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.
Singular Research List up 33.3% year to date but fell behind S&P 500's big gain in November
In November our hedged portfolio of long and short names could not keep up with the S&P 500, as the index put in its 2nd best month all year. The Singular Research List rose 2.16% in November versus a 3.06% for the time-weighted S&P 500. With earnings season upon us, there was more volatility in the list than we usually experience. Within the list, performance ranged from up 53.7% to down 19.3%. Since much of the volatility in the list was driven by news flow, let me start by recapping the earnings announcements.
Ten of our companies reported in November, with six beating our expectations, and four missing. Hansen Natural Corp. (HANS:BUY) was far and away our biggest winner rising an impressive 53.7% in November. Q3:05 sales doubled and EPS was up 240%. Growth continues to be driven by high margin energy drinks, a category that is growing at 50% and in which HANS is taking market share from larger competitors. Finally, HANS announced a new stock buyback program in mid November under which the company can buy back up to $50 million of its own shares.
Parlux Fragrances (PARL:BUY) missed our earnings estimate, but the market drove the stock 24.3% higher anyway. Part of the explanation is that our estimates were more aggressive than our competitors and PARL actually met Street expectations. The company also reiterated guidance that indicates sales will more than double in the next two quarters. Sales growth has been accelerating at PARL and operating income was up 90.5% in Q3:05. Our EPS estimates imply EPS will at least double for FY:06. PARL trades at just 11x consensus earnings and our price target implies 84% upside.
Maxwell Technologies (MXWL:BUY) reported better than expected results with revenues up 80% YoY. The company is narrowing its losses and our analyst expects profitability by Q4:06. MXWL was up 12.8% for the month. Span-America Medical Systems (SPAN:BUY) also reported better than expected results significantly beating our estimates, and the stock was up 12.3% in November. We continue to expect the firm's new catheter product to be a significant catalyst in coming quarters. Join us for our December 19th conference call when the CEO of SPAN, Jim Ferguson, will elaborate on his business. Our price target implies 85% upside.
Hardinge (HDNG:BUY) had a rough quarter missing our estimates by 63%. However, due to rising backlogs and orders (up 38% and 18% respectively), the stock gained 4.3%. As a machine tools manufacturer, Hardinge is very exposed to global economic growth. Since we have a favorable view on future global economic growth, we continue to rate HDNG a Buy and our price target implies 55% upside. Hampshire (HAMP:BUY) also missed our estimates, but the stock was basically flat, up 1%. We expect rising revenues at HAMP due to a recent acquisition but margins are under some pressure. With the continuing consolidation in the apparel industry, we would not be surprised to see HAMP as an acquisition target in 2006.
American Physicians Service Group (AMPH:BUY) reported EPS of more than double our estimate helped by the realized gain on an equity investment. On a pro forma basis, however the upside was just a penny and the market did not like the operating margin compression. AMPH declined 0.2% in November. AMPH continues to have large positions in cash, equity investments and fixed income investments. Backing these out, investors are getting the two profitable business subsidiaries for around $3/share. We continue to believe there is value to be unlocked in AMPH and remind investors that AMPH is up 20% from a year ago when we initiated on it. Our price target implies another 75% upside.
Iris International (IRIS:HOLD) reported an inline quarter which included 36% revenue growth and 185% EPS growth. However, the stock was up 250% from our initiation price. Since IRIS had almost reached our price target of $25, we reluctantly cut our rating to HOLD from BUY. IRIS remains a fantastic company, but at 49x forward earnings and 84x trailing earnings, it is difficult to argue that it is undervalued.
Excel Maritime (EXM:BUY) reported 45% higher EPS than we had projected although the sale of one of its boats accounted for much of the upside. On a pro forma basis, EPS of $0.61 missed our $1.07/share expectation and helps explain why the stock declined 13% in November. Nevertheless, EPS is up 164% year to date. We believe that most investors do not fully understand the radical transformation that EXM has undertaken in the last year to bulk up its fleet, revenues and earnings. EXM is a classic example of what we look for in our investments as the firm is both very profitable and very cheap. Excel Maritime sports a 44% ROE, and operating margin in the 45 - 55% range, yet trades at just 3.5x our 2005 EPS estimate, and at just 2.6x free cash flow. Our price target implies 72% upside.
