July was a Volatile Month with Some Great Companies Now on Sale
July was another volatile month, and a difficult one for our small growth names. Our research list underperformed the S&P 500 by 3%. The Singular Research list was down 2.5% Vs. the S&P 500 return of 0.5%. Year to date, our research list is up 14.2% Vs. the S&P 500’s 2.3%. As 2nd quarter earnings come out, so far we have mostly been pleased with results from our companies. While the bulk of earnings will come in August, of those companies which reported in July, eight beat our analysts’ estimates, one tied, and three came up short. However, while our companies beat by an average of 6.2%, the stocks rose by an average of just 0.3%.
As mentioned above, July was a very volatile month with twelve of our stocks moving by double digits. Our top gainer was Rimage (RIMG:BUY) up 19.2% on the month. Rimage has become very adept at lowering expectations and then beating those lowered expectations. The company had guided to a range of $0.18 – 0.23, and reported $0.33, well ahead of our estimate of $0.24. Sales of producer units to large retail chains like Wal-Mart continue to hold out the promise of significant gains in future quarters. In the meantime, consumables revenue (up 23% in Q2:06) is driving top line growth.
Our second biggest gainer was Span-America Medical Systems (SPAN:BUY) up 14.4% in July after reporting earnings results that beat our estimates by a wide margin. SPAN reported EPS of $0.26 vs. our $0.16 estimate, a 63% upside surprise. While custom product sales continue to struggle, high margin medical sales grew almost 40%, and expenses were well managed leading to a doubling of the company’s operating margin and 72% profit growth. At just 11x our 2007 EPS estimate of $1.11, we believe the stock has plenty more room to run.
The last two biggest gainers were both short calls, not surprising given how growth stocks struggled in July. Our short call on XM Satellite radio (XMSR:HOLD) returned 13.5% last month as the company missed expectations and lowered guidance again. At this point, our analyst felt the risks of a buyout outweighed the potential for a further stock price decline and we upgraded XMSR to HOLD from SELL. Since we launched on XMSR last December, the stock has returned 59.1%. Baidu.com, Inc. (BIDU:SELL) returned 13.1% in July as it reported lower than expected results. We had forecasted EPS of $0.25 and EPS came in at $0.21. Our thesis was that BIDU was priced for perfection, and so far, we have been right.
On the down side, the biggest loser was On Track Innovations Ltd. (OTIV:BUY) down 16.8%. While the company has reported some new customer wins, it was rejected in its bid to supply new US passports utilizing its technology. The company intends to appeal the decision. Nonetheless, investors are waiting for concrete proof that this technology can translate into profits at some point. This decision provides just the opposite. The company does itself no favors by its poor investor relations effort. However, we continue to believe that the ultimate market opportunity for OTIV is too big to ignore, and we expect profitability in 2007 and movement towards profitability in 2H:06. Our price target implies 85% upside.
NVE Corp. (NVEC:HOLD) returned -15.8% in July as the company reported much better than expected results from its core business. While our thesis that MRAM was not a near term commercial opportunity turned out to be correct, we underestimated the improvement in the company’s core business. Our analyst upgraded NVEC from SELL to HOLD. Since our initiation last October, NVEC returned 53.1% for our subscribers.
The next largest decliner was Acacia Research (ACTG:BUY), down 14.2% last month. This is baffling considering the stellar performance the company reported for Q2:06. Not only did revenue rise 436%, but the company reported its first quarter of GAAP profitability, $0.04 Vs our breakeven estimate. The drop in ACTG is inexplicable in light of its fundamentals and can only be explained by its low visibility and small cap tech profile. This is a great buying opportunity for a first rate business that is temporarily on sale. The stock is already up 71.4% since we launched on it last December and our price target implies an additional 41% upside.
Excel Maritime (EXM:BUY) shares fell 13.1% in July as the market did not like the continuing earnings decline the company reported yet again. While the company reported better than expected revenue, earnings missed our estimate by a penny. Nonetheless, we see the selloff as an overreaction. Shipping rates are firming and vessel prices are rising. Our price target implies 33.5% upside. Miller Industries (MLR:BUY) declined 10.9% last month on no news. The company is now priced at just 9.1x our 2006 EPS estimate of $1.98. This seems awfully cheap for a company with a dominant and defensible position in its niche, 156% earnings growth last year and 22% earnings growth projected for 2006.
American Software (AMSWA:BUY) was also caught up in the small cap tech selloff, dropping 10.7%. One of the attributes we especially liked about AMSWA was its generous dividend which should provide some downside protection. The dividend yield now stands at 4.8%, which should attract both value and growth investors to this name. The company has an impressive customer list and is in a consolidating industry. Our price target implies 66.7% upside.
Premier Exhibitions (PRXI:BUY) shares fell 10.6% despite beating our earnings estimates. Premier is poised for significant long term growth which is already in evidence. Revenues grew 130% and earnings were up 76.3% last quarter. Attendance at the company’s “Bodies” exhibitions is far surpassing expectations and is growing. The company’s operating leverage will only improve once its agreement with Jam productions ends and it begins to recognize all of the revenue from its shows. This is a great name on sale and we don’t expect it to stay here long as investors come to better understand the story. Hardinge (HDNG:BUY) was our last double digit decliner down 10.2% on no news. Its earnings call is scheduled for August 9th and we are looking for 10% sales growth and 27% earnings growth, yet the stock trades at just 9.7x our 2006 EPS estimate of $1.38. HDNG is a great name for value investors to take a look at. Our price target implies 51% upside.
While we are never pleased with any month where we failed to beat our benchmark, out of 24 months this marks just our 5th month of underperformance, a remarkably consistent record. Moreover, we are heartened by the fact that in many cases, we see no good reason for our stocks to be down, other than general market currents. One thing we believe in here at Singular is that earnings growth drives stock prices ultimately. While multiple expansion is nice, we don’t count on it. Our companies have an average projected earnings growth of 24%, yet trade at just a median PE of just 15x. Even these numbers are understated, as they fail to include the companies with explosive revenue growth that are just turning the corner to profitability. The stocks on our list have an average of 58% upside to their price targets. We at Singular are working hard to find compelling, actionable and investable ideas in the MicroCap space for our subscribers. As always, we are grateful to our clients and strive to earn their trust.
