Director’s Letter April 2014: Small Caps Hit and Air Pocket

Director’s Letter April 2014

Singular Research Director's Letter: March 2014, Headwinds Out of the Gate

Singular Research Director's Letter: March 2014

Director’s Letter February 2014: A New Year Brings a New Equity Market

Director’s Letter February 2014

Director’s Letter January 2014: A New Year Brings a New Equity Market

Director’s Letter January 2014

New Year, Same Fears, New Market Direction

New Year, Same Fears, New Market Direction

After completing a year where it was difficult for equity investors to post positive returns, we enter 2012 with the same macro issues that affected 2011 equity markets.  Concerns over European sovereign debt are likely to remain for most of 2012, albeit with slow progress.  Countering this are attractive valuations for US equities.  Add in a presidential election year with its potential for policies supporting economic growth and we have a mixture that can swing investor sentiment.  The volatility caused by these and other macro items in 2011 resulted in negative returns for the small cap indexes.  Our focus on bottom-up fundamental analysis enabled us to post positive returns that were significantly above our benchmark.

We expect Europe to muddle through their debt issues in 2012, which may cause a mild European recession this year.  But we are more confident than ever that a US double dip will not occur.  Supporting our positive thesis on the US economy is the stronger than expected labor report for December.  Although traditionally a lagging indicator, in this weak recovery marked by slow labor growth, any positive labor trends in hours worked and new job creation provide the fuel for improving consumer behavior.  Positive consumer activity has been generally weak in the economic recovery from the Great Recession, and that is why we look at changes in consumer sentiment for insight into changing consumer behavior.

As the chart above indicates, consumer sentiment is close to post recession highs after recording a low in mid 2011.  With fewer new unemployment claims, those employed are witnessing less layoffs; and after tightening household budgets for the past few years, we expect higher growth in consumer spending during 2012.  However, given the high unemployment rate, such a change in consumer activity is likely to be imbued with setbacks.  Ahhh, more fuel for volatile investor sentiment this year.

We expect the major driving forces for equity markets in 2012 to be the improving US economy with greater consumer participation, the potential for job creating economic policies and strength in non-European trading partners.  We may even witness the passing of the European debt concerns in the second half of 2012.

We are delighted to post performance of 664 basis points above the Russell 2000 benchmark in 2011, for our fully invested Singular List model portfolio.  Two names on the Singular List were acquired in 2011, and many outperformed due to better than expected earnings.  For December, the S&P 500 was up 0.85%, the Russell 2000 was up 0.47% and the aggregate Singular List was down 2.3%.  The Long-Only Singular List was also down 2.3% in December.  For 2011, the S&P500 was virtually flat at -0.02%, the Russell 2000 was down 5.5% and the aggregate Singular List was up 0.82%.  The Long Only Singular List was up 1.2% in 2011.

We added one new name and dropped one name from the Singular List in December.  We dropped coverage of BioSante Pharmaceutical (BPAX) after release of disappointing results from the Phase 3 clinical trials.  The new compound worked as expected, but the placebo effect was very strong such that the likelihood of FDA approval was significantly diminished.  Other compounds under development for cancer indications are more than a year from the initiation of a Phase 3 clinical trial.

We initiated coverage of PhotoMedex (PHMD) with a BUY rating.  PHMD designs and manufactures laser and light based products for use in healthcare and personal care.  The company has been successful in the professional healthcare market and has merged with Radiancy, which has similar technologies but is very successful in the consumer market.  We expect the product synergies along with complimentary end-market expertise will lead to new innovative new product development and consistent revenue growth.

Our top five performers in December were from a variety of industries, and most beat recent earnings estimates.  The top performer in December was Synovis, up 47.7%.  Earnings were well above our analysts forecast and the company agreed to be acquired by Baxter and traded up to the acquisition price.  Arabian American Development was up 30.5% in December.  Revenues and earnings in Q3 were both well above our analysts’ forecast, and the new mining operation remains on target.  Our analyst increased the price target.  Orchids Paper Products was up 21.3% in December.  Revenues and earnings were stronger than expected in Q3, and the company raised the dividend.  REX American Resources was up 20.3% in December.  Q3 earnings beat our analyst’s expectations on lower than forecasted revenues.  Cover-All Technologies was up 20.0% in December.  The company missed our analysts earnings forecast in Q3 due to a delay in booking license revenues.  The company remains well positioned for a strong 2012 with the growing pipeline of license revenues.

