Singular Research Director’s Letter September 2016: Is it Time for Small Caps to Lead the Market in the Coming Year?

Singular Research Director’s Letter: September 2016

Is it Time for Small Caps to Lead the Market in the Coming Year?

After a relatively strong Q2 earnings season, small caps have outperformed large caps for two months in a row, a rare occurrence in the past few years. Might this be the beginning of small cap outperformance cycle? It is certainly overdue, as many small caps have gone through a bear market in the last few years. Earnings forecasts for the broader market have ticked up for 2017, and employment data continues to demonstrate how this slowly plodding economic expansion has more legs. But in the short term we are moving into seasonally weak months for equity markets. Presidential election politics may have an impact in the short term but we just don’t see it yet. We do perceive a huge positive from the increasing likelihood of more stimulative fiscal spending worldwide, which in the US means greater infrastructure spending. This would serve to counteract the inevitable Fed tightening, which we still expect to resume close to year end.


For the companies on the Singular Research coverage list, IntelGenx Technologies (IGXT) was the strongest performer driven by the sale of US royalties on one product and news about other new products – one to launch in 2017 in Spain, and two additional products lining up for US launch in 2018. Avid Technology (AVID) had an extremely strong Q2, propelling the stock above our target price, so we dropped coverage. (STMP) rebounded strongly, driven by earnings that were above expectations. INTL FCStone (INTL) reported strong operating profit which drove the large earnings beat in Q2. Innospec (IOSP) has been consistently beating earnings estimates the last few quarters.


Two of the companies in the worst performing group of the Singular coverage list during August missed earnings estimates for Q2. The worst performing stock of the coverage list, ACET, missed our analysts’ expectations due to pricing pressure in the Human Health segment, weak performance in Performance Chemicals, and a tough comp. The timing of revenues can be tough to predict in certain segments for ACET and the company has fundamentally outperformed after weak quarters in the past. SA recently had an equity raise which pressured the stock. EBS had a weak Q2, but has spun-off the bioscience business and announced a share repurchase which our analyst expects will lead to EBITDA growth in the coming year. SALM beat earnings expectations but slow revenue growth in Broadcast during the election year was disappointing. CTRP was down (as a short) driven by Q2 report that was in line with expectations. In recent weeks the stock has performed well as a short after the company announced a dilutive stock offering.


At Singular Research, we continue to seek out investment ideas that have minimal to no Wall Street coverage. We recently launched coverage on several new names along with dropping coverage on others. We thank our clients for your support of independent equity research.
We remind our readers that the 11th Annual Singular Research Conference, the Best of the Uncovered’s, is in September. We anticipate a number of interesting and relatively unknown companies to present. Please plan to attend this insight-packed one-day event in Los Angeles. There is more information on the Singular Research website, or contact your Singular Research representative for details. We look forward to seeing you in Los Angeles on September 22, 2016.


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