Volatile Month, but Singular Research List Beats S&P 500 by 2.0%
June was a month full of volatility as market participants weighed the potential for inflation expectations to grow against the prospect of slowing economic growth brought on by Fed rate hikes and stubbornly high energy prices. Our list was not immune with six of our stock moving by double digit percentages. Fortunately for us and our clients, five of those six were up double digits with only one double digit decliner. For the month of June, the Singular Research List returned 2.06% versus the S&P 500’s 0.09% return leading to another positive alpha month and 1.97% of outperformance. We are proud to report that year to date our list is up 17.1% versus a 1.9% return for the benchmark; from inception, our stocks are up 141.1% versus a 15.3% return for the S&P 500 index.
The best performer of the month was Excel Maritime Carriers (EXM:BUY) up 27% in June. This was a nice surprise as the stock has been our single worst performer. We were initially attracted to EXM by its impressive growth in revenues and earnings coupled with very low price multiples. However, many of its time charters were at rates higher than prevailing shipping rates and as ships came off old charters and signed new ones at the lower rates, performance rapidly deteriorated. We believed that the stock price decline was unwarranted and that as older ships got scrapped, leading to a smaller global fleet, shipping rates would firm up. That is exactly what happened in June with shipping rates exceeding our estimates. We would not be surprised to see an upside quarter reported for Q2:06.
Loud Technologies (LTEC:BUY), one of our newest initiations, was our second best performer gaining 23.3% on the month. The company is in the process of a turnaround and is well positioned to benefit from Guitar Center’s (GTRC:NR) growth. GTRC is adding 35 – 40 new stores a year and growing revenues at 17%, figures likely to rise as international expansion plans get underway. LTEC is the market leader in branded professional audio and other music products.
Amrep (AXR:HOLD) increased 22.4% in June before we downgraded the stock from BUY to HOLD on valuation concerns. Amrep has a confusing combination of businesses including a real estate development subsidiary and a magazine fulfillment business. While results from the magazine fulfillment business have been lackluster, results from the company’s real estate subsidiary have been stellar. Our analyst was concerned that comparisons were becoming more difficult and that the stock had gotten ahead of itself. Amrep was up 123.7% since our February 2005 initiation.
Acacia Technologies (ACTG:BUY) gained 17.4% in June. Acacia signed numerous licenses in Q2:06 with such companies as Fujitsu, Philips Electronics and Intel just to name a few. The company has ramped up its acquisition of patent portfolios and now has 47 different patent portfolios although only around ten have been converted to active licensing programs. Acacia remains one of our best ideas and is at the vanguard of an entirely new industry of intellectual property acquisition and licensing companies. Since our December 2005 initiation, the stock is already up 108.3%.
On Track Innovations Ltd. (OTIV:BUY) rose 16.6% for the month. OTIV has been a bit of a disappointment since our December 2005 launch, as the company could benefit from a better investor relations strategy. The company needs to better describe its business model to investors. That said, the opportunities for the company in its Smart ID, contactless payment solutions, and petroleum solutions product lines is almost open ended.
Our only double digit decliner for the month was Parlux Fragrances (PARL:BUY) down 29.7% in June. Parlux has been a very controversial story with a great deal of mistrust in company management. Sixty-three percent of the float is short. While the company reported better than expected Q4:06 and FY:06 results, the company has delayed the filing of its 10K as it struggles to comply with Sarbanes-Oxley requirements for internal controls. Both of our competitors have downgraded the stock to HOLD. We feel this is a mistake. Management’s guidance for FY:07 implies 32 – 36% earnings growth, and the company has a history of beating its guidance. Trading at just 7.5x FY:07 EPS and with so much of the stock already short, we feel downside is limited here. If management is found to be fraudulent, then clearly all bets are off, but we do not see compelling evidence of this yet and believe the risk/reward profile of PARL is attractive. Despite the recent decline in the share price, Parlux is still up 133.5% since we launched on it back in August of 2004.
June was also a busy month for our research team in terms of new initiations. Early in the month, we launched on a new short call, Baidu.com (BIDU:SELL) with a $50 price target. BIDU has the honor of appealing to speculators in two ways: one as a play on the fast growing Chinese market, and secondly as a major player in online search. The company has been crowned the “Chinese Google” by fans who have driven the valuation into the stratosphere. When we initiated coverage on BIDU, it traded at 95.2x our Street high 2006 EPS estimate of $0.91, and 142x 2006 consensus EPS. While we believe the company will experience rapid growth, it is priced for perfection and the market is discounting all the potential risks to its business plan which we laid out in our report.
We also added American Software (AMSWA:BUY) to our list in June. The company has a very attractive enterprise software business model complete with recurring revenues and high gross margins. The company is the industry leader in its supply chain planning niche and we believe the economy is poised for a return to information technology spending by corporations both in the U.S. and abroad. Moreover, the enterprise software space has seen rapid consolidation leading us to believe that American Software may get acquired at an attractive premium to current levels. Finally, the company pays investors a 4.3% dividend yield while they wait.
One of the most interesting and attractive investment ideas we have seen in awhile is Premier Exhibitions, Inc. (PRXI:BUY). The company has an attractive and profitable legacy business in exhibiting artifacts from the RMS Titanic shipwreck. With a new permanent exhibition planned for lower Manhattan which could generate $8 million per year in gross profit, this business alone is set to grow nicely in FY:07 and FY:08. However, the real growth story is the company’s “Bodies” exhibitions, showing carefully dissected and preserved cadavers in various poses. This is a unique, hugely popular, and surprisingly profitable business. The company currently partners with another company on the exhibits, but once the partnership ends (probably FY:08), these exhibits will get even more profitable. We forecast revenue growth, 90.2% in FY:06, will accelerate to 161% in FY:07.
We continue to be cautious on the outlook for stocks for 2H:06 and believe it is unlikely that interest rate hikes will abate any time soon. Stocks seldom perform well in a rising interest rate environment. We continue to believe that in a low return market environment, stock selection is more important than ever. Opportunities abound in the Microcap space for those diligent and savvy investors willing to put in the hard work. Here at Singular, we do that work for you. As always, we thank our clients for having faith in us and hope that we continue to earn your trust.