Our worst performers in December were from a diverse set of sectors.  BioSante Pharmaceutical was down 81.3%.  The company reported Libigel clinical study results that met expectations, but the placebo effect was very strong.  As a result we do not expect FDA approval and we dropped coverage.  CrowdGather was down 35.3%.  Earnings met our analyst’s estimate in Q3 and website traffic increased 20% from Q2.  Seabridge Gold was down 29.3%.  The company missed our analyst’s Q3 earnings estimate due to non-cash charges.  Seabridge recently completed a compliant resource estimate at one project, resulting in an 18% increase in indicated gold resources.  PhotoMedex was down 16.5%.  The company announced completion of the merger with Radiancy.  OYO Geospace was down 15.0%.  The company reported earnings below our analyst’s expectations in its Q4.  Our analyst remains positive on the company given the new wireless GSR product and strong demand for efficient seismic work in the oil & gas industry.

Our top five performers for 2011 were Arabian American Development, up 117.4%; PriceSmart was up 83.0%; Synovus was up 72.8%; US Home Systems was up 57.6%; Market Leader was up 56.3%.  We continue to look to improve our equity research performance, and as we enter 2012, we perceive attractive valuations for a number of companies in a variety of sectors.  We are diligently completing our work to present these names in the first quarter.  We believe the European debt concerns have caused market valuations to remain low, and we expect economic growth in the US to tick up during 2012.  We expect there may be several potential positive surprises in 2012 including better than expected US growth, improving consumer and manufacturing activity, eventual resolution of European debt issues, and better than expected growth in China.  We look forward to another year of above benchmark performance, and we thank our clients for your support of independent equity research in the small cap space.

Sincerely,

Greg Garner, CFA

Senior Equity Analyst

CONSUMER TECHNOLOGY MARKET UPDATE BY TRIP HAWKINS

THE GOOGLE PHENOMENON

The rapid rise in Google stock since its IPO has led some to suggest it is now overvalued. But Google may deserve it, and more. The company invented a unique and lucrative business model, has few constraints on growth, and continues to be an extremely innovative company relative to peers. And the stock rise is in part attributable to the IPO being underpriced because of investment banks that did not like the way the deal was brought to market.

APPLE STATUS

How long a ride can Apple get from iPod? Because none of the competing MP3 brands has any cache, Apple’s unique ability to make the iPod a powerful fashion statement will help sustain Apple until their next big idea. However, Apple’s attempts with Motorola to make iPod mobile phones are stymied because of conflicts in business models that caused Steve Jobs to call mobile carriers, “the four orifices.” The problem is very simple: the mobile carriers no doubt want to sell the music, not just sell a phone that allows Apple to sell music through the consumer’s desktop computer (thereby leaving the mobile service operator out of the loop). Steve’s statement will make this hill that much harder to climb, but in the meantime he can sell some iPods in China and elsewhere.

