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.