24-APR-14 – Innovative Solutions and Support, Inc. (ISSC:BUY) Revenue beat largely due to record Engineering sales. EPS shortfall reflects greater contribution from lower-margin Engineering sales versus higher-margin Production sales. Trimming FY:14 EPS estimate. Maintain price target and BUY rating.

Q2:14 HIGHLIGHTS Revenue increased 52.1% year-over-year to $12.5 million in Q2:14 and was above our forecast of $10.9 million, largely attributable to higher-than-expected Engineering sales. EPS of $0.05 was below our $0.06 estimate primarily due to a combination of the larger than expected contribution from low-margin Engineering sales and modestly higher SG&A expense. Backlog as of March 31, 2014 stood at $80.9 million versus $87 million at December 31, 2013 with net orders of $6.7 million for the quarter. Initial production deliveries related to the Delta Airlines contract are expected to begin later this fiscal year and are expected to result in increasing Production revenue. Geoffrey Hendricks, Founder, Chairman and CEO, announced he will be retiring at the end of calendar year 2014. Shahram Askarpour, President, will become the company’s new CEO. We are trimming our FY14 estimate to $0.22 from $0.25 to account for (1) the Q2:14 EPS shortfall versus our estimate and (2) the higher than previously expected contribution from Engineering sales for the year which will result in lower relative margins. We maintain our FY:15 EPS estimate of $0.43 at this time but will revisit our forecasts after release of the company’s 10-Q. We maintain our Buy rating and $10 price target for the shares.

25-APR-14 – Arabian American Dev. Co. (ARSD:BUY) Record Q4 petrochemical revenues (+33%) driven by 40% rise in volumes. 2013 saw records for revenues, EBITDA, net income, and EPS. We maintain our BUY rating and raise our price target, as we believe ARSD remains substantially undervalued with continued opportunities in petrochemicals and equity income from its AMAK investment.

Q4:13 HIGHLIGHTS ARSD reported Q4:13 diluted EPS of $0.13 vs. $0.08 LY (restated), consensus of $0.15, and our $0.16 estimate. The performance was driven by a 40% rise in petrochemical volumes, partially offset by lower petrochemical margins coupled with lower AMAK equity income of $1.1 million. Q4 revenues rose 33% to $66.6 million vs. $49.9 million (restated) in Q4:12 and were above our $55.7 million estimate due principally to higher sales volumes and toll processing fees, partially offset by lower product prices. Volumes rose 40% to 19.7 million gallons from 14.1 million in Q4:12, well above our 15.5 million gallon estimate. North American volumes rose 35% to 15.7 million gallons due to the increased deliveries to a Canadian tar sands customer and a 60% increase in international sales to 4.0 million gallons. Gross margins (excl. D&A) were 16.3% vs. 15.5% LY but below our 17.8% estimate. The shortfall vs. our estimate was due to larger than expected sales volumes of by-products at lower margins. The by-product volumes arose from higher sales of prime products to the Canadian tar sands customer. We previously revised our FY:14 estimate to $1.03 from $0.86 and our FY:15 estimate to $1.23 from $1.02 to reflect higher petrochemical volumes partially offset by lower margins, as well a reduction in estimated AMAK earnings. We maintain our BUY rating and raise our price target to $19.50 from $18.50. RISKS Continued volatility in the company’s product selling prices and feedstock (natural gasoline) could pressure margins and profitability. Delays in signing new customers could restrict revenue and earnings growth.

22-APR-14- Syntel (SYNT:SELL) Quarter beats consensus but FY:14 EPS guidance lowered. We are lowering our FY:14 EPS estimate while maintaining our price target of $76.00 and SELL rating.

Q1:14 HIGHLIGHTS Revenues and EPS beat consensus. Revenues came in at $219.5 million versus our estimate of $208.0 million and slightly ahead of consensus at $218.4 million. EPS came in at $1.39, beating our estimate of $1.25 and consensus at $1.32. Revenue guidance was provided at $915-940 million (mid-point of $927.5 million), raised slightly versus previous guidance of $910-940 million (mid-point of $925 million), but still below consensus of $932.1 million and our estimate of $915.67 million. EPS guidance was lowered to $5.10-5.28 (mid-point $5.19) versus prior guidance of $5.10-5.35 (mid-point $5.22), well below consensus of $5.36 and our estimate of $5.29. We lower our FY:14 EPS estimate to $5.20 from $5.29 and maintain our SELL rating and a target price of $76.00 RISKS BPO and IT Spending could strengthen further as the US economy continues to strengthen, and/or firms look to outsource to save costs. SYNT and other IT firms could successfully lobby Congress to exclude the outplacement provision (15% visa cap) in the next version of the Immigration Reform Bill, removing the overhang. Rupee appreciation gets fully priced into consensus and the currency does not appreciate further.

22-APR-14 – IEC Electronics Corporation (IEC:DROP) Terminating coverage in order to focus resources elsewhere.

