Singular Research Director’s Letter July 2017: Small Cap Companies Bounce Back

Singular Research Director’s Letter : July 2017

Small Cap Companies Bounce Back

The small and micro-cap sectors of the equity markets began to play catch-up to the broader market indices in the past month. The outperformance of the small caps is a necessary component for the longevity of this bull market since small caps have underperformed for some time. But we still anticipate there is likely to be some rough riding for the broader market in the coming months. The employment picture remains strong and is at the point where higher wages are anticipated and with that will come increasing inflationary pressures. Fed tightening is still in its early phase. So what might cause the bullishness to question itself? Any number of unforeseen events could occur but what we do see is a slowing in the aggregate earnings growth for the broader market. We are not forecasting a bear market at this time but it would be ‘normal’ to have some corrective pressures. This bull market seems a bit extended, and the seasonally weak autumn timeframe is coming soon.

For the top performing companies in June on the Singular Research coverage list, most reported strong fundamental performance in Q1. IntelGenx Technologies (IGXT) was the top performer in June. The company has designed oral film drug delivery systems and is working on several pharma products that are likely to be launched in 2018. In Q1, IGXT reported revenues above expectations and during June, the company received approval for a patent on its oral film dosage form, which will lead to long-term exclusivity for its products. The new patent allows for instant or sustained release. Lakeland Industries (LAKE) makes safety garments for industrial and public protective clothing markets. The company reported good unit volume growth and healthy gross margins in Q1 and beat our analysts’ estimates.  NV 5 Global (NVEE) provides professional engineering and consulting solutions for infrastructure, construction, real estate and energy markets. NVEE reported higher than expected revenues in Q1 with a record backlog. Gray Television Networks (GTN) owns television stations and digital assets in many US markets. GTN reported stronger than expected revenue and EPS in Q1:17, and the stock is rebounding after a weak performance in May. (STMP) provides online postage services and reported a Q1 that was far better than expected and increased guidance.

The worst performing group of the Singular Research coverage list during June include several companies that are correcting after strong runs. The worst performing stock of the coverage list was Biolase (BIOL) which makes laser dental products that are very patient-friendly, and recently introduced two new products in Q1. Supreme Industries (STS) had a weak Q1 due to delays in customer supplied chassis. Management noted the delays did not result in lost orders. Century Casinos (CNTY) has casino operations in a diverse set of venues including cruise ships and horse racing. CNTY reported a strong Q4 with adjusted EBITDA up 40%, and the stock is correcting after a strong run. Multi-Color Corp. (LABL) makes labels for consumer products, and our analyst has increased estimates after the strong Q1 that was above expectations. The stock has been correcting after a strong run. ClearOne (CLRO) provides audio/video conferencing tools for Fortune 500 companies. The company has developed new products that are expected to drive growth in 2H17, but the product transition was detrimental to Q1 results. Q4:16 was below expectations.

We continue to work on new ideas in the small and micro cap space. At Singular Research, we continue to seek out investment ideas that have minimal to no Wall Street coverage. We thank our clients for your support of independent equity research.

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