Singular Research List beats S&P 500 by 5.9% in May
Last month we pointed out that we thought we were seeing signs of speculation, of a lack of appreciation for risk. We highlighted the fact that the VIXX was at its lowest level in a decade, and that money was flooding into Emerging Markets Funds. We highlighted that major stock indices were at five to six year highs, and we pointed out that certain commodity prices were soaring. What conclusions did we draw? That a hedged portfolio with some short exposure makes sense. The month of May proved us right with all five of our short calls returning double digit returns. The Singular Research List returned 2.96% in May versus a negative (2.91)% return for the S&P 500. Year to date, our list is up 14.8% versus the S&P 500’s 1.8%.
It was not only short calls which helped propel our May performance. Three of our long calls bucked the market trend and returned double digit performances. Topping the list was Hansen Natural Corp (HANS:BUY) which was up an impressive 42.8% in May. The company continued its longstanding trend of beating analysts’ expectations in Q1:06 with revenues doubling and earnings growing by 130%. We continue to be very positive on HANS and have raised our price target to $240. Since inception, HANS is up 1,369%.
Our second best long call was Iris International (IRIS:BUY) up 20.1% for May. While the company’s core business is growing at a healthy clip, and remains a large opportunity, it is just a $350 million market. IRIS has taken steps through new distribution agreements, new product introductions and recent acquisitions to address a much larger $2 billion market. Our price target implies 48% additional upside.
Arrhythmia Research Technology, Inc. (HRT:BUY) rose 15.3% in May as the company reported better than expected Q1:06 earnings results. Organic revenue growth was 37.4% prompting our analyst to raise his price target. Our new 2007 estimates imply 19% EPS growth, yet the stock still trades at just 12.9x those earnings. Our price target implies 38% further upside.
As previously mentioned, all five of our short positions had big months, starting with XM Satellite Radio (XMSR:HOLD) down 28.9%. The company is now facing lawsuits and an FTC inquiry among other problems. It continues to hemorrhage cash and profitability seems ever farther away despite strong revenue growth. The company may also be losing share to its rival, Sirius Satellite Radio (SIRI: Not rated). Losses per share were actually aided by massive shares outstanding dilution. Since we launched on XMSR with a SELL rating at the end of last year, the stock has been cut in half.
Our short call on Foxhollow Technologies, Inc. (FOXH:HOLD) returned 26.1% in May. Not only is the company rudderless as it struggles to find a new CEO (now five months into the search), but losses continue to be greater than expected and revenue growth is slowing. However, after declining 48.6%, our analyst felt the shares were now more appropriately valued and upgraded his rating from SELL to HOLD. Shares of NeuroMetrix Inc. (NURO:SELL) fell 22.8% in May as the company reported much weaker than expected Q1:06 results. We were looking for $0.15/share and the company reported a penny. Revenues missed as well. Our thesis has long been that sales growth will slow to the rate of customer growth and that 2005’s growth rate of 91% was not sustainable in light of just 50% customer growth rates. The company has a nice business model but at 56x our street high estimate for 2006 earnings, it is poised to fall further.
Travelzoo Inc. (TZOO:SELL) came back to earth after the short squeeze last month, falling 22.7% in May. The story here remains the same. Decent business model, but priced for perfection, especially in light of rising customer acquisition costs. One new wrinkle is the CEO sold $120 million worth of his holdings into the short squeeze raising the float to greater than 6 million. Our hunch is that this will temper future short squeezes and keep the stock steadily heading toward our price target of $16 implying an additional 46% return. NVE Corp. (NVEC:SELL) declined another 12.5% in May as investors get tired of waiting for MRAM revenue which seems eternally just over the horizon. Importantly, St. Jude Medical (STJ:not rated), a major customer of NVEC, has recently reported very disappointing results, driven by slow sales of the products that NVEC’s equipment goes into, namely pacemakers and defibrillators. Investors should not overlook the potential problem of inventory building at STJ that might impact NVEC’s sales in coming quarters.
May also had some double digit decliners. Topping that list was Miller Industries Inc. (MLR:BUY) down 27.9%. We launched on the stock in April and now wish we had waited a month. Nonetheless, we believe the market is misinterpreting management’s comments regarding the upcoming quarter. Miller gets orders from the US government all the time and a sizeable order will slip from Q2:06 into Q3:06 due to Pentagon procurements issues. The company actually reported much better than expected Q1:06 results beating our revenue estimates by $10 million and our EPS estimates by 13%. Just as we thought IRIS was a screaming bargain before it went up 20% this month, so MLR is now on the for sale rack. It is confounding to see a company that grew sales and earnings 49% and 156% respectively trading at just 10x our 2006 EPS estimate. We doubt it will stay like that for long.
On Track Innovations Ltd. (OTIV:BUY) fell 24.2% in May as investors are unhappily surprised that profitability seems further off than previously expected. Part of the problem is how little concrete information the company provides. Not only does the company give opaque guidance, but even such basic metrics such as how much the company’s smart cards are sold for is unavailable. That said, revenues did increase 38% in Q1:06 double the pace of the quarter before and gross margins jumped 1,600 basis points. With metrics like those, we expect the company will be profitable by Q1:07. Moreover, the markets the company is targeting are enormous, and the opportunity is almost open ended if the company can execute. Our price target implies 80% upside.
Hardinge, Inc. (HDNG:BUY) declined 11.9% in May on disappointing Q1:06 results. One bright spot here is sales growth which adjusted for currency was actually up 15%, very healthy for this value stock. Due to recent acquisitions of former partners, the company’s expense structure will be markedly different over the course of the next two years and we continue to believe investors are not expecting the kind of earnings growth we forecast. Despite relatively modest revenue growth projections, we see earnings growth of 73% and 91% respectively for 2006 and 2007. Expense reductions include $2.5 million of minority interest expense, $300 – 500K/year in SG&A costs, and reduced royalty expense of $1.5 million per year. Even with no sales growth, these operating cost cuts would lead to 50% EPS growth, yet the stock trades at just 10.5x our 2006 EPS estimate and just 5.5x our 2007 EPS estimate.