KEY POINTS We are terminating coverage at this time.

21-APR-14 – Edgewater Technology (EDGW:DROP) EDGW shares have risen above our prior price target of $8.10. With no discernible justification for an increased price target at this time we are closing out our coverage.

NOTES EDGW shares have performed very well in recent days, topping our price target. Recent trading activity is not due to any material news that we are aware of, nor do we see any justification for an increase to our price target at this time. With EDGW shares above our previous price target of $8.10, we are closing out our coverage as we do not maintain “neutral” or “hold” rated recommendations. We include our most recent financial model in this report for reference purposes only. RISKS  Company has completed its high-margin PI2 contract and does not have a replacement on the horizon. Revenue trends are volatile and change rapidly.

17-APR-14 – Abbott Laboratories (ABT:SELL) Sales falling faster in Q1:14 due to weakness in multiple segments. Trend highlights continued product troubles and unfavorable currency movements. Earnings ahead of estimates; however, almost half of total due to upward adjustments. Slowing topline combined with limited catalysts continues to support SELL rating.

ABT HIGHLIGHTS Overall revenues were down (2.5)% on weak performance in Established Pharmaceuticals (6.6)%, Nutrition (4.0)%, and Medical Devices (1.2)%. Only Diagnostic segment saw positive revenue growth of 2.6% vs. Q1:13. Adjusted earnings of $0.41 were ahead of Street estimates of $0.36 and our forecast of $0.40. Q1:13 adjusted EPS was $0.42. GAAP earnings were $0.22. In our opinion, adjusting for intangible amortization, gross margin, R&D, SG&A, Other Income, and taxes for yet another quarter is excessive and provides limited credibility to the adjusted result. Q1:14 adjusted operating margins were higher largely due to several expenditure delays in R&D and SG&A totaling $60 million. US Diabetes Care fell (28)% in the quarter due to the initiation of Medicare competitive bidding. This was partially offset by 14% growth in US Medical Optics helped by new products in the cataract market. Other bright spots such as US Core Lab and International Molecular were both up 11%, but this was not sufficient to offset other noted declines. Revenue trends have slowed incrementally each quarter from 2.5% in Q2:13 to now (2.5)% in Q1:14 suggesting the turn is still ahead. Substantial adjustments to earnings are excessive and make it difficult to discern margin trends, raising risk profile and supporting our thesis that shares are overvalued relative to the market.

Small Caps Hit and Air Pocket

March saw equities, and small cap stocks in particular, give up some of February’s advance.  While events in the Ukraine might be viewed as the primary risk point on the global stage, we view that as more of a coincident catalyst as small caps may have simply been due for a pullback.  Given the stellar performance in 2013 it is not difficult to view the market segment as needing some time to consolidate those gains relative to corporate fundamentals.  In that context, a sideways move with attendant back and forth swings around a flat-line is not hard to fathom.

Looking at key macroeconomic statistics, the most recent round of unemployment data indicated a positive downward trend continues.  Obviously such data needs to be viewed over a continuum and in concert with myriad other data points.  Even so, as we sift the data looking for clues on which direction the market may trend, growing employment could be one point supporting the notion that the market is consolidating before a next leg up.

For March, the S&P 500 was up 0.67%, the Russell 2000 was down 0.67% and the aggregate Singular List was up 3.8%.  For the trailing twelve months, the S&P was up 19.2%, the Russell 2000 was up 23.3%, and the Singular Research List was up 19.2%.

We initiated coverage on two companies during March, both with SELL ratings.  The first was Abbott Labs (ABT), which we initiated with a $30 price target, and the second was Syntel (SYNT), which we started with a $76 price target.

Our top five performers in March include companies from a variety of industries.  The top performer was Vertex Energy, up 70.1%.  The company announced a significant, accretive acquisition followed by strong Q4:13 earnings.  Orion Energy was up 30.1%in March.  After reporting earnings in February there was no news to directly account for the solid performance leaving us to conclude investors are methodically warming to the story.  SELL-rated SolarCity was down 26.2%.  Absent any specific news, we attribute the decline to the overall weakness seen in many high-risk names in March. Bacterin was up 25.3%, following a similarly strong February, driven by a solid earnings report.  SELL-rated Pandora declined 18.9% as Amazon emerged as the latest threat in the music-streaming space.

Our worst performers in March are from a variety of industries and for differing reasons.  Despite the adverse moves in the near term, we believe our theses are sound on all of them, offering significant alpha from here.  Reed’s was down 26.3%in March.  The company reported earnings which disappointed although we feel the issues that weighed on earnings can be cured.  Global Ship Lease was down 18.1% despite the lack of an observable catalyst.  Seabridge Gold was also down 18.4% following a decline in gold for the month.  Arabian American Development was down 11.3% following the release of earnings early in the month.  Hudson Technologies was down 10.5% in March as the shares continued to slip following a nice gain last December following the EPA’s latest ruling on coolant phase out regulations.

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

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