Our biggest disappointment for November was Arrhythmia Research Technology, Inc. (HRT:BUY). The company missed our estimates by 50% and the stock was down 19.3%. However, our analyst believes that recent low margin tool sales are indicative of higher margin custom molded products in future quarters. We view the stock decline as an overreaction and our price target implies 60% upside from current levels.
During November we also added two new names to our research list, one long and one short. Outlook Group (OUTL:BUY) is a specialty printing company with some recent large contract wins including Proctor and Gamble (PG:Not Rated). Its 16.6% decline on no news was an inauspicious start, but our price target implies 61% upside. Foxhollow Technologies, Inc.(FOXH:SELL) is our newest short call, and is very much in the mold of NeuroMetrix (NURO:SELL) in terms of being a medical device company bid up to a price unsupported by the company's fundamentals. (As an aside we were gratified to see our short call on NURO return 16.5% for November, our third best call for the month.) FOXH manufactures and markets the SilverHawk system for treating peripheral artery disease (PAD). The company has been consistently unprofitable, but our analyst expects that to change next quarter. Still, at 78x our street high 2006 EPS estimate of $0.57/share, FOXH is priced for perfection. Our price target, which itself includes fairly heroic assumptions, implies more than 30% downside.
As our list grows, I find myself unable to talk about each name at the length I would like to. Just in November, we had other double digit movers such as DRTK (up 15%), NVEC (down 13.1%), and TZOO (down 16.6%). Year to date our research list is up 33.3% versus the S&P 500's 2.8% return. We continue to believe these are the best ideas from the Microcap space and we will be introducing more in the coming months. We are grateful for our customer's support and will keep striving to bring you the best unbiased investment research anywhere. B11+B12In November our hedged portfolio of long and short names could not keep up with the S&P 500, as the index put in its 2nd best month all year. The Singular Research List rose 2.16% in November versus a 3.06% for the time-weighted S&P 500. With earnings season upon us, there was more volatility in the list than we usually experience. Within the list, performance ranged from up 53.7% to down 19.3%. Since much of the volatility in the list was driven by news flow, let me start by recapping the earnings announcements.
Ten of our companies reported in November, with six beating our expectations, and four missing. Hansen Natural Corp. (HANS:BUY) was far and away our biggest winner rising an impressive 53.7% in November. Q3:05 sales doubled and EPS was up 240%. Growth continues to be driven by high margin energy drinks, a category that is growing at 50% and in which HANS is taking market share from larger competitors. Finally, HANS announced a new stock buyback program in mid November under which the company can buy back up to $50 million of its own shares.
Parlux Fragrances (PARL:BUY) missed our earnings estimate, but the market drove the stock 24.3% higher anyway. Part of the explanation is that our estimates were more aggressive than our competitors and PARL actually met Street expectations. The company also reiterated guidance that indicates sales will more than double in the next two quarters. Sales growth has been accelerating at PARL and operating income was up 90.5% in Q3:05. Our EPS estimates imply EPS will at least double for FY:06. PARL trades at just 11x consensus earnings and our price target implies 84% upside.
Maxwell Technologies (MXWL:BUY) reported better than expected results with revenues up 80% YoY. The company is narrowing its losses and our analyst expects profitability by Q4:06. MXWL was up 12.8% for the month. Span-America Medical Systems (SPAN:BUY) also reported better than expected results significantly beating our estimates, and the stock was up 12.3% in November. We continue to expect the firm's new catheter product to be a significant catalyst in coming quarters. Join us for our December 19th conference call when the CEO of SPAN, Jim Ferguson, will elaborate on his business. Our price target implies 85% upside.
Hardinge (HDNG:BUY) had a rough quarter missing our estimates by 63%. However, due to rising backlogs and orders (up 38% and 18% respectively), the stock gained 4.3%. As a machine tools manufacturer, Hardinge is very exposed to global economic growth. Since we have a favorable view on future global economic growth, we continue to rate HDNG a Buy and our price target implies 55% upside. Hampshire (HAMP:BUY) also missed our estimates, but the stock was basically flat, up 1%. We expect rising revenues at HAMP due to a recent acquisition but margins are under some pressure. With the continuing consolidation in the apparel industry, we would not be surprised to see HAMP as an acquisition target in 2006.