Amrep Corp (AXR:BUY) declined 10.7% in May which normally would lead me to highlight it as a good name to look at adding or building a new position. Unfortunately, or fortunately depending on whether you already own it or not, the stock was up 22% yesterday and is above our price target. Our BUY rating is under review. CREDO Petroleum Corp. (CRED:BUY) fell 10.3% in May. It was poised for a breather after a monstrous run that still leaves it up 77% since we launched with a BUY rating last August. The company reported a great first quarter beating our analyst’s already lofty expectations as energy prices remain high. Our price target implies another 48% upside for this Microcap energy stock.
While we dropped Foxhollow Technologies, Inc. from our list, we added a new name, LOUD Technologies (LOUD:BUY). Our analyst believes the name is poised for a turnaround over the next few years, and our price target implies 80% upside. We believe that May, once again, illustrated the wisdom of our dual alpha strategy, profiting from both long and short ideas in a market likely to return mediocre results overall. Since we started, our average recommendation has returned 67.2%. We continue to believe that in a low return market environment, stock selection is more important than ever. Opportunities abound in the Microcap space for those diligent and savvy investors willing to put in the work. Here at Singular, we do that work for you. As always, we thank our clients for having faith in us and hope that we continue to earn your trust.
The Rise of the Speculators?
We have noticed with increasing wariness a seeming abandonment of appreciation of risk in the investment world. This rise in speculation is the result of too much savings chasing too few good investment ideas and it is a global phenomenon. It spreads like a cancer from market to market as ever more desperate investors refuse to come to terms with the low return environment we find ourselves in. Hot money is chasing recent performance wherever it can be found. If ever there was a time to hew to a strict valuation methodology and framework, this is it. Before getting to performance on individual stocks on our list, I wanted to review how we see the global economic and investment landscape and make a few observations.
VIXX is at its lowest levels in a decade.
Investors are using margin loans to pay tax bills, children’s tuition, and to buy real estate and cars.
Emerging Markets funds saw inflows of $5.4 billion in Q4:05 (second largest inflow in category history), and $6.3 billion in the first two months of 2006.
Venture capital funding in the first quarter of $6.02 billion was the highest since Q1:01.
The syndicated loan market is up to $1.5 trillion and lenders are dropping covenants from loan terms.
What each of these have in common is a disregard for risk. The VIXX index is perhaps the cleanest and clearest view of the price of risk as an indicator of implied volatility in the options market. In the face of arguably overpriced markets and rising interest rates, such complacence is difficult to explain. Markets are becoming more inefficient as millions of individuals are moved from defined benefit pension plans run by professional institutional investors to self directed defined contribution plans such as 401Ks. Investors weaned on the 20%+ returns of the 1980s and 1990s are using more leverage and seeking out riskier investments such as Emerging Markets. Institutional investors are not immune either as fiduciaries seek higher return ways to meet their liabilities and obligations. Torrents of cash flooding the Venture Capital market and easing of lending covenants confirm this.
Dow is at a six year high.
Nikkei is near a 5.5 year high.
NASDAQ is near 5 year high.
The $1.5 trillion hedge fund market is now competing with the $261 billion venture capital market to finance private companies, driving up valuations.
The number of stocks on our Cocktail Party screen used to identify speculative overpriced stocks has more than doubled to 34 names from just 16 at year-end.
After a difficult period following the tech stock bubble collapse, markets are roaring back to life and hitting new highs, nor is this phenomenon limited to the United States by any stretch. Hedge funds, looking for ways to justify their ample fees, are muscling into new arenas such as the venture capital market. Our own proprietary indicators of overvaluation are flashing caution as well.
Oil prices are at record highs.
Silver is approaching levels last seen when the Hunt brothers cornered the market.
Gold is at a 25 year high.
Strong global economic demand is driving up the prices of many raw materials such as oil, copper and steel. Yet, here too, there is speculative froth as precious metals prices hit new highs, not explained by industrial uses. Individuals, led by ETF enablers, are piling into precious metals funds chasing recent performance. Another interpretation, equally menacing, is that with GDP growth rampaging ahead at 4.8% and unemployment down to 4.7%, investors are seeking traditional safe harbors from inflation, such as gold.
Interest rates are rising, not just in the US but aboard, as central banks raise overnight rates. Stocks seldom do well in the face of rising interest rates.
Corporate profit margins are at historically high levels.
We’ve had 10 quarters in a row of double digit profit growth, longest streak in over 30 years.
The very fact of recent impressive corporate performance makes the future that much more difficult. Rising interest rates mean the tsunami of excess savings circling the globe will find enticing alternatives in fixed income instruments and cash, rather than stocks. Corporate profit margins have expanded nicely as excess capacity has been brought back on line and costs have been cut. However, demand is rising and companies must add new staff which may mean falling profit margins in future quarters. Falling profit margins may spell the end of double digit profit growth, making it even more difficult for stocks to advance.
So what does this mean for our clients? One conclusion is the relative attractiveness of earning 5% risk free in money market accounts. Another, is a hedged portfolio such as ours. Last year, we returned 37%, with every short call we made beating the S&P’s paltry 2.5%. However, shorting stock carries its own peculiar risks. Speculative and pricey stocks can become more speculative and pricier and the loss is open ended. In April, we experienced this with Travelzoo Inc. (TZOO:SELL).
The Singular Research list declined 2.4% in April vs. the S&P 500 which returned 1.2%. Year to date, our list is up 11.5% versus the S&P 500 which is up 4.8%. Our best call in April was Acacia Technologies (ACTG:BUY) up 26.6%. While the company did not meet our aggressive assumptions for Q1:06, it is well positioned for explosive and lucrative growth in the coming years. Investors can see the long and full pipeline of patent portfolios which have not even begun to be exploited. Q1:06 revenues grew 153% and we project GAAP profitability in 2H:06. The company is already cash flow breakeven.
Amrep Corp (AXR:BUY) reported a 68% upside surprise in March and the stock has never looked back. Our analyst raised his estimates and price target in early April only to see the stock test his new price target. The company is monetizing its vast real estate holdings in New Mexico. Amrep is up 111% since we launched on it February of last year. McDermott International (MDR:BUY) gained 11.7% in April as the supply of oil rigs continues to lag demand. McDermott International is now up 50% from year end when we launched on it.
