Singular Research Strong Out of the Gate, up 8.6% 

After two phenomenal years where our research list was up 50%, and then 37%, it was reasonable for us to wonder if things might slow down this year, reversion to the mean and such. But such was not to be the case in January. We had our third best month ever with the Singular Research list up 8.55% Vs. 2.46% for the S&P 500. Moreover, we are happy to report that this performance was broad based with 10 different stocks up double digits for the month. Some of the results were driven by earnings reports, some was driven by other news, and still others were up on no news.

Our top performer of the month was Credo Petroleum (CRED:BUY) up 72.9%. Credo is now up 144.5% from where we launched on it with a BUY rating last August. The company reported better than expected Q4:05 results on the back of rising energy prices. Our analyst raised his price target to $32. Lowrance Electronics (LEIX:HOLD) was up 45.3% for the month after news it was being acquired by Simrad Yachting for $37/share, which coincidentally was our analyst's price target. Our thesis was that this was a growth stock being priced like a value stock. It did not take long for that story to bear itself out as we just launched on LEIX at the end of December.

Span-America Medical Systems (SPAN:BUY) reported 81% better EPS than expected for Q4:05 results on 23% sales growth. The company's sales of mattresses to nursing homes continue to grow at double digits and operating income grew 73%. Most impressively, this performance occurred in the face of rising raw materials costs which brought gross margins down. Even after the run-up, the stock still trades at just 10.4x our 2007 EPS estimate, and our price target implies another 57% upside. Maxwell Technologies Inc. (MXWL:BUY) was up 21% in January, as the company reported a large order with General Hydrogen Corporation. No sooner did the market absorb this good information than the company announced another huge order today for 1.5 million units with Enercon GmbH. Since MXWL is already at our price target, our rating and price target are under review.

Duratek Inc. (DRTK:BUY) was up 18.8% for the month on no news. We can only surmise that value investors came to understand what a bargain this company is despite its recent struggles. On Track Innovations Ltd. (OTIV:BUY) was also up 18.7% last month on not much news. We think OTIV is very well positioned in the contactless smart card market and we recently saw a TV ad for "Pay Pass," MaterCard's contactless technology, featuring an OTIV card and reader. OTIV is already up 24% from where we launched with a BUY in early December. McDermott International (MDR:BUY) was up 16.6% for January as the company made some progress toward settling its outstanding asbestos litigation. MDR is especially well positioned to benefit from new construction stemming from the recently passed Transportation bill and from Katrina related repair and reconstruction. Rimage Corporation (RIMG:BUY) was up 12.9% on no real news as well. RIMG is now up 68.6% since we launched with a BUY last June.

Acacia Technologies (ACTG:BUY) was up 12.3% on news of numerous licensing deals. This is a very exciting company with a very unique business model. We are especially excited about having the CEO, Paul Ryan, on our conference call next Monday. Rounding out the list is Hansen Natural Corp. (HANS:BUY) up 11.4% for the month. On January 9th we raised our estimates and we raised our price target from $90 to $120. Not long afterwards, a competitor did the same. HANS continues to be a very exciting growth opportunity and is now up 620% since we launched with a BUY rating in October 2004.

In terms of poor performers for January, thankfully there are not very many. Acme United Corp. (ACU:BUY) declined 11.5% on no news. We believe that this is a great opportunity to buy a quality growth name for a very cheap price. Since hitting a high in late June of $21 the stock has declined 41.4%. An investor would be forgiven for thinking sales and earnings must have suffered during this period. However, sales grew 21.1% and 15.6% in the last two quarters and EPS grew 18.7% and 11.6%. ACU trades at just 9.8x our 2006 EPS estimate despite 138% ttm EPS growth. Our price target implies 110% upside.

With the bulls back in charge in January, a couple of our short positions went against us as well. NVE Corp. (NVEC:SELL) was up 15.8% on a good earnings report. Trading in the shares continues to be volatile and driven by MRAM expectations. Our price target implies 35% downside from current levels. NeuroMetrix Inc. (NURO:SELL) increased 26.5% in January. The company had no real news in January, but this continues to be a favorite with the momentum crowd. As we recently saw with Google, momentum can shift to the downside quite suddenly when lofty expectations are not met. NURO reports tomorrow.

On the macro front, we expect 2006 to be much like 2005. Valuations have improved for the major averages as earnings growth went up and stock prices stood still. However, we continue to believe that earnings growth cannot exceed the nominal growth in the economy and in fact, must be less since public companies, by definition, do not participate in the rapid growth of small private companies. With an optimistic estimate of real GDP growth at 5% and inflation at 3%, that means earnings growth should be 8% or less on average. Earnings growth has recently exceeded this as firms have used up idle capacity, improved productivity and have worked existing employees harder, while cutting other costs. Indeed, as Table 1 shows, profit margins are at record highs. If firms cannot expand profit margins, then stock price growth maybe well fall short of 8% this year. In any event, we see single digit type profit growth and stock price gains for the major averages which means skilled stock picking will be as important as it was in 2005.

Table 1: Corporate Profits are Already at Record Highs.

We are excited that 2006 is off to such a strong start and we are working hard to find more uncovered companies with explosive potential. As always, we thank our clients for having faith in us and hope that we continue to earn your trust.

Tags: Director's Letter, Latest Updates