VIDEO GAMES

The next round of consoles were introduced by Sony, Microsoft, and Nintendo at the May E3 show. Despite enthusiasm for the future, this triggers a negative phase for software publishers. Their R&D costs will increase because of the greater power of the new platforms. Retailers will reduce inventory of the prior platforms. Consumers will now get the message that the older platforms are obsolete and reduce expenditures. Publishers will slash inventory prices and margins will collapse. All of this will occur even before the new platforms are in the market, and when they do arrive, first year hardware sales may restore only 10% of the customer base. In addition, new platforms mean new licensing agreements, and with recent transitions the platform companies have been gaining leverage. Among the software publishers, only EA has any truly “must have” properties (eg, NFL), but even EA will face a big challenge in repeating the favorable terms they had in the past. EA faces other issues, including the recent delay of their Godfather game and challenges in generating revenue in Asia where Western software brands are of less interest and copyright laws are less respected. Historically, these platform transitions have been a death sentence for some publishers and have triggered consolidation moves for others. The recent sale of Eidos is one such example. Eidos had vaingloriously held out for years, rebuffing numerous M&A proposals. This shift is also bad for Nintendo, who is likely to be a distant third in the platform race. Nintendo’s history is as a successful toy and novelty company, not as a technology company. With platforms increasingly like rocket science, the future belongs to Sony and Microsoft. Nintendo has great youth brands and makes great software, but their days as a mainstream box in the living room are nearing an end. They are a much stronger company than Sega ever was, but their migration path may evoke comparisons.

ONLINE GAMES

The PC-Internet gaming sector is misunderstood in both directions. The MMO, or “massively multiplayer online game,” is overrated. This phenomenon uniquely occurred in Korea because of Korean reluctance to buy the foreign console formats. This resulted in the Internet café phenomenon, which eventually drove adoption of PCs and broadband in Korean homes and the exporting of the business model to mainland China. The model is also sensible in these markets because there is no content to pirate or copyright to violate. Instead, the client software can be given away because ongoing access to the server is required, and the server can confirm not just payment, but payment on a recurring basis. However, this model will not dominate in Western markets where the gaming market is highly fragmented and users dislike the high subscription fees and demanding gameplay of MMOs. The most successful MMO in the U.S. has an audience of less than 1 million.

Meanwhile, a form of “social community gaming” is underrated. As Yahoo! well knows, the casual web game is alive and well in the U.S. with more than 30,000,000 regular players. Despite the maturity and doldrums of the boxed PC game market, startups like PopCap Games pioneered a web game model that has been highly successful. They sell over the Internet, offering a free downloadable version with a premium fee to download a “deluxe” version. Games like this are very successful on Internet outlets such as AOL, MSN, and Yahoo!. What they demonstrate is that mass market consumers want to be entertained, and they have a need to interact, but not that much. And much more importantly, they want social interaction rather than feeling like they are playing by themselves. Hence we find that a # 1 console game may sell 5,000,000 copies but a far simpler Internet game with less marketing behind it, like NeoPets, can build an audience of 20,000,000. NeoPets was recently sold to Viacom, although we don’t know how well NeoPets “advertising placement” revenue model performs.

3G MOBILE PHONE SERVICES

Hutchison, under the brand name of Three, was the first to introduce higher-speed mobile phone services known as 3G, or “third generation.” Three now operates 3G services in a variety of markets including Hong Kong, the UK, Italy, and Australia. Known by other names such as UMTS and EVDO, these services have been rolled out by other major companies in the last year such as Vodafone, Verizon Wireless, and Sprint PCS. Amp’d, led by the co-founder of Boostmobile, will launch this fall as an MVNO partner of Verizon’s. The theory of these services was premium performance for premium price. But the most successful marketing model has been to court the value-oriented heavy users, because the higher speeds provide more capacity. Both marketing models are being used today, and the sweet spot appears to be early adopters in the youth market. These customers use more voice, more message traffic, and buy more content. While this audience today numbers only about 1% of the world’s 1.5 billion subscribers, the market is growing exponentially and the visibility and word-of-mouth from these users will be critical to developing the mass market.