On the down side, our call on Travelzoo Inc. (TZOO:SELL) lost 96.73% moving up from $19.58 to $38.52. It had been as high as $52 before giving back some of the gains. It was a classic short squeeze. After missing estimates for three quarters in a row, the company reported EPS of $0.24/share for Q1:05 versus our estimate of $0.18 and the First Call consensus of $0.14. We continue to believe the stock is worth around $16, representing 58% upside to our target.
IRIS International, Inc. (IRIS:BUY) declined 24.3% in April. The company announced it had acquired Leucadia Technologies, Inc., a molecular diagnostics company, for $10.1 million in cash and stock. While the acquisition gives Iris entrée into the fast growing $1.5 billion Molecular Diagnostics market, it was dilutive, and as a result, Iris lowered its 2006 guidance to $0.45 versus our projections of $0.53. The stock is now as cheap as it was a year ago. Meanwhile, revenues have grown 44% and earnings have grown 141% over that time frame. Our price target implies 111% upside.
Parlux Fragrances (PARL:BUY) declined 15.4% for the month on no news save the signing of a worldwide license for Paris Hilton sunglasses. While we are wary of the probable need to fund increasing working capital balances to meet the company’s growth plan, the stock is ridiculously cheap. Our FY:06 estimates imply 91% revenue growth and 103% earnings growth yet the stock trades at just 12.6x FY:06 earnings. Span-America Medical Systems (SPAN:BUY) reported a disappointing Q1:06, and the stock fell 15.1%. The company missed our estimate by 3¢ as higher foam prices and an inventory correction at Wal-Mart hurt reported results. However, the company is just beginning to sell its new safety catheter product which we expect will excite investors once it reaches meaningful sales volumes.
Excel Maritime Carriers (EXM:BUY) declined 13.4% as the dry good bulk shipping industry remains an unpopular sector. We loved the company when it traded at 0.75x book value, and now love it even more at 0.58x book value. The company stands to benefit from global economic growth especially in the Far East where Excel ships grain, coal, and iron ore. Industry dynamics are complicated. High scrap steel prices lead shippers to scrap older ships, yet many new ships are coming on line in the next few years. This is a deep value play and we expect the next catalyst will be the announcement of a share buyback program.
While we never like to have a down month, we are focused on long-term results. Since we started, our average recommendation has returned 60.3%. We have never had a quarter where we did not beat the S&P 500, and April marks only the fourth month we have underperformed. We continue to believe that in a low return market environment, stock selection is more important than ever. Opportunities abound in the Microcap space for those diligent and savvy investors willing to put in the work. Here at Singular, we do that work for you. As always, we thank our clients for having faith in us and hope that we continue to earn your trust.
Singular Research List Outperforms the S&P 500 by over 10% in Q1:06
We are pleased to report that March was yet another month of the Singular Research list outperforming the S&P 500. Our list returned 2.12% in March versus the S&P 500’s 1.11%. For the first quarter, we were up 14.2% versus the S&P 500’s 3.6% return. Indeed, our list has outperformed the S&P 500 in every quarter going back to August 2004. March was a very volatile month for the list as well with 10 stocks moving up or down by double digit percentages.
On the positive side, our biggest gainer for March was Insteel Industries (IIIN:HOLD) up 48.5%. We only just initiated on the company with a BUY rating in late January. However, since then the stock has climbed 121%. Prior to our initiation, the company had recently announced a share repurchase program and that it had repaid all of its debt. Insteel had also announced impressive Q1:06 results. On March 20th, our analyst raised her price target to $54 from $42 on some more aggressive assumptions. However as much as we like the company, now that it has more than doubled, we feel it is fairly valued and we downgraded to HOLD on March 27th.
Our second biggest winner was Hansen Natural Corp. (HANS:BUY) up 35%. The company again reported stronger than expected Q4:05 results with sales growing 95% and EPS up 142%. One thing we know is true is that stock prices follow earnings growth, and that clearly has been the case for HANS. We raised our price target from $120 to $130 but with recent speculation that Anheuser-Busch (BUD:NR) might be interested in partnering with Hansen or buying the company outright, the stock is already testing our higher price target. HANS is now up 914.4% since we launched with a BUY rating on it.
Showing that value stocks can produce strong returns as well as growth stocks, our third biggest gainer was Amrep Corp (AXR:BUY) up 26.8% for the month. The company reported much better than expected results driven by strong real estate sales up 80% YoY from New Mexico. Our analyst continues to worry about the health of the core publishing business, but the market clearly is not too worried with the stock testing our $39 price target. Continuing the recent trend of one company a month being acquired, Outlook Group announced it was being sold to an investor group for $13.50 per share. While we feel the company is selling itself too cheap, the stock was up 23.3% in March on the news.
March was a big earnings month for our list and the market did not react favorably to some of our company’s reports. Topping the list of decliners this month was Preformed Line Products Company (PLPC:BUY) down 16.9%. The company reported worse than expected Q4:05 results because customers took a break from their rapid Fiber-To-The-Premise (FTTP) rollout to draw down inventory. We view this as a great buying opportunity as the long-term fundamental catalysts for growth for PLPC remain very much in place. These include the FTTP rollout, the recently passed federal Energy bill and Hurricane Katrina reconstruction. The types of projects that PLPC works on are massive and take a long time to get started. We expect revenue growth acceleration throughout 2006 and 2007, yet the stock trades at just 12.5x our 2006 EPS estimates.
The second biggest decliner for March was Hampshire Group, Ltd. (HAMP:BUY) down 15.2% also on a disappointing earnings result for Q4:05. While margins are coming under pressure and the company operates in a fiercely competitive industry, the expectations for the company are very low as well and the valuation is compelling. The company generates prodigious free cash flow and has been buying back its own stock. Our price target implies 63% upside. Foxhollow Technologies, Inc. (FOXH:SELL) rose 15% in March. The company reported worse results than our analyst had projected, but results in line with prior guidance. The company is seeing slowing revenue growth and recently lowered guidance. Our price target implies 29% downside from current levels.