American Physicians Service Group (AMPH:BUY) reported EPS of more than double our estimate helped by the realized gain on an equity investment. On a pro forma basis, however the upside was just a penny and the market did not like the operating margin compression. AMPH declined 0.2% in November. AMPH continues to have large positions in cash, equity investments and fixed income investments. Backing these out, investors are getting the two profitable business subsidiaries for around $3/share. We continue to believe there is value to be unlocked in AMPH and remind investors that AMPH is up 20% from a year ago when we initiated on it. Our price target implies another 75% upside.
Iris International (IRIS:HOLD) reported an inline quarter which included 36% revenue growth and 185% EPS growth. However, the stock was up 250% from our initiation price. Since IRIS had almost reached our price target of $25, we reluctantly cut our rating to HOLD from BUY. IRIS remains a fantastic company, but at 49x forward earnings and 84x trailing earnings, it is difficult to argue that it is undervalued.
Excel Maritime (EXM:BUY) reported 45% higher EPS than we had projected although the sale of one of its boats accounted for much of the upside. On a pro forma basis, EPS of $0.61 missed our $1.07/share expectation and helps explain why the stock declined 13% in November. Nevertheless, EPS is up 164% year to date. We believe that most investors do not fully understand the radical transformation that EXM has undertaken in the last year to bulk up its fleet, revenues and earnings. EXM is a classic example of what we look for in our investments as the firm is both very profitable and very cheap. Excel Maritime sports a 44% ROE, and operating margin in the 45 - 55% range, yet trades at just 3.5x our 2005 EPS estimate, and at just 2.6x free cash flow. Our price target implies 72% upside.
Our biggest disappointment for November was Arrhythmia Research Technology, Inc. (HRT:BUY). The company missed our estimates by 50% and the stock was down 19.3%. However, our analyst believes that recent low margin tool sales are indicative of higher margin custom molded products in future quarters. We view the stock decline as an overreaction and our price target implies 60% upside from current levels.
During November we also added two new names to our research list, one long and one short. Outlook Group (OUTL:BUY) is a specialty printing company with some recent large contract wins including Proctor and Gamble (PG:Not Rated). Its 16.6% decline on no news was an inauspicious start, but our price target implies 61% upside. Foxhollow Technologies, Inc.(FOXH:SELL) is our newest short call, and is very much in the mold of NeuroMetrix (NURO:SELL) in terms of being a medical device company bid up to a price unsupported by the company's fundamentals. (As an aside we were gratified to see our short call on NURO return 16.5% for November, our third best call for the month.) FOXH manufactures and markets the SilverHawk system for treating peripheral artery disease (PAD). The company has been consistently unprofitable, but our analyst expects that to change next quarter. Still, at 78x our street high 2006 EPS estimate of $0.57/share, FOXH is priced for perfection. Our price target, which itself includes fairly heroic assumptions, implies more than 30% downside.
As our list grows, I find myself unable to talk about each name at the length I would like to. Just in November, we had other double digit movers such as DRTK (up 15%), NVEC (down 13.1%), and TZOO (down 16.6%). Year to date our research list is up 33.3% versus the S&P 500's 2.8% return. We continue to believe these are the best ideas from the Microcap space and we will be introducing more in the coming months. We are grateful for our customer's support and will keep striving to bring you the best unbiased investment research anywhere.
Volatility up at Start of Q3:05 Earnings Season, but Our Research List Notches Another Gain in an Otherwise Down Market
October marked a return to our winning ways. The Singular Research List rose 0.26% in October versus a decline of 1.59% for the S&P 500. With earnings season upon us, there was more volatility in the list than we usually experience. Within the list, performance ranged from up 27% to down 25%. Since much of the volatility in the list was driven by news flow, let me start by recapping the earnings announcements.
Eleven of our companies reported in October, with five beating our expectations, and six missing. Utah Medical Group (UTMD:BUY) missed our estimate by 6.4%, but the miss was overshadowed by the news that the company won its lawsuit against the FDA. Since the specter of an unfavorable outcome had been depressing the stock, the successful conclusion helped the stock pop almost 17% for the month. Travelzoo (TZOO:SELL) came up short of our analyst's (and consensus) $0.15/share estimate which was just what we wanted to hear for a SELL-rated stock. TZOO dropped 16.1% for the month.