THE SMARTPHONE

Another trend in relative infancy is the smartphone, a high-end mobile handset that is replacing the PDA. While a mainstream feature (camera) phone may have $75 in components and 2MB of RAM, a smartphone may have $400 in components and feel like a PDA. To be clear, the smartphone is killing the PDA and has already surpassed its 30 million customer base. Many PDA users will transition to a smartphone, which can do much more and is favored by enterprise users. Smartphones now represent 2% of mobile phones. The format is a notable success in China, where lugging around a garishly large handset establishes a “Cadillac” element of status, even for a middle class housewife who only uses it for voice calls. Nokia and Motorola do particularly well in China because of their quality high-end phones and famous brand names. But for every smartphone sold, there are 10 feature phones sold because of the much lower manufacturing cost and smaller form factor. Most consumers are not enterprise users and most do not want to lug around a larger device. Clearly, the next big handset growth wave will be the Java and Brew-programmable feature phones, which will exceed one billion handsets within another year or so, and exceed two billion handsets perhaps 2-3 years from now. No device in history has ever grown that fast or sold that many. During this same time period, the smartphone will also grow fast and get to milestones like 100 million, 200 million, and so on. Beyond the transition from voice phones to feature phones, the smartphones will eventually come down enough in component cost and miniaturization to become the “next generation” of feature phones. While this is going on, there will be a big battle for OS supremacy on the smartphone. Contenders are Symbian (controlled by Nokia), MS Smartphone (Microsoft), Linux, and Palm. Linux may do surprisingly well, because it is an open platform. Handset makers and operators will not want a dominant standard, so there will be pressure against both Symbian and any Microsoft proposals. But Symbian is today a huge front-runner and even with reduced share may remain the OS leader. These handsets also run other platforms like Java, so publishers of mobile content like Digital Chocolate can easily support smartphones simply by using their Java versions. As for Palm, with the decline in the PDA and only a modest foothold in the smartphone market, the format will face a challenging future.

MOBILE SERVICES

Content for mobile phones, including ringtones, screensavers, and games, has reached a bit of a speed bump. In the late 1990s, this market suffered from the hype of WAP (wireless access protocol) which never panned out as a major content offering. However, the vision of DoCoMo in Japan and the introduction of camera phones triggered a huge growth phase in content from 2001-2004. Growth has now slowed as Japan and Korea have matured, and other regions have too many customers that are unaware of content or don’t attribute much value to it. One telling example is the European mobile operator whose programmable-Java phone handset market grew last year from 2 million to 6 million subscribers. Most of those users don’t understand the data services, and since there is a minimum monthly fee of 5 Euros, only 200,000 subscribers had signed up. At a tactical level, the market will grow faster as the carriers shift marketing emphasis from voice to data. Previously, the U.S. focus was on voice because in 2003 voice revenue was $85 billion compared to only $2 billion for data services. But despite an absence of marketing, data grew 115% in 2004 to $4.3 billion, while voice grew “only” 15% to $98 billion.

But with voice becoming a commodity that threatens margins, data must be the future. In Japan, data marketing has been strong from the beginning, resulting in perhaps $25 in data ARPU (average revenue per user), compared to $4 in Europe and only $2 in the U.S. Voice ARPU is $50 in first tier markets and this underscores the maturity of voice and the need to grow data marketing, consumer awareness and trial, and hence, revenue.

The history of electronic media helps explain these figures. Content media typically result in consumer spending the equivalent of $3 to $15 in ARPU. By contrast, network media have ARPU equivalents of $30 to $150. What this reveals is that consumers put a modest level of value on entertainment content, whereas they will repeatedly spend 10 times more money to have access to networks that improve their social lives. Mobile voice is one such example, but now it is time to use the data side of the equation to create network software solutions.

Instead of simple downloads of rings and games, what points the way towards this potential is mobile email and instant messaging (IM). While there is nothing wrong with the $4 billion spending on ringtones, when you spread it across several hundred million consumers you get ARPU numbers like the $2 we have in the U.S. But users of the RIM Blackberry are spending $60 in ARPU. And users of IM are generating $5-10 in ARPU. These are network software applications that have social benefit, hence users are willing to pay much more. Notably, even in Japan the ARPU numbers have flattened out because Japan lags in developing and introducing this kind of network social software. There is a great future ahead for a much wider variety of social applications with different themes, including games, blogs, photo sharing, dating, and so on.