On Track Innovations Ltd. (OTIV:BUY) fell 14.9% in March on disappointing Q4:05 results. We had expected the first quarter of profitability, but that now seems delayed until 2H:06. The company does a poor job of communicating with investors and we suspect that is contributing to the stock’s decline. Furthermore, the options and warrant issuance is excessive. Despite all this, however, the market opportunity for OTIV is truly enormous and we continue to believe that patient investors will be rewarded. Excel Maritime Carriers (EXM:BUY) declined 11.8% in March as the company experienced negative operating leverage in Q4:05. The company is trading for less than book value and is trading at close to our estimate of liquidation value. We expect a share buyback announcement before too long which could serve as a catalyst to get the stock moving back up.
On March 3rd, we raised IRIS International, Inc. (IRIS:BUY) from HOLD to BUY and added it back to our list. We had downgraded on valuation concerns last November when the stock reached $22.91. The company reported almost exactly what we had forecast for Q4:05, yet the market took it poorly sending the stock sharply lower. When the stock hit $17.73, we thought it was sufficiently undervalued relative to our $25 estimate of intrinsic value to upgrade. In hindsight, we were a little early as the stock kept falling to $15.63 down 11.8% since our upgrade. The company is well positioned and well run and remains one of our best ideas. Our price target implies 61% upside.
March was a very busy month for Singular Research as we were inundated with earnings reports and 10K filings. It is important for our clients to know that we read all the SEC filings for our companies as there are few better sources of detailed information on these businesses. Our models reflect information from these documents such as operating lease liabilities and options outstanding. Each year, we capitalize our company’s operating leases to move this off balance sheet debt back on balance sheet in our analysis. Furthermore, we revalue all options outstanding at our companies using the Black-Scholes model to estimate how much of firm value the option holders lay claim to. Detail oriented and time consuming work like this is what separates us from other similar equity research firms.
We are excited that 2006 is off to such a strong start and we are working hard to find more uncovered companies with explosive potential. As always, we thank our clients for having faith in us and hope that we continue to earn your trust.
Enron: Exhibit one in The Case for Independent Stock Research
Before I get to February's performance, I wanted to recount a story. This past weekend, I watched "Enron: The Smartest Guys in the Room," a documentary about the downfall of the corporation. There were many interesting things to take away from the story but one aspect caught my attention. The company had numerous analysts covering it, and most had Strong Buy or Buy ratings on the company. When pressed privately, most admitted they had no idea how the company made its money, but said it had a knack for consistently beating earnings estimates. For one analyst at Merrill Lynch, that was not good enough and he did not have a positive rating on the company. Andy Fastow, Enron's CFO called Merrill and told them if they did not get rid of this analyst, they would not see a dime of investment banking fees. Merrill fired the analyst and, soon thereafter, received approximately $50 million in investment banking fees. We all know the rest of the story. Investors would have been wise to listen to the one analyst doing his job.
For us at Singular Research, stories like this reaffirm why we feel we are on the right path. We don't have any corporate finance arms, and don't do any investment banking business. Our only clients are our investor subscribers and our goal is to find the best ideas out there for them. Our research is uncompromised and is conflict free. Our analysts are free to follow their best instincts and hunches based on solid fundamental investment research and we find that when you let smart people work without hindrance, the results can be amazing. And with that, let me get to February's performance.
February was yet another month of solid outperformance. In a market that continues to trade sideways, we are now up almost 12% YTD. The Singular Research list added another 3.01% in February, handily beating our S&P 500 benchmark's -0.02% return. Five stocks returned double digit gains, while two stocks declined by double digits.
Topping the list was a relative newcomer to our list, Insteel Industreis, Inc. (IIIN:BUY) up 36.2% in February. Recently, the company renegotiated its line of credit, announced all debt was paid off, announced a share buyback program and reported results bucking seasonally slow trends. The company has tailwinds from major catalysts including the recently passed federal energy bill, hurricane reconstruction, and a booming commercial real estate market. Our second best performer was Pychemedics Inc. (PMD:BUY) up 23% for the month. The company reported better than expected Q4:05 results, continues to take market share away from the traditional urine testing market for illicit drugs, and is poised to benefit form the possibility of new federal drug testing guidelines. Duratek (DRTK:HOLD) was our third biggest gainer up 20% on news that the company was being acquired by EnergySolutions, a national energy services company headquartered in Salt Lake City, Utah, for $22/share in cash and debt assumption (a 25.7% premium to the prior day's closing price).
One of our most high profile stocks was the next most profitable call in February, XM Satellite Radio, (XMSR:SELL) down 15.6% in February. Advertising expenses are spiraling out of control as the company continues to bleed red ink, prompting one director to flee stating he sees "a significant chance of a crisis on the horizon." Tejon Ranch (TRC:BUY) was our last double digit gainer, up 11.7% in February. There was no news from the company, but we have long maintained that the company's huge land holdings in Southern California have been undervalued by the market. Our price target implies an additional 48% upside.
The biggest disappointment of the month was Rimage Corporation (RIMG:BUY) down 33.4% for the month. The company pre-announced lower than expected results and then delivered just that. The company has spent heavily on consulting to help it plan its next growth leg up. However, our analyst believes the fundamental investment thesis is in tact and expects a return to double digit growth in 2007. Our price target implies 65% upside. The other double digit decliner was Credo Petroleum (CRED:BUY) down 27.1%. This has all the hallmarks of traditional profit taking after a huge run up and perhaps nervousness about the sustainability of high energy prices. Even after this decline, CRED is up 80% from where we launched on the stock just less than six months ago.
February was a big earnings month for our research list with six doing better than our estimates and six doing worse1 . In one sense, this is gratifying. Our estimates are our best estimates of what companies will actually report rather than lowball estimates that companies can easily beat. Our estimates are proprietary for our paying subscribers only and do not flow through to First Call, so our prime incentive and motivation is accuracy. However, this is difficult even for gifted analysts when companies provide no guidance as most of ours do not. As Table 1 indicates and as described above, RIMG, PMD, and XMSR were the biggest movers on earnings news.
In each of the last two months, we have had a company on our list get acquired by another firm, LEIX in January and DRTK last month. This is one advantage of working with smaller firms. Of our remaining list, we see PARL, HAMP, and HANS as other potentially likely acquisition targets.
We are excited that 2006 is off to such a strong start and we are working hard to find more uncovered companies with explosive potential. As always, we thank our clients for having faith in us and hope that we continue to earn your trust.