NVE Corporation (NVEC:SELL), another one of our SELL-rated stocks beat our estimate by a penny or 14.3%, but investors were not impressed with the reported results and sent the shares down 11.7% during the month. Image Sensing Systems (ISNS:BUY) reported results a penny less than we expected, but investors liked the future outlook for a recovery in international product sales and bid up the shares by 9%. Rimage (RIMG:BUY) reported blowout Q3:05 results, 30% ahead of our estimates, and well ahead of the $0.31/share consensus estimate, and the stock rose 8.7%. Acme United (ACU:BUY) reported results below our expectations due to higher than expected air freight costs as a result of robust customer demand, but investors were pleased with management's forward guidance and drove up the shares 2.9% for the month.
Five of the eleven companies which reported in October declined in value. Psychemedics (PMD:BUY) reported in line with our estimates, but declined 5.6% nonetheless. Our analyst believes that PMD is well positioned for a change of federal guidelines to hair and saliva drug testing as alternatives to urine drug testing. Our price target implies 67% upside. Atrion (ATRI:BUY) reported better than expected results, yet declined 6.1%. The company is showing excellent cost control, 20%+ EPS growth and trades at just 11.8x our 2006 EPS estimate of $5.20. Our price target implies 39% upside. Preformed Line Products Co. (PLPC:BUY) also beat our estimates, yet declined 7%. The company is benefiting from strong demand ($3 million in sales in Q3:05) for its utility products from the storm ravaged Gulf Coast region. Investors may be overlooking a one time gain from Q3:04 which made GAAP EPS decline 24%. Backing out the one-time gain from a year ago, Pro Forma EPS grew 9.3%. At just 11x our 2006 estimated EPS of $3.93, PLPC is 37% below our price target.
Duratek (DRTK:BUY) and NeuroMetrix (NURO:SELL) were the two worst performers of the month. DRTK missed our estimate by a wide margin. The company is struggling to replace commercial projects that are finishing. One major source of PLPC's profits, Gulf state utilities, have been a source of DRTK's woes. With hurricane damage to utility infrastructure, firms are delaying dealing with waste buildup in favor of getting power lines back up. The good news is that waste will have to be taken care of at some point, and it continues to build up not just in the U.S. but around the world. DRTK has numerous future contract opportunities with the DOE as well and we still like the name. At 11.8x our 2006 EPS estimate of $1.23, we still find the shares attractive and believe the sell-off is overdone. The company has a unique expertise in a growing market and we expect a return to growth next year. Our price target of $20 implies 38% upside for patient investors.
NeuroMetrix is a challenging company to cover. The firm just turned profitable so it is difficult to estimate the earnings potential and operating leverage inherent in the company's business model. NURO beat our estimates by 3¢ and crushed the consensus estimate which was for a loss. The company gives no guidance and analysts really have no clue about how the firm might grow. We tend to focus in on customer growth which at 40% is substantially below the 90% growth in sales. If sales growth slows to 40%, investors better look out below. Also, as the company aggressively adds new sales staff, Sales and Marketing spending may restrain EPS growth more than the market expects. Our price target implies 28% additional downside from current levels.
October was a busy month for our research list and even companies that did not report seemed to have market moving news flow. Parlux Fragrances (PARL:BUY) reported that Q2:06 results would come in lower than we had originally expected. However, even the reduced guidance implies 74% revenue growth and 70% EPS growth. Also, the firm did not change its FY:06 guidance of sales of $190 - 210 million and EPS of $2.00 - 2.20. The stock was down 21% and we believe it is a great bargain at just 11.6x FY:06 estimated EPS of $2.10/share. Our price target implies 63% upside.
Other significant movers during the quarter include Hardinge, Inc (HDNG:BUY) a classic value stock that has been steadily beating our estimates and moved up 13.7% in October. Our last note on HDNG from August highlighted the ridiculously low 2006E EPS multiple of 6.5x, and it looks like the market agreed. Our price target implies another 38% upside. Arrhythmia Research Technology, Inc. (HRT:BUY) was up 11.2% in October on no news. Our price target implies 49% upside. Maxwell Technologies Inc. (MXWL:BUY) was down 11.2% on no news. Our price target there implies 34% upside.