MOBILE SOFTWARE COMPANIES

However, RIM (Research in Motion) should be feeling the warmth of numerous red laser dots on their shirt. The Blackberry can attribute its growth to the interoperability of email addresses. With every conceivable competitor wanting a slice of the mobile email pie, this interoperability will become RIM’s Achilles Hell. Because of it, Blackberry lacks “stickiness” and the email market may be carved up among numerous competitors in the future.

Index Corp. in Japan is another high-flying success in mobile software, with a market cap in the vicinity of $2 billion. With a diverse offering of services and revenues in the $300 million per year range, Index may evolve more smoothly than pure mobile content plays like Jamdat or rollups like For-Side and Mforma. Index has higher profit margins and is priced at “only” 6 times revenue run rates. U.S. investors hungry for a mobile pure-play have valued Jamdat at more than $800 million, which is close to 20 times trailing revenue. This phenomenon led For-Side and Cybird of Japan, and Mforma in the U.S., into rollup strategies that may prove hard to operate. Jamdat is also more dependent on content downloads on which they neither control the channel nor own the intellectual property. A desire for continued growth led Jamdat to sacrifice most of their IPO cash in a 15-year license deal for Tetris. If Jamdat can become “the next Index Corp.” then their stock has room for some appreciation. But the current market cap makes their recent success a tough act to follow. As recently as 2003, a rumored EA-Jamdat financing fell apart because of disagreements around a $50 million valuation. The stock has risen 15,600% in the 2 years since. Now, that is a tough act to follow. This may explain the recent rumor that EA was exploring an acquisition of Jamdat, which would give EA an external move to offset their platform transition issues.

SINGULAR RESEARCH 5-Star Awards from StarMine for Earnings accuracy!

Analyst Earnings Estimate Accuracy

Singular Research, a trusted supplier of unbiased independent research on small and micro cap companies, announced today that it has received a five starmine awards for earnings accuracy for its coverage in the first quarter of 2011. The awards Included two 5 star awards, its highest ranking for an analyst.

StarMine analyzes every earnings estimate and revision by thousands of analysts. To receive a high score, an analyst “must make estimates that are both significantly different from, and more accurate than, other analysts’ estimates.” The highest rank of five stars from StarMine is for the top 10% of analysts.

Singular Analayts receiving STARMINE awards include:

Managing Director Robert Maltbie, CFA stated, “We are honored to receive recognition for our efforts and I wish to congratulate our team for their diligence and effort in covering hard to follow companies such as SYNO & SA . We further believe this award serves as a testament to our goal of providing the highest quality of objective & unbiased research on under followed small cap equities.”

About Singular Research

Singular Research aims to be the most trusted supplier of independent research on small-cap companies. Singular analysts research high-quality companies that are typically not covered by any other firms. We provide Honest Advice: Our Independent analysts have no financial interest in the stocks we cover. Analysts are compensated based on the accuracy of their research calls not through trading commissions or investment banking fees. Winner 2008 Top Performers Award from First Coverage

We provide unbiased advice: Our Independent analysts have no financial interest in the stocks we cover. Analysts are compensated based on the accuracy of their research calls not through trading commissions or investment banking fees. Singular Research aims to be the most trusted supplier of unbiased, performance-based research on small micro cap companies to fund managers. Its goal is to provide initiation reports and quarterly updates for approximately 40 micro to small cap companies. In many cases, Singular’s analysts research companies that are not covered by any other firms.

Analysts do not receive any form of direct compensation from companies under coverage. Analysts are compensated based on the accuracy of their research calls, not through paid for research by companies or potential deal flow.

The Singular Research Coverage list track record since inception, August ’04, is up 151.53% through December 2010, compared to the S&P 500 at 13.90%

Singular Research List up 1.9%, Beats Index, Plus New Initiation

November was a busy month as we got the rest of the Q3 earnings calendar and almost all of the 10Qs filed. For the September quarter, earnings surprises ranged from -1,400% to an upside surprise of 467%. Excluding the ICOP outlier, the average surprise was a positive 9% on the longs and 0.2% on our short calls. Not surprisingly, many of our stocks moved quite dramatically on the earnings results. We had six stocks up by double digits and five stocks down by double digits. Despite recommending a long/short portfolio against a bull market backdrop, we still managed to outperform the S&P 500 again in November. The Singular Research list was up 1.9% versus the S&P 500’s 1.6%. With one month left in 2006, our list is up 21.3% year to date versus 11.9% for the S&P 500.

