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.
Singular Research List Reports Best Month Yet in 2005, up 6.59%
Sell in May and Go Away? That old saw certainly did not apply to our research list this past month. Investors who sold the stocks on our research list (or covered shorts) would be sorry indeed. June was another extraordinarily good month for our research list companies. We had eight stocks increase by double digit percentages, with only one declining by a similar amount. So let's get right to it.
The biggest winner this month was our Sell rated NVEC which dropped 22%. This is especially gratifying in light of last's month's big increase. Our analyst, however, held to his guns maintaining that the May run up was based solely on hype and rumor and was unjustified by the fundamentals. June seems to have borne that out and NVEC is now within 10% of his target price. Since we launched with a "Sell" rating on NVEC last October, it has declined over 50%.
PLPC was up just over 20% for June on the heels of strong earnings for Q1:05. Sales were up 28%, and EPS was up an impressive 151%. AXR also had a good month moving up 18.6% and was recently included in Fortune Magazine's list of America's 100 Fastest Growing Small Companies (in fact, four of our companies made this prestigious list). MXWL, which we just initiated on earlier in the month, is already up 15.8%. We knew this was a turnaround story and were pleasantly surprised to see the market agree with our opinion so quickly.
Other notable movers included ATRI up 14.3% in June. The company beat our analyst's expectations for Q1:05 and he raised both his estimates and price target. Earnings are growing at almost 80%. HANS put in yet another great month, up 13.7%. Since we launched on HANS last October, the stock is up 239%, but our price target implies another 18% upside. Impressive as this rise in the stock price is, it is still less than earnings which are growing at 286%. ACU rose another 10.8% in June bring its total return from initiation to 112%. EPS was up 55% in the most recent quarter. PARL rounds out the list of double digit advancers for June up 10.8%. But will the company's newest fragrance from tennis phenom Sharapova suffer due to her semi-final loss at Wimbledon? Only time will tell.
HDNG was the sole double digit decliner dropping 11.2%, perhaps as a result of the CFO leaving to join another firm. But with EPS growing at greater than 30%, the company priced at just 10.7x our FY:05 EPS estimate, and 42% upside implied by our price target, we doubt it will stay down for long.
One last note. During the month, we downgraded AE from BUY to HOLD and dropped the stock from our research list at month end. Our analyst felt that the stock was both fully valued and that the outlook for the future was diminished with 2H:05 results likely to disappoint. Since we launched last year with a BUY rating until we downgraded, AE was up 22% handily beating any equity index benchmark.
Singular Research List Reports Seventh Consecutive month of outperforming the S&P 500
One of the most noteworthy aspects of the current market and U.S. economy is the flattening of the yield curve. Despite an unrelenting campaign by the federal reserve to raise overnight rates, long term rates have not moved up but instead have more down. Rarely have investors been offered so little extra yield for tying up their money for longer periods of time. Three month T-Bills yield 3%, and 10 year Treasury Bonds yield just 3.92%. Market participants have different takes on this situation. On the one hand are those who remember from their training somewhere that a flat yield curve indicates slowing future economic growth and perhaps a recession on the horizon. While historically, this has been a decent forward looking indicator, I side with the other camp.
This camp believes that there are unique forces driving down long term interest rates in the U.S. The obvious force is the increasing reserves of U.S. government bonds being held by such foreign central banks as China and Japan. Indeed, this is usually framed as foreigners lending us the money to splurge on what we could not otherwise afford, and is told as a cautionary tale. In my opinion, however, this is a symptom of deeper economic forces at work. Why are foreign central banks buying up our national debt? The answer is they have excess dollars (foreign reserves) that need to be put to work, and stuffing it in the mattress doesn't cut it. Why do they have excess dollars? The short answer is they sell more goods and services to us than we do to them, in other words, they run a trade surplus with us.
And now we get at the nub of the problem. Why do they run a trade surplus with us? Is it because the Chinese peg their currency to the dollar? Is it because of trade barriers? While these may have some impact, the evidence leads me to believe that differing savings rates are the main culprit. Put simply, either Japanese and Chinese citizens save too much and do not spend enough or Americans spend too much and do not save enough. This savings imbalance is unleashing a flood of money looking for investments, and few places are as attractive as the Untied States with its better than average growth prospects, strong credit worthiness, clear rule of law, and protections for minority shareholders.