Singular Research Strong Out of the Gate, up 8.6%
After two phenomenal years where our research list was up 50%, and then 37%, it was reasonable for us to wonder if things might slow down this year, reversion to the mean and such. But such was not to be the case in January. We had our third best month ever with the Singular Research list up 8.55% Vs. 2.46% for the S&P 500. Moreover, we are happy to report that this performance was broad based with 10 different stocks up double digits for the month. Some of the results were driven by earnings reports, some was driven by other news, and still others were up on no news.
Our top performer of the month was Credo Petroleum (CRED:BUY) up 72.9%. Credo is now up 144.5% from where we launched on it with a BUY rating last August. The company reported better than expected Q4:05 results on the back of rising energy prices. Our analyst raised his price target to $32. Lowrance Electronics (LEIX:HOLD) was up 45.3% for the month after news it was being acquired by Simrad Yachting for $37/share, which coincidentally was our analyst's price target. Our thesis was that this was a growth stock being priced like a value stock. It did not take long for that story to bear itself out as we just launched on LEIX at the end of December.
Span-America Medical Systems (SPAN:BUY) reported 81% better EPS than expected for Q4:05 results on 23% sales growth. The company's sales of mattresses to nursing homes continue to grow at double digits and operating income grew 73%. Most impressively, this performance occurred in the face of rising raw materials costs which brought gross margins down. Even after the run-up, the stock still trades at just 10.4x our 2007 EPS estimate, and our price target implies another 57% upside. Maxwell Technologies Inc. (MXWL:BUY) was up 21% in January, as the company reported a large order with General Hydrogen Corporation. No sooner did the market absorb this good information than the company announced another huge order today for 1.5 million units with Enercon GmbH. Since MXWL is already at our price target, our rating and price target are under review.
Duratek Inc. (DRTK:BUY) was up 18.8% for the month on no news. We can only surmise that value investors came to understand what a bargain this company is despite its recent struggles. On Track Innovations Ltd. (OTIV:BUY) was also up 18.7% last month on not much news. We think OTIV is very well positioned in the contactless smart card market and we recently saw a TV ad for "Pay Pass," MaterCard's contactless technology, featuring an OTIV card and reader. OTIV is already up 24% from where we launched with a BUY in early December. McDermott International (MDR:BUY) was up 16.6% for January as the company made some progress toward settling its outstanding asbestos litigation. MDR is especially well positioned to benefit from new construction stemming from the recently passed Transportation bill and from Katrina related repair and reconstruction. Rimage Corporation (RIMG:BUY) was up 12.9% on no real news as well. RIMG is now up 68.6% since we launched with a BUY last June.
Acacia Technologies (ACTG:BUY) was up 12.3% on news of numerous licensing deals. This is a very exciting company with a very unique business model. We are especially excited about having the CEO, Paul Ryan, on our conference call next Monday. Rounding out the list is Hansen Natural Corp. (HANS:BUY) up 11.4% for the month. On January 9th we raised our estimates and we raised our price target from $90 to $120. Not long afterwards, a competitor did the same. HANS continues to be a very exciting growth opportunity and is now up 620% since we launched with a BUY rating in October 2004.
In terms of poor performers for January, thankfully there are not very many. Acme United Corp. (ACU:BUY) declined 11.5% on no news. We believe that this is a great opportunity to buy a quality growth name for a very cheap price. Since hitting a high in late June of $21 the stock has declined 41.4%. An investor would be forgiven for thinking sales and earnings must have suffered during this period. However, sales grew 21.1% and 15.6% in the last two quarters and EPS grew 18.7% and 11.6%. ACU trades at just 9.8x our 2006 EPS estimate despite 138% ttm EPS growth. Our price target implies 110% upside.
With the bulls back in charge in January, a couple of our short positions went against us as well. NVE Corp. (NVEC:SELL) was up 15.8% on a good earnings report. Trading in the shares continues to be volatile and driven by MRAM expectations. Our price target implies 35% downside from current levels. NeuroMetrix Inc. (NURO:SELL) increased 26.5% in January. The company had no real news in January, but this continues to be a favorite with the momentum crowd. As we recently saw with Google, momentum can shift to the downside quite suddenly when lofty expectations are not met. NURO reports tomorrow.
On the macro front, we expect 2006 to be much like 2005. Valuations have improved for the major averages as earnings growth went up and stock prices stood still. However, we continue to believe that earnings growth cannot exceed the nominal growth in the economy and in fact, must be less since public companies, by definition, do not participate in the rapid growth of small private companies. With an optimistic estimate of real GDP growth at 5% and inflation at 3%, that means earnings growth should be 8% or less on average. Earnings growth has recently exceeded this as firms have used up idle capacity, improved productivity and have worked existing employees harder, while cutting other costs. Indeed, as Table 1 shows, profit margins are at record highs. If firms cannot expand profit margins, then stock price growth maybe well fall short of 8% this year. In any event, we see single digit type profit growth and stock price gains for the major averages which means skilled stock picking will be as important as it was in 2005.
Table 1: Corporate Profits are Already at Record Highs.
We are excited that 2006 is off to such a strong start and we are working hard to find more uncovered companies with explosive potential. As always, we thank our clients for having faith in us and hope that we continue to earn your trust.
Singular Research List ends year up 37.2%
2005 was a banner year for Singular Research. After a 50% return for 2004, we are highly gratified to return another hefty 37.2% gain in 2005. We continue to believe that the returns to disciplined, fundamental bottom-up research are higher in the Microcap space than anywhere else in the market. Our team of seasoned analysts reviews thousands of companies to find the most promising ones selling at the cheapest valuations. We believe the results of our efforts speak for themselves.
Rather than go over December's performance (another winning month up 2.9% VS. S&P 500's -0.28%) at length, I thought I would look back over the year. The Singular Research List outperformed the S&P 500 every quarter in 2005, and every month but two. 22 of the names we wrote on in 2005 outperformed the index including every single short call we made. Of the 15 calls that went against us, we still cover ten and still view them as excellent investment opportunities.