On the macroeconomic front, some areas of concern have moderated, and others remain. Commodity inflation has eased in some cases, yet core inflation remains a major concern of the Federal Reserve, especially with historically low unemployment. Yet, rather than bargain for higher wages leading to wage and, ultimately, price inflation, workers seem convinced the economy is far weaker than headline statistics suggest. Investors seem manic/depressive, vacillating between fears of inflation leading to Federal Reserve tightening, and fears of a recession just around the corner.

Our bigger concern is a simple one. It stems from the simple belief that earnings drive stock prices. After a long string of double digit earnings growth, corporate profits as a percent of the economy are near record levels. If profit margins decline, rather than see earnings growth in excess of nominal GDP growth, investors will see low single digit earnings growth. We do not believe the market is properly discounting this possibility. Moreover, even if strong earnings growth can continue, there is the very real possibility of rising interest rates from today’s very low levels, which would also be detrimental to stock returns.

Looking more closely at our list, our top performer was one of our newer initiations, US Global Investors (GROW:BUY). GROW grew 58.8% bigger in November and is now up 145.4% since our October 9th initiation. Investors have been impressed with the company’s 81% revenue growth and 125% growth in earnings as mutual fund assets under management nearly doubled from $2.4 billion to $4.6 billion. Our price target and rating are under review.

The second best performer was Bolt Technology (BTJ:BUY) up 24.1% on top of the 21% last month. We had viewed last quarter’s selloff as an excellent opportunity to add this oil services name at reduced prices. With oil starting to back up again, investors have rediscovered why they liked Bolt in the first place, namely 25% top line growth and 94% earnings growth. BTJ beat our $0.24 estimate by 46%, the second biggest earnings surprise on our list.

ACS Motion Control (ACSEF:BUY) rose 20% in November as investors realized they had overreacted to the downside earlier in the year. Despite missing our estimates slightly, ACS proved it could still be profitable despite the loss of a major customer suffered earlier on the year. ACSEF is now up 31.1% since we launched on it in September, but our price target implies another 70% upside.

McDermott International (MDR:BUY) also had a great month rising 16.5% after beating our estimates. After watching the company report backlog growth of 169%, 122% revenue growth and 74% profit growth, our analyst raised his estimates. Investors seem not to have appreciated just how profitable MDR would be once its Power Generations Systems subsidiary was reconsolidated, now that asbestos headaches are behind the segment. MDR is now up 85.8% since we launched on it last December.

American Software Inc. (AMSWA:BUY) was up 15.7% in November ahead of its earnings report due out next Thursday. We are looking for 17% revenue growth and 206% earnings growth. News flow for the month was not unusual, consisting of new customer wins, new awards won and conferences attended. Investors may have been attracted to the hefty dividend yield which, while now 3.9%, was 4.4% at the start of the month. AMSWA is now up 20.2% since we launched on it in June, not counting the dividend.

Miller Industries Inc. (MLR:BUY) rose 11.7% for the month after reporting an 11.5% upside earnings surprise. This remains one of our favorite value ideas, and at just 10.9x our 2007E estimates is still very reasonably priced considering its 20% revenue and 23% earnings growth last quarter. Our price target implies 75% upside.

Not surprisingly, our worst call of the month was one of our short calls, Baidu.com, Inc. (BIDU:SELL) up 32.7%. Investors’ infatuation with Chinese stocks, especially Chinese Internet stocks defies rationality. In scenes reminiscent of the worst parts of the Internet bubble, we have seen competitors justify price targets based on multiples years out in the future. Indeed, it is hard to imagine how a company trading at 104x EV/EBITDA, 24.5x Book value, and 69.7x forward earnings could be undervalued. BIDU’s recent announcement of its entry into the Japanese market seems ill fated according to our analyst and may say more about growth prospects and the competitive environment in China than anything else. Our price target implies 57% downside for BIDU.