The decline in interest rates in the U.S. in the face of rising short-term rates is directly related to this flood of savings. Evidence from the TIPS market indicates it is not an inflation/deflation issue as real long term interest rates are falling both here and aboard. So what implications does this have for the U.S. equity market? First, while multiples are historically high, they should be high in an environment where interest rates are at 40 year lows. In a world of 4% risk-free rates, low beta firms will have single digit costs of capital.
Simple math tells us that the risk of rising interest rates outweigh the potential gains from rates falling even further. Nonetheless, until foreigners learn to spend more and save less, and as long as foreign economies are burdened by massive social welfare states which retard their growth relative to the U.S., there will be continued and sustained downward pressure on long-term U.S. interest rates. In such an environment, I believe that stocks will tread water and return mid single digit type performance. In other words, stock price appreciation will come from earnings growth not multiple expansion.
Which brings us back to the Singular Research List. Our companies have performed remarkably well over the last year, but in many cases the price appreciation was simply in line with growth in earnings per share. The following graph illustrates this point.
Few things in the stock market are certain, but the notion that stock prices eventually will follow earnings growth is about as close as we can come.
As the market mood switched from fear to greed in May, the most speculative stocks outperformed. Our research list was impacted by this development, specifically our two short calls NVEC, and TZOO. NVEC was up a startling 66.4% on no news. TZOO was up 19%, also on no news. We continue to recommend short positions in each of these names. Despite this setback, several of our long calls put in excellent monthly performances led by PARL up 48.3% on assumption of coverage by a competitor, ATRI up 37%, HANS up 31.5% and IRIS up 30%. For the month, the Singular Research List was up 4.18% versus the S&P 500's 2.91% performance, an outperformance of 127 bps. Year to Date, our research list has outperformed the S&P 500 by 19.2%
Singular Research List is 17% ahead of the S&P 500 Through April
April was the strongest month yet for the Singular Research List. While the S&P 500 declined 2.96% , our stocks returned a positive 5.15%, for 8.11% outperformance. Not surprisingly in a down market like April, our two short positions helped power our results, but the magnitude of the moves caught even us by surprise. Travelzoo (TZOO:SELL) declined 44.3%, leaving it much closer to our $23 price target. Given that even our $23 price target assumes very aggressive growth assumptions, there may well be room to move down to the single digit midget range on this one. NVE Corp (NVEC:SELL) was another great short call this month, declining right through our already lowered price target of $14 and returning 36.9% performance for April. Our analyst, Sean O'Neill, is evaluating his ratings and price target in light of the company's recent Q1:05 earnings report. Great call Sean!
But even in this down market, many of our long positions held up strikingly well. Iris International (IRIS:BUY) returned 30.8% in April driving by phenomenal Q4:04, and Q1:05 results, raised guidance and an initiation by one of our competitors. IRIS is now up 124% from where we initiated on it last year. A newcomer to the list added just this month, Duratek Inc. (DRTK:BUY) returned 20.9% on better than expected earnings and strong growth prospects. Finally, Acme United (ACU:BUY) continued to show impressive price gains, up 13.3% for April on strong earnings reports, and a more aggressive stock buyback program. Acme has been in our list for some time and has returned 78% since initiation last year.
As always, there were some disappointments, Parlux Fragrances (PARL:BUY) declined 22.2%, as momentum players abandoned the stock after its huge run up from last year through March of this year. Nothing fundamentally has changed with the firm, and we would view the recent pullback as an excellent buying opportunity. Our price target implies 95% upside. Since we initiated on PARL last year, our recommendation is up 103%. Adams Resources and Energy (AE:BUY) also declined sharply down 22.1% in April. Our $30 price target implies 85% upside on AE.
