYTS Buy 02/27/12 $ 11.00 $ 9.25 $ 8.69 -6.05% 3.88%
Vertex Energy VTNR Buy 07/22/13 $ 4.40 $ 3.06 $ 2.80 -8.50% 3.88%
Newtek Business Services NEWT Buy 03/27/13 $ 4.85 $ 2.90 $ 2.62 -9.66% 3.88%
Pandora P Sell 07/09/13 $ 13.00 $ 25.27 $ 28.40 -12.39% 3.88%
Hackett Group HCKT Buy 03/15/12 $ 7.00 $ 7.15 $ 6.25 -12.59% 3.88%
LSB Industries LXU Buy 09/28/12 $ 55.00 $ 37.07 $ 32.08 -13.46% 3.88%
University General Health System UGHS Buy 02/25/13 $ 1.00 $ 0.56 $ 0.47 -16.07% 3.88%
Seabridge Gold SA Buy 07/21/09 $ 50.00 $ 9.45 $ 6.93 -26.67% 3.88%
Bacterin BONE Buy 02/03/12 $ 5.00 $ 0.60 $ 0.41 -31.67% 3.88%
NetSol Technologies NTWK Buy 07/10/12 $ 15.00 $ 7.88 $ 5.07 -35.66% 3.88%
Total (Average) 2.09% 3.38%
Year to Date Performance of Singular Research List
January Performance 6.09% 4.92%
February Performance 0.45% 1.00%
March Performance 3.55% 4.44%
April Performance 1.07% 0.43%
May Performance 1.59% 3.76%
June Performance 0.60% 0.62%
July Performance 5.86% 6.42%
August Performance 2.13% 3.09%
September Performance 4.59% 6.22%
October Performance 3.91% 2.45%
November Performance 2.09% 3.38%
December Performance
Year to Date Performance 25.95% 29.59%
(1) Adjusted for dividends

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