October was an eventful month on both the micro and macro front, but we try to stay focused on the longer term picture. Year to date our research list is up 30.5% versus the S&P 500's -0.3% return. We continue to believe these are the best ideas from the Microcap space and we will be introducing more in the coming months. We are grateful for our customer's support and will keep striving to bring you the best unbiased investment research anywhere.
Singular Research Gears up for What Promises to be an Exciting Q3:05 Earnings Season
September was the first month since October 2004 that we failed to beat the S&P 500. The Singular Research List declined 1.39% vs. the S&P 500's 0.60% increase. While we are disappointed, we'd note that the Singular Research list is up 30.1% vs. the S&P 500 which is up 1.33% year to date. Moreover, for the third quarter, our research list was up 4.7% vs. the S&P 500 up 2.8%. While we are disappointed anytime performance lags, we think many of our names are well positioned for exceptional price appreciation in the coming months.
September's underperformance was driven by both some bad news for a few of our names and some price declines on no news. First, the bad news. Duratek (DRTK:BUY) announced that revenues would be lower than expected for 2005 and the stock declined 12.8% in September. Specifically, the company announced that it now expects revenues for full year 2005 to be in the range of $280 - 286 million due to a lower than expected contribution from the Commercial Services subsidiary, a lengthening sales cycle for federal work, and lack of international projects. We view the selloff as overdone and would point out that DRTK trades at just 13x 2004 and 2005E EPS. Today, the company announced a new strategic partnership with TriVis, Inc. to provide services for commercial spent nuclear fuel dry storage to the U.S. nuclear utilities marketplace, a new $100 million opportunity. We'd also note that the stock is already up almost 14% from the low on the date the company announced its new outlook. Our price target implies 31% additional upside from current levels.
Amrep (AXR:BUY) reported lower than expected Q1:06 results and the stock declined 9.3% in September. Our analyst lowered his estimates and price target, but maintained his BUY rating. Revenues from the company's' Kable fulfillment services subsidiary continue to be soft as earlier expected customer losses materialize. Real estate revenues were also light for the quarter although these are notoriously lumpy and difficult to predict. Largely lost in the bad news, was the announcement of a one-time gain of $3.6 million or $0.54/share which will be paid out to shareholders as a dividend. Our price target implies 38% upside for AXR.
Acme United (ACU:BUY) declined 17.8% on no significant news. The company did announce that this quarter would include a non-recurring charge of $1.7 million, but the stock had already declined 15.6% before the announcement. The share price decline is baffling to us and the only reasonable expectation is that some shareholders are taking profits in a stock which is up 48% in the last year even after the recent price decline. This is an excellent buying opportunity for a small growth stock which we expect will report strong back to school results for the third quarter. ACU has grown earnings by 178%, yet trades at just 12.4x our 2005E EPS and 10.2x our 2006E EPS and our price target implies 97% upside.
On the plus side, two of our names put in double digit price increases. Credo Petroleum (CRED:BUY) increased 33.8% in September. This has been a great time to own any stock with the word "petroleum" in its name and Credo is no exception. Credo's sales were up 50% last quarter and EPS was up 70%. Our analyst raised his estimates and price target. The new price target implies a further 29% upside. Rimage (RIMG:BUY) was up 10.5% in September. While the stock was up on no news, we continue to believe the story is very compelling. RIMG is up 33.5% since we launched on it in late June and our price target implies an additional 20.8% upside.
We added three new recommendations in September, two long and one short. Utah Medical Devices (UTMD:BUY) is in the midst of litigation with the FDA which our analyst believes in undeservedly depressing the stock price. She expects a favorable resolution to the litigation and a return to more normal multiples for this small profitable medical devices company. UTMD trades at just 13.8x our 2005E EPS and our price target implies an additional 20% upside. Excel Maritime Carriers (EXM:BUY) is a dry goods bulk shipper and, as such, is a great play on global demand for such commodities as iron ore, coal and wheat. Demand from developing nations in the Far East such as China and India looks set to drive shipping rates upward. In our opinion, EXM is well positioned to profit from the relative shortage of large cargo vessels. EXM trades at just 4.2x our 2005E EPS and 3.6x our 2006E EPS and our price target implies 37% upside.