As we have stated from the beginning, we expect the major indices to return mid single digit type performances on average over the next couple of years as valuations, in many cases, are stretched. In this type of environment, we expect the market to move sideways, much as it has. Investors are leering from one fear to the next. Is inflation the problem? Is it stagnant economic growth? High oil prices? Declining dollar? Trade deficit? Budget Deficit? The bigger issue is a world awash in savings that is driving real interest rates down and raising the value of every asset class. Real interest rates in the U.S. as indicated by the TIPS market hover around 2% down from 4% in recent years. Overseas, real yields are similar. Eventually, this pool of savings looking for more places to invest will work its way down to the venture capital and private equity markets spurring new business creation. Signs abound already, in fact, that this is happening. In a market such as this one, successful stock picking will be more valuable than ever. The small cap market remains one of the areas where the return to diligent research is the highest, and we are delighted to discover these great companies before they hit the radar screens of larger firms. Year to date, our research list has beaten the S&P 500 by 17%. We hope to continue this streak through the balance of the year.
Subscribers will find much more inside. Why not sign up for a free one month trial? If you believe as we do, that most asset classes are overvalued, and we're in for mid single digit type returns on the major US indices, then successful stock picking will become even more crucial for market beating returns. Let us help you to a prosperous 2005. Happy trading.
About March 2005 Performance
"Don't fight the Fed" - Unknown
"Rule number one of investing is never lose money. Rule number two is never forget rule number 1" - Warren Buffet.
These two quotes come to mind as we wrap up March and the first quarter. First, it has long been sage advice that trying to make money in stocks as the Fed is in a tightening cycle is difficult, and recent results bear this out. While the Fed only controls short-term rates, normally we expect long-term rates to follow. That they have not up until recently, has been quite an anomaly. Since hitting a near term low of around 4% in early February, the 10 Year treasury is now up 50 bps.
As yields on bonds become more attractive, we would expect funds to shift out of stocks and into bonds. Indeed, the first quarter ends with the S&P declining 2.6%. Moreover, higher interest rates tend to hit the more speculative stocks, whose prospective cash flows are farther in the future, even harder. For example, the NASDAQ is down 8.1% for the first quarter.
For this reason, we think our picks are exceptionally well positioned for relative outperformance in the 2nd quarter. We tend to recommend stocks with positive and growing free cash flow and low valuations. This is where the second quote comes to mind. In an environment where stocks are likely to decline, we want companies that have a margin of error built into their valuations. Our rigorous focus on fundamental intrinsic value has helped us avoid losing money even as the indices have declined. Indeed, our list of stocks put in yet another month of outperformance in March beating the S&P 500 by 1.9%. For the first quarter, our recommended list is up 5.2% versus the S&P500's 1.9% decline, for a 7.24% alpha.
For a change this month, rather than talk about which stocks helped our hurt our performance, I'd like to highlight a few of those stocks with the most room to our analyst's price targets. Acme United (ACU:BUY) remains one of our favorite picks. After a spectacular run for most of lat year through early March, the stock has given back some of its recent gains, on no news, down 20% in March. It currently sits 80% below our $25 price target. This is a great opportunity to build a position.
United Guardian (UG:BUY) is another stock we'd highlight, sitting 60% below our $12 price target. While the company did report disappointing earnings, it has been aggressively returning cash to shareholders, first in a special dividend of $0.25/share last September, and more recently, hiking its regular dividend 20%.UG trades at just 12.3x our forward estimates.
Finally, Travelzoo (TZOO:SELL) remains one of our top short ideas. Despite having declined 42% from our initial short call at $94, we still believe the stock remains hugely overvalued. Our $23 price target implies an additional 58% decline from current prices and the recent jump in the shares, most likely on other's short covering, provides a great entry point. TZOO is a classic case of the kind of stock which should be hurt the most in a rising interest rate environment.
Subscribers will find much more inside. Why not sign up for a free one month trial? If you believe as we do, that most asset classes are overvalued, and we're in for mid single digit type returns on the major US indices, then successful stock picking will become even more crucial for market beating returns. Let us help you to a prosperous 2005. Happy trading.