Five Biggest Winners of 2005
Hansen Natural Corp. (HANS:BUY) was our biggest winner up 333% for the year. Since October 2004, when we first launched on HANS, it is up 586%. Hansen also had a phenomenal 2005 with 239% average EPS growth for the first three quarters of 2005. Iris International (IRIS:NR) was our second best performing stock of 2005 up 135%. We cut Iris to HOLD on valuation concerns in early November. Iris saw phenomenal gains in sales and earnings in 2005, and the stock price fully reflected this. Travelzoo (TZOO:SELL) fell 77% in 2005. While we admired the company's business, we simply could not envision any scenario where the shares were worth $95. When a company is priced for perfection like that, the slightest hiccup, such as rising customer acquisition costs, drives share prices down sharply. Our fourth best pick of the year was another short call, NVE corporation (NVEC:SELL). Despite a very volatile ride, the shares ended the year down 47.6%. Trading in NVEC seems to be driven by the ever elusive dream of MRAM and spintronics. Our analyst did not believe the hype and saw the successful production of large quantities of MRAM product still far away. Such a disappointing reality was not priced into the stock at the beginning of the year. Rimage Corp. (RIMG:BUY) was fifth, up 46% for the year. In the most recent quarter, sales were up 56% and our analyst raised his estimates and price targets. Earnings were up 86%.
Before, I recount the five biggest losers of 2005, I wanted to take a moment to look at what our performance would have been like without some of our best picks. Clients, understandably, have asked if our list is being driven by a couple superstars or if all the horses are pulling. Specifically, we were asked what the list would have returned without HANS, IRIS, PARL, and TZOO. While I might be more interested in how our performance looked without our biggest losers, we were not asked about that. Turns out that removing those four stocks from our list still would have resulted in us outperforming 11.7% vs. 2.6% for the S&P 500. Even more remarkably, while our cumulative performance is up 106%, removal of these four stocks would still leave us up a respectable 43.8%.
Five Biggest Losers of 2005
No one in investments bats a thousand and so it is worthwhile to look at what did not work. Before doing so, I'd like to say that we continue to believe in these names and many are among the stocks in our list with the most room to our estimate of intrinsic value. Put another way, these are among our best ideas for 2006. Arrhythmia Research Technology, Inc. (HRT:BUY) was our biggest loser, dropping 38.3%. Ironically, the stock has already soared in the new year, up 27.1%, perhaps giving us an early glimpse of what 2005's losers can do in 2006. While HRT missed our analyst's estimates in each of the last two quarters, he continues to believe the sellofff was overdone. Outlook Group Corp. (OUTL:BUY) declined 35.4% last year. OUTL missed our analyst's estimates last quarter and the market drove the shares down sharply. OUTL pays a dividend which should help shore up further declines as the yield is now 2.2% after a 4% gain for the shares so far in January. Shares of Excel Maritime Carriers (EXM:BUY) dropped 29% in 2005. Just when you think a cheap company can't get any cheaper, it does. This is the classic deep value story with a twist. Revenues and earnings have been growing on average at 142% and 126.4% respectively over the last four quarters. And while our forward estimates are likely high due to falling shipping rates, EXM trades at a trailing PE of just 3.2x, and at less than book value (0.86x). Interlink Electronics (LINK:NR) dropped 25%. Our analyst cut the stock from BUY to HOLD in mid-February after the company preannounced worst than expected results. We were saddened to see the stock drop from $9.43 down to $7.07, but gratified to see it continued to fall to its current $3.10 after our downgrade.
Duratek Inc. (DRTK:BUY) had a rough year and the stock fell 22%. Back in April, when we launched with a BUY rating, it appeared that DRTK was well-positioned to take advantage of the world's increasing use of nuclear fuel for energy. Indeed, first quarter EPS growth was up 50%. However, starting in the second quarter, the company's commercial services division began to underperform our projections and by September, a lengthening sales cycle for federal work and a dearth of international projects were added to the company's list of woes. Our analyst believed the selloff was overdone despite the bad news and the company did rally 15% in November. Nonetheless, of all our disappointments, this remained one of the tougher calls. The company's accounting is complex project based accounting, and revenue visibility is almost non-existent. That said, a few new project wins could serve as a catalyst for the stock to rally (more than the 7.6% already in January) in 2006.
December was a busy month for us with five new initiations, four long and one short, and we are excited about all of them. On Track Innovations Ltd. (OTIV:BUY) is deeply involved in the contactless smart card industry and each of the verticals it sells into is potentially a multi-billion dollar opportunity. XM Satellite Radio (XMSR:SELL) is about as hyped a company as we see out there today and with more than $500 million in fixed costs, we expect many investors will vote with their feet long before the company achieves profitability. Acacia Technologies (ACTG:BUY) is a true company for the 21st century with no product, no sales, and no manufacturing, just high margin licensing revenues. We expect this firm to reach break-even next year and for other investors to sit up and take notice of its explosive results. Lowrance Electronics (LEIX:BUY) sells into the fast growing GPS market and is priced like a value stock despite its compelling growth story. Lastly, McDermott International (MDR:BUY) while a bit larger than most of our companies, has numerous catalysts for stock price appreciation and is well positioned to take advantage of Hurricane Katrina's cleanup and recovery in the Gulf region.
Looking ahead to 2006, we believe the US economy is in excellent shape, especially compared to many of our trading partners. We expect the Federal Reserve will end its interest rate raising efforts in 1H:06, but expect long term interest rates will continue to rise as unemployment continues to fall and the economy expands. On the corporate front, we expect firms will start to spend their large cash hordes on investments in new plant and equipment, making investment a more significant portion of GDP growth, even as heavily indebted consumers scale back consumption somewhat. Valuations remain stretched from the long secular bull market from 1980 - 2000, and in the face of potential interest rate increases, we believe more than single digit type increases for the major averages will be difficult. In such an environment, careful stock selection will be as important as ever to investors looking to outperform. We continue to believe our research list is exceptionally well positioned for the New Year with a 41.6% average upside to our price targets. Stocks on our list with the most room to our price target include OUTL, EXM, SPAN, ACU and PARL.
Here at Singular Research, I want to thank all of our analysts and our marketing and client relations staff for all of their hard work in 2005. We are excited about 2006 and we will work hard to continue to deliver the kind of results our clients expect of us. Finally, I would like to thank our clients for the trust and faith they have put in our abilities. Without you, none of this would be possible.