Lastly, NeuroMetrix (NURO:SELL) designs and manufactures equipment to replace traditional nerve conduction studies for patients with suspected neuropathies. The company is unprofitable, although we expect that to change, and ttm sales are just $25 million. While we expect the company to have a large measure of future success, revenue growth far exceeds customer growth and we believe that investors will ultimately be disappointed. The company is priced for perfection at 630x our 2005E EPS, 54x our 2006E EPS, 14x revenues, and 11x book value. We'd note that our estimates are far more aggressive than other analysts who cover the stock, and our long-term assumptions include sustained (over seven years) 43% return on capital, a feat few companies in history have achieved. Even with these heroic assumptions, our price target is just $17, 46% below current levels. In addition to the aforementioned Acme United, other names on our list with large expected price appreciation include Arrhythmia Research Technology, Inc. (HRT:BUY) 86.5% room to target and Span-America Medical Systems (SPAN:BUY) 85.4% room to target.
We continue to believe that the current financial landscape is one of low returns. In such an environment, passive index investing is the equivalent of accepting sub par returns and accepting higher savings rates in order for investors to reach their goals. This is a stock picker's market, and no where is that more true than in the vast uncovered Microcap space. Our analysts will continue to pour over the thousands of companies that deserve to be priced cheaply and find the overlooked nuggets that show genuine promise. We are excited for Q3:05 earnings season as we expect strong results from our companies as a group, and encourage our customers to check back frequently with our website for expected earnings dates and conference call information. As always, we are grateful to our customers without whom none of this would be possible.
August Marks the 10th Month in a Row of Singular Research Beating the S&P 500
August marked another month of outperformance for the Singular Research List, up 0.71% while the S&P 500 declined 1.08%. Seven of our companies reported earnings during August and results are summarized below.
Overall, we are pleased with the earnings results. Misses were small and positive surprises more numerous and larger. August was a difficult month for the markets and it should come as no surprise that our best stock in August was one of our SELL recommendations, TZOO down 23.3%. This is the stock which keeps on giving as it is now down 75.4% since we recommended investors short the name. As we can only get 100% on our short calls, this is about as good as we can expect. Nonetheless, our analyst has lowered his price target on TZOO to $14 from $23 representing 40% downside from current levels. Our short call on NVEC also did well, up 11.5% for the month.
Of our long calls, only CRED was up more than 10%. This is one of three new stocks we added to the research list in August and I will get to them in a minute. Finally on the downside, we had three significant disappointments. ATRI was down 17.9% on the heels of a weaker than expected earnings report at the end of July. We feel the sell off is overdone and this represents an attractive entry point on the stock. Our price target of $85 represents 30% potential upside, and we'd note that ATRI is still up 38.5% from where we recommended investors buy it.
DRTK was down 15.8% for the month also on weaker than expected earnings reported at the end of July. The company now trades at just 11.3x our 2006 EPS estimate of $1.86. Just yesterday, the company announced a new $16 million contract to cleanup a nuclear power plant in Wisconsin. HRT was our last double digit decliner down 14.1% in August. While we were disappointed that the company missed our estimates right out of the box (we initiated with a BUY August 12th). Our analyst believes HRT can generate mid teens type sales and earnings growth and his price target of $19 implies 68% upside from its current price.
Arrhythmia Research Technology, Inc. (AMEX:HRT) was one of three new stocks Singular Research launched coverage on in August. The other two were Credo Petroleum Corp. (NASDAQ:CRED) and Psychemedics Corp. (AMEX:PMD). HRT engages in the licensing of medical software to detect and aid in the treatment of potentially lethal arrhythmias. The company manufactures and distributes conductive resin sensors, and metal snap fasteners used in disposable electrodes for diagnostic and monitoring instruments. CRED is an independent oil and gas exploration and development company. The company has two business lines: one locates and drills new oil and gas wells; and one uses its patented Calliope Gas Recovery System to extract the hard to reach remnants of older wells. Finally, PMD provides testing services for the detection of abused substances through the analysis of hair samples. The Company's patented technology provides quantitative and historical data, which can show a pattern of individual drug use over time.
In a down market such as August was, it helps to have stocks which pay dividends. Many investors are initially startled to learn that so many microcaps pay dividends. Dividends can provide a floor under a stock in down markets as Merck investors are unfortunately learning in larger caps names. Below is the list of our companies which pay a dividend. It's important to remember that many of these names as well as our other names have significant share buyback programs as well.