About February 2005 Performance
"To the extent we have been successful, it is because we concentrated on identifying one-foot hurdles that we could step over rather than because we acquired any ability to clear seven-footers." - Warren Buffett
We kept our winning streak alive in February with another month of outperformance. The StockJock research list returned 2.8% for the month of February eclipsing the 1.76% return for the S&P 500. Results were lead by our short call on NVEC which dropped 26.9% as our analyst saw through the chip maker's hype. PARL put in another strong month, up an additional 11.5% and is now up 200% from where we launched on it last year. Our price target and rating on both PARL and NVEC are under review in light of this month's strong performance. HAMP, launched on February 4th with a BUY, also put in a strong month, up 8.3%.
As always, there were some disappointments. We dropped coverage of HGGR, but not before it dropped 15.9% on us. LINK was also down 15.9% on a negative preannouncement. Our analyst has downgraded LINK to HOLD following the news. The last big loser was ISNS which dropped 11.9% giving back much of last year's gains. In our opinion, ISNS remains attractively valued. Its results were exactly in line with our estimates and we remain a strong believer in the story viewing the pullback as another buying opportunity.
We launched on two new companies in February, Hampshire Group, Ltd. (HAMP) at the beginning of the month, and Amrep Corp. (AXR) at the end of the month, both with BUY ratings. Hampshire is a manufacture of apparel, especially sweaters, and Amrep has two subsidiaries, one in Real estate and another in magazine subscription fulfillment.
In addition to our stock picks, we hope you'll find our screens and other resources valuable as well. If you are looking for quick trading ideas, check out our Swing Trades (Hyperlink) screen based on technical analysis. Value investors, check out our Mid Cap GARP screen (Hyperlink). Contrarians, looking for that list of stocks with endless success already baked into its price? Look no further than our list of "Cocktail Party" (Hyperlink) stocks.
Subscribers will find much more inside. Why not sign up for a free one month trial? If you believe as we do, that most asset classes are overvalued, and we're in for mid single digit type returns on the major US indices, then successful stock picking will become even more crucial for market beating returns. Let us help you to a prosperous 2005. Happy trading.
January 2005 Director's Letter
Director's Letter
January 2005
January was another great month for Singular's research picks. Our research list was up 2.64% versus a 2.34% decline in the S&P 500 leading to an almost 500 basis point outperformance.
Performance was broad based, driven by strong performances from Travelzoo Inc. (TZOO:SELL) Adam's Energy (AE:BUY), Hansen Natural Corp. (HANS:BUY), Acme United Corp. (ACU:BUY), and American Physicians Service Group Inc. (AMPH:BUY).
Travelzoo Inc. dropped an eye popping 39.3% during the month as investors realized the company could never grow free cash flow fast enough to meet the expectations imbedded in the stock price. However, even at $58, TZOO still trades at a forward PE of 70, and a trailing PE of 174 and still has a way to go to our price target of $23.
Adam's Energy not only rose over 20% in January, but is up another 17% so far in February. The stock still has another 20% to our $30 price target. Hansen was up 12.3% in January and now exceeds our $32 price target. Since we initiated on Hansen with a BUY rating the stock is up 71%. Our rating is under review. Acme United put in another good month, up almost 9% as a competing firm put ACU on its list of to watch. ACU is up 90% since we launched with a BUY rating last year. Finally, AMPH was up 8.6% in January.
Of course not every call worked out. Image Sensing Systems (ISNS:BUY) was down 11.3% despite being picked as a "Hidden Gem" on the Motley Fool, a month and a half after we launched on it. Our $18 price target implies another 20% gain from current levels. Our calls on Interlink Electronics (LINK:BUY), CPI Aerostructures (CVU:BUY), NVE Corp. (NVEC:SELL) were down 10.8%, 10.6%, and 10.8% respectively.
In addition to our stock picks, we hope you'll find our screens and other resources valuable as well. If you are looking for quick trading ideas, check out our Swing Trades (Hyperlink) screen based on technical analysis. Value investors, check out our Mid Cap GARP screen (Hyperlink). Contrarians, looking for that list of stocks with endless success already baked into its price? Look no further than our list of "Cocktail Party" (Hyperlink) stocks.
Subscribers will find much more inside. Why not sign up for a free one month trial? If you believe as we do, that most asset classes are overvalued, and we're in for mid single digit type returns on the major US indices, then successful stock picking will become even more crucial for market beating returns. Let us help you to a prosperous 2005. Happy trading.
