Enron: Exhibit one in The Case for Independent Stock Research

Before I get to February's performance, I wanted to recount a story. This past weekend, I watched "Enron: The Smartest Guys in the Room," a documentary about the downfall of the corporation. There were many interesting things to take away from the story but one aspect caught my attention. The company had numerous analysts covering it, and most had Strong Buy or Buy ratings on the company. When pressed privately, most admitted they had no idea how the company made its money, but said it had a knack for consistently beating earnings estimates. For one analyst at Merrill Lynch, that was not good enough and he did not have a positive rating on the company. Andy Fastow, Enron's CFO called Merrill and told them if they did not get rid of this analyst, they would not see a dime of investment banking fees. Merrill fired the analyst and, soon thereafter, received approximately $50 million in investment banking fees. We all know the rest of the story. Investors would have been wise to listen to the one analyst doing his job.

For us at Singular Research, stories like this reaffirm why we feel we are on the right path. We don't have any corporate finance arms, and don't do any investment banking business. Our only clients are our investor subscribers and our goal is to find the best ideas out there for them. Our research is uncompromised and is conflict free. Our analysts are free to follow their best instincts and hunches based on solid fundamental investment research and we find that when you let smart people work without hindrance, the results can be amazing. And with that, let me get to February's performance.

February was yet another month of solid outperformance. In a market that continues to trade sideways, we are now up almost 12% YTD. The Singular Research list added another 3.01% in February, handily beating our S&P 500 benchmark's -0.02% return. Five stocks returned double digit gains, while two stocks declined by double digits.

Topping the list was a relative newcomer to our list, Insteel Industreis, Inc. (IIIN:BUY) up 36.2% in February. Recently, the company renegotiated its line of credit, announced all debt was paid off, announced a share buyback program and reported results bucking seasonally slow trends. The company has tailwinds from major catalysts including the recently passed federal energy bill, hurricane reconstruction, and a booming commercial real estate market. Our second best performer was Pychemedics Inc. (PMD:BUY) up 23% for the month. The company reported better than expected Q4:05 results, continues to take market share away from the traditional urine testing market for illicit drugs, and is poised to benefit form the possibility of new federal drug testing guidelines. Duratek (DRTK:HOLD) was our third biggest gainer up 20% on news that the company was being acquired by EnergySolutions, a national energy services company headquartered in Salt Lake City, Utah, for $22/share in cash and debt assumption (a 25.7% premium to the prior day's closing price).

One of our most high profile stocks was the next most profitable call in February, XM Satellite Radio, (XMSR:SELL) down 15.6% in February. Advertising expenses are spiraling out of control as the company continues to bleed red ink, prompting one director to flee stating he sees "a significant chance of a crisis on the horizon." Tejon Ranch (TRC:BUY) was our last double digit gainer, up 11.7% in February. There was no news from the company, but we have long maintained that the company's huge land holdings in Southern California have been undervalued by the market. Our price target implies an additional 48% upside.

The biggest disappointment of the month was Rimage Corporation (RIMG:BUY) down 33.4% for the month. The company pre-announced lower than expected results and then delivered just that. The company has spent heavily on consulting to help it plan its next growth leg up. However, our analyst believes the fundamental investment thesis is in tact and expects a return to double digit growth in 2007. Our price target implies 65% upside. The other double digit decliner was Credo Petroleum (CRED:BUY) down 27.1%. This has all the hallmarks of traditional profit taking after a huge run up and perhaps nervousness about the sustainability of high energy prices. Even after this decline, CRED is up 80% from where we launched on the stock just less than six months ago.

February was a big earnings month for our research list with six doing better than our estimates and six doing worse1 . In one sense, this is gratifying. Our estimates are our best estimates of what companies will actually report rather than lowball estimates that companies can easily beat. Our estimates are proprietary for our paying subscribers only and do not flow through to First Call, so our prime incentive and motivation is accuracy. However, this is difficult even for gifted analysts when companies provide no guidance as most of ours do not. As Table 1 indicates and as described above, RIMG, PMD, and XMSR were the biggest movers on earnings news.

In each of the last two months, we have had a company on our list get acquired by another firm, LEIX in January and DRTK last month. This is one advantage of working with smaller firms. Of our remaining list, we see PARL, HAMP, and HANS as other potentially likely acquisition targets.

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