Year to date, the Singular Research list is up 32%, versus 0.7% for the S&P 500. We continue to feel that the broad market will face difficulties closing the year with more than mid-single digit type gains. As a result, security selection will be more important than ever for those investors looking to outperform. We believe few areas of the market offer a better return to traditional fundamental research than the Microcap area does. Finally, in closing we welcome clients to join our Bi-Weekly Monday morning call during we which we discuss our latest research, performance, the economy, and market trends. Additionally, we occasionally invite management teams from our covered companies to discuss their companies for our investors. We hope to see you there.
Mixed Bag on Earnings Results, but Singular Research List Notches Another Month of Outperformance
July marked another month of outperformance for the Singular Research List, despite the strongest month for the S&P 500 this year. Eleven of our companies reported earnings during July, and I would like to briefly recap some of those results.
In general, we would rather have companies exceed our expectations than miss our estimates, but as many investors know, it is what is coming in the future that drives today’s price action. RIMG offers a case in point. Although the company missed our analyst’s earnings estimate, the company announced a large order from Wal-Mart. Our analyst ended up raising his 2005 estimates despite the miss. The stock rallied sharply up 18.4% for the month, and was our best performer for July. On the other hand, IRIS beat our estimate by 50% turning in what we thought was a great quarter, but perhaps because management only maintained its prior guidance rather than raising it, the stock sold off 10% and was one of our worst performers for July. We continue to like IRIS, and with sales up 51%, margins expanding dramatically, and EPS up 196%, what’s not to like?
ISNS reported our worst miss of the month as problems at the firm’s Asian subsidiary that investors had expected to be resolved last quarter lingered on. Following the usual pattern, the stock price declined 10.7% for July, and was our worst performer. We continue to like ISNS, and believe that once the current problems get resolved investors will be surprised at just how profitable this little firm is. As it stands, in the midst of its current troubles, ISNS has 91% gross margins, 36% operating margins, and a 22% Return on Equity. Not bad for a company which is struggling.
For the month, the Singular Research List returned 5.43% vs. 3.33% for the S&P 500. We have quite a streak going since the last time we failed to beat the S&P 500 on a monthly basis was last October. This month we had five stocks return double digit performances. Besides, RIMG mentioned above, HAMP returned 15% perhaps in response to passage of CAFTA which may give the firm more sourcing flexibility. PARL returned 14.8% as the company announced it is putting itself up for sale. A buyer would be lucky to get this firm at current prices as PARL trades at just 13x forward earnings, despite growing EPS at better than 60% last year. MXWL was up 13.3% in July as the company was selected by Orbital Sciences for NASA's 'Glory' Earth Sciences Satellite Mission. Finally, SPAN, our newest company, was up 10.5% for the month, as investors reacted to the long awaited news that the company was launching its Secure I.V. Catheter product this quarter.
While SPAN was our only new stock for July, we did drop a couple stocks from our list after our analysts downgraded them. CBUK was dropped after the company reported weaker than expected Q4:05 results stemming from the company’s golf and corporate channels. The stock was up 7% from our November launch price when we downgraded it. We also downgraded UG after receiving a disappointing update on the firm’s new product development initiatives. Our analyst felt that with the stock up 26% and future prospects iffy at best, money was better put to work elsewhere.
On the macro front, July was an interesting month. GDP came in at an impressive 3.4% for Q2. CAFTA passed. The federal budget deficit shrank $90 billion unexpectedly as tax revenues surged. Despite being larded up with $14 billion in tax cuts for “struggling” oil and gas companies, Congress finally passed an energy bill. Inflation remains restrained. The Fed continues to raise short-term rates, but looks close to being done. Long-term interest rates remain surprisingly low. Corporate earnings, at least for S&P 500 companies have come in much better than expected with three quarters of firms beating expectations. All signs point to a robust economy ahead, and that bodes well for our companies as well.
Year to date, the Singular Research list is up 31% versus an S&P just barely in positive territory at 1.8%. We continue to think the major averages will face headwinds through year-end despite strong earnings as valuations remain historically high. This is truly a stock picker’s market. Finally, I would like to thank our clients, without whom none of this would be possible. We will continue to strive to bring you the best ideas from the brightest minds untarnished by institutional conflicts of interest.