IRIS International, Inc. (IRIS:BUY) shares fell 25.1% in November on weaker than expected results. The company reported numerous one-time charges, and a CFO change, however we believe investors are not giving the company credit for the likely resumption of profitable growth next year. We also find the insider buying by the CEO and several directors encouraging. Our price target implies 78.2% upside.

Maxwell Technologies Inc. (MXWL:BUY) dropped 21.1% last month despite better than expected earnings results. Ultracapacitor sales are lumpy and the company is being unfairly punished for lower guidance in our analyst’s opinion. Maxwell is turning the corner to profitability so investors are going to be concerned by continued losses. MXWL is still up 37.6% since we launched on it back in June 2005. The recent selloff gives event-driven and technology oriented investors a great entry point to this stock with 70% upside to our target.

The fourth biggest decliner in November was our other Chinese Internet stock, CTRP International (CTRP:SELL) up 13.3%. This stock remains perhaps an ever better short candidate than BIDU given the lower barriers to entry. This is the Chinese equivalent of Travelocity before Orbitz was created. Only, it is worse than that as Chinese customers with lower per capita GDP are even more price sensitive than Americans. We project that CTRP will face a very competitive marketplace with downward pressure on margins. For a company facing slowing growth rates and margin compression in an increasingly competitive environment, we do not see how multiples such as EV/EBITDA of 45x, PE of 44x, and P/S of 19x can be maintained.

Last but not least, Hansen Natural Corp. (HANS:BUY) fell 11.4% in November. Hansen got caught up in the growing stock option backdating scandal. By caught up, I mean they received a letter from the SEC and have begun an internal investigation. As a result, the 10Q has been delayed and the class action lawyers have swooped in. Lost in the fracas was better than expected Q3:06 earnings results. Sometimes, the best investments are made when everyone else is running for the exists. We believe this may well be the case with HANS. Despite an estimated 75% earnings growth rate for 2006, HANS trades at just 22x our 2007E estimates. Our price target implies 113% upside.

During the quarter we added a new name, The Lamson & Sessions Co. (LMS:BUY). LMS has had very strong historical results such as 15.8% sales and 111% earnings growth last quarter, yet trades at just 7.8x trailing EPS and EV/EBITDA of 4.2x. The stock has already rallied sharply as at least one investor has pressured the company to buy back more of its own stock. Our price target implies 40% upside. We also dropped On Track Innovations Ltd. (OTIV:HOLD) from our list. Despite a large market opportunity, the company continues to fumble and losses are piling up. Making matters worse, the company shows a disregard for investors that is unrivaled, and may well have run afoul of Reg. FD. We aren’t willing to stick around to find out.

We’d like to take a moment to point out a couple of names we think have excellent prospects and are currently on sale. Among our growth oriented names, Premier Exhibitions, Inc. (PRXI:BUY) strikes us as having an excellent risk/reward profile. The company is poised to move from a net revenue to a gross revenue model, and will no longer have to share profits on its shows. Due to the complexities of its prior revenue sharing arrangements, we do not believe the market fully appreciates how explosive the financial results are likely to be in the coming quarters. We are looking for 137% and 62% revenue growth for FY:06 and FY:07 ended February respectively. Earnings growth could accelerate from an expected 42% in FY:07 to 83% in FY:08, yet the company is priced at just 14.4x our FY:08 estimates.

Our top value pick would be Acme United Corp. (ACU:BUY). The company is executing well and taking market share. We expect 16% revenue growth in 2006 and 14% in 2007. Despite an estimated 25% EPS growth rate in 2007 and 20.2% return on equity, the stock trades at just 9.7x our estimates. European operations have been a drag on reported results. If, as we expect, European operations turn profitable, our estimates could well prove conservative.

We are focused on only one thing, finding the most compelling and attractive investments in the Micro to small cap space for our clients. Thank you for your support.