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.
Tags: Director's Letter, Latest Updates