Singular Research List Outperforms the S&P 500 by over 10% in Q1:06

We are pleased to report that March was yet another month of the Singular Research list outperforming the S&P 500.  Our list returned 2.12% in March versus the S&P 500’s 1.11%.  For the first quarter, we were up 14.2% versus the S&P 500’s 3.6% return.  Indeed, our list has outperformed the S&P 500 in every quarter going back to August 2004.  March was a very volatile month for the list as well with 10 stocks moving up or down by double digit percentages.

On the positive side, our biggest gainer for March was Insteel Industries (IIIN:HOLD) up 48.5%.  We only just initiated on the company with a BUY rating in late January.  However, since then the stock has climbed 121%.  Prior to our initiation, the company had recently announced a share repurchase program and that it had repaid all of its debt.  Insteel had also announced impressive Q1:06 results.  On March 20th, our analyst raised her price target to $54 from $42 on some more aggressive assumptions.  However as much as we like the company, now that it has more than doubled, we feel it is fairly valued and we downgraded to HOLD on March 27th.

Our second biggest winner was Hansen Natural Corp. (HANS:BUY) up 35%.  The company again reported stronger than expected Q4:05 results with sales growing 95% and EPS up 142%.  One thing we know is true is that stock prices follow earnings growth, and that clearly has been the case for HANS.  We raised our price target from $120 to $130 but with recent speculation that Anheuser-Busch (BUD:NR) might be interested in partnering with Hansen or buying the company outright, the stock is already testing our higher price target.  HANS is now up 914.4% since we launched with a BUY rating on it.

Showing that value stocks can produce strong returns as well as growth stocks, our third biggest gainer was Amrep Corp (AXR:BUY) up 26.8% for the month.  The company reported much better than expected results driven by strong real estate sales up 80% YoY from New Mexico.  Our analyst continues to worry about the health of the core publishing business, but the market clearly is not too worried with the stock testing our $39 price target.  Continuing the recent trend of one company a month being acquired, Outlook Group announced it was being sold to an investor group for $13.50 per share.  While we feel the company is selling itself too cheap, the stock was up 23.3% in March on the news.

March was a big earnings month for our list and the market did not react favorably to some of our company’s reports.  Topping the list of decliners this month was Preformed Line Products Company (PLPC:BUY) down 16.9%.  The company reported worse than expected Q4:05 results because customers took a break from their rapid Fiber-To-The-Premise (FTTP) rollout to draw down inventory.  We view this as a great buying opportunity as the long-term fundamental catalysts for growth for PLPC remain very much in place.  These include the FTTP rollout, the recently passed federal Energy bill and Hurricane Katrina reconstruction.  The types of projects that PLPC works on are massive and take a long time to get started.  We expect revenue growth acceleration throughout 2006 and 2007, yet the stock trades at just 12.5x our 2006 EPS estimates.

The second biggest decliner for March was Hampshire Group, Ltd. (HAMP:BUY) down 15.2% also on a disappointing earnings result for Q4:05.  While margins are coming under pressure and the company operates in a fiercely competitive industry, the expectations for the company are very low as well and the valuation is compelling.  The company generates prodigious free cash flow and has been buying back its own stock.  Our price target implies 63% upside.  Foxhollow Technologies, Inc. (FOXH:SELL) rose 15% in March.  The company reported worse results than our analyst had projected, but results in line with prior guidance.  The company is seeing slowing revenue growth and recently lowered guidance.  Our price target implies 29% downside from current levels.

On Track Innovations Ltd. (OTIV:BUY) fell 14.9% in March on disappointing Q4:05 results.  We had expected the first quarter of profitability, but that now seems delayed until 2H:06.  The company does a poor job of communicating with investors and we suspect that is contributing to the stock’s decline.  Furthermore, the options and warrant issuance is excessive.  Despite all this, however, the market opportunity for OTIV is truly enormous and we continue to believe that patient investors will be rewarded.  Excel Maritime Carriers (EXM:BUY) declined 11.8% in March as the company experienced negative operating leverage in Q4:05.  The company is trading for less than book value and is trading at close to our estimate of liquidation value.  We expect a share buyback announcement before too long which could serve as a catalyst to get the stock moving back up.

On March 3rd, we raised IRIS International, Inc. (IRIS:BUY) from HOLD to BUY and added it back to our list.  We had downgraded on valuation concerns last November when the stock reached $22.91.  The company reported almost exactly what we had forecast for Q4:05, yet the market took it poorly sending the stock sharply lower.  When the stock hit $17.73, we thought it was sufficiently undervalued relative to our $25 estimate of intrinsic value to upgrade.  In hindsight, we were a little early as the stock kept falling to $15.63 down 11.8% since our upgrade.  The company is well positioned and well run and remains one of our best ideas.  Our price target implies 61% upside.

March was a very busy month for Singular Research as we were inundated with earnings reports and 10K filings.  It is important for our clients to know that we read all the SEC filings for our companies as there are few better sources of detailed information on these businesses.  Our models reflect information from these documents such as operating lease liabilities and options outstanding.  Each year, we capitalize our company’s operating leases to move this off balance sheet debt back on balance sheet in our analysis.  Furthermore, we revalue all options outstanding at our companies using the Black-Scholes model to estimate how much of firm value the option holders lay claim to.  Detail oriented and time consuming work like this is what separates us from other similar equity research firms.

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