Singular Research List ends year up 37.2% 

2005 was a banner year for Singular Research. After a 50% return for 2004, we are highly gratified to return another hefty 37.2% gain in 2005. We continue to believe that the returns to disciplined, fundamental bottom-up research are higher in the Microcap space than anywhere else in the market. Our team of seasoned analysts reviews thousands of companies to find the most promising ones selling at the cheapest valuations. We believe the results of our efforts speak for themselves.

Rather than go over December's performance (another winning month up 2.9% VS. S&P 500's -0.28%) at length, I thought I would look back over the year. The Singular Research List outperformed the S&P 500 every quarter in 2005, and every month but two. 22 of the names we wrote on in 2005 outperformed the index including every single short call we made. Of the 15 calls that went against us, we still cover ten and still view them as excellent investment opportunities.

Five Biggest Winners of 2005

Hansen Natural Corp. (HANS:BUY) was our biggest winner up 333% for the year. Since October 2004, when we first launched on HANS, it is up 586%. Hansen also had a phenomenal 2005 with 239% average EPS growth for the first three quarters of 2005. Iris International (IRIS:NR) was our second best performing stock of 2005 up 135%. We cut Iris to HOLD on valuation concerns in early November. Iris saw phenomenal gains in sales and earnings in 2005, and the stock price fully reflected this. Travelzoo (TZOO:SELL) fell 77% in 2005. While we admired the company's business, we simply could not envision any scenario where the shares were worth $95. When a company is priced for perfection like that, the slightest hiccup, such as rising customer acquisition costs, drives share prices down sharply. Our fourth best pick of the year was another short call, NVE corporation (NVEC:SELL). Despite a very volatile ride, the shares ended the year down 47.6%. Trading in NVEC seems to be driven by the ever elusive dream of MRAM and spintronics. Our analyst did not believe the hype and saw the successful production of large quantities of MRAM product still far away. Such a disappointing reality was not priced into the stock at the beginning of the year. Rimage Corp. (RIMG:BUY) was fifth, up 46% for the year. In the most recent quarter, sales were up 56% and our analyst raised his estimates and price targets. Earnings were up 86%.

Before, I recount the five biggest losers of 2005, I wanted to take a moment to look at what our performance would have been like without some of our best picks. Clients, understandably, have asked if our list is being driven by a couple superstars or if all the horses are pulling. Specifically, we were asked what the list would have returned without HANS, IRIS, PARL, and TZOO. While I might be more interested in how our performance looked without our biggest losers, we were not asked about that. Turns out that removing those four stocks from our list still would have resulted in us outperforming 11.7% vs. 2.6% for the S&P 500. Even more remarkably, while our cumulative performance is up 106%, removal of these four stocks would still leave us up a respectable 43.8%.

Five Biggest Losers of 2005

No one in investments bats a thousand and so it is worthwhile to look at what did not work. Before doing so, I'd like to say that we continue to believe in these names and many are among the stocks in our list with the most room to our estimate of intrinsic value. Put another way, these are among our best ideas for 2006. Arrhythmia Research Technology, Inc. (HRT:BUY) was our biggest loser, dropping 38.3%. Ironically, the stock has already soared in the new year, up 27.1%, perhaps giving us an early glimpse of what 2005's losers can do in 2006. While HRT missed our analyst's estimates in each of the last two quarters, he continues to believe the sellofff was overdone. Outlook Group Corp. (OUTL:BUY) declined 35.4% last year. OUTL missed our analyst's estimates last quarter and the market drove the shares down sharply. OUTL pays a dividend which should help shore up further declines as the yield is now 2.2% after a 4% gain for the shares so far in January. Shares of Excel Maritime Carriers (EXM:BUY) dropped 29% in 2005. Just when you think a cheap company can't get any cheaper, it does. This is the classic deep value story with a twist. Revenues and earnings have been growing on average at 142% and 126.4% respectively over the last four quarters. And while our forward estimates are likely high due to falling shipping rates, EXM trades at a trailing PE of just 3.2x, and at less than book value (0.86x). Interlink Electronics (LINK:NR) dropped 25%. Our analyst cut the stock from BUY to HOLD in mid-February after the company preannounced worst than expected results. We were saddened to see the stock drop from $9.43 down to $7.07, but gratified to see it continued to fall to its current $3.10 after our downgrade.

Duratek Inc. (DRTK:BUY) had a rough year and the stock fell 22%. Back in April, when we launched with a BUY rating, it appeared that DRTK was well-positioned to take advantage of the world's increasing use of nuclear fuel for energy. Indeed, first quarter EPS growth was up 50%. However, starting in the second quarter, the company's commercial services division began to underperform our projections and by September, a lengthening sales cycle for federal work and a dearth of international projects were added to the company's list of woes. Our analyst believed the selloff was overdone despite the bad news and the company did rally 15% in November. Nonetheless, of all our disappointments, this remained one of the tougher calls. The company's accounting is complex project based accounting, and revenue visibility is almost non-existent. That said, a few new project wins could serve as a catalyst for the stock to rally (more than the 7.6% already in January) in 2006.

December was a busy month for us with five new initiations, four long and one short, and we are excited about all of them. On Track Innovations Ltd. (OTIV:BUY) is deeply involved in the contactless smart card industry and each of the verticals it sells into is potentially a multi-billion dollar opportunity. XM Satellite Radio (XMSR:SELL) is about as hyped a company as we see out there today and with more than $500 million in fixed costs, we expect many investors will vote with their feet long before the company achieves profitability. Acacia Technologies (ACTG:BUY) is a true company for the 21st century with no product, no sales, and no manufacturing, just high margin licensing revenues. We expect this firm to reach break-even next year and for other investors to sit up and take notice of its explosive results. Lowrance Electronics (LEIX:BUY) sells into the fast growing GPS market and is priced like a value stock despite its compelling growth story. Lastly, McDermott International (MDR:BUY) while a bit larger than most of our companies, has numerous catalysts for stock price appreciation and is well positioned to take advantage of Hurricane Katrina's cleanup and recovery in the Gulf region.

Looking ahead to 2006, we believe the US economy is in excellent shape, especially compared to many of our trading partners. We expect the Federal Reserve will end its interest rate raising efforts in 1H:06, but expect long term interest rates will continue to rise as unemployment continues to fall and the economy expands. On the corporate front, we expect firms will start to spend their large cash hordes on investments in new plant and equipment, making investment a more significant portion of GDP growth, even as heavily indebted consumers scale back consumption somewhat. Valuations remain stretched from the long secular bull market from 1980 - 2000, and in the face of potential interest rate increases, we believe more than single digit type increases for the major averages will be difficult. In such an environment, careful stock selection will be as important as ever to investors looking to outperform. We continue to believe our research list is exceptionally well positioned for the New Year with a 41.6% average upside to our price targets. Stocks on our list with the most room to our price target include OUTL, EXM, SPAN, ACU and PARL.

Here at Singular Research, I want to thank all of our analysts and our marketing and client relations staff for all of their hard work in 2005. We are excited about 2006 and we will work hard to continue to deliver the kind of results our clients expect of us. Finally, I would like to thank our clients for the trust and faith they have put in our abilities. Without you, none of this would be possible.

Tags: Director's Letter, Latest Updates