Singular Research List beats S&P 500 by 5.9% in May

Last month we pointed out that we thought we were seeing signs of speculation, of a lack of appreciation for risk. We highlighted the fact that the VIXX was at its lowest level in a decade, and that money was flooding into Emerging Markets Funds. We highlighted that major stock indices were at five to six year highs, and we pointed out that certain commodity prices were soaring. What conclusions did we draw? That a hedged portfolio with some short exposure makes sense. The month of May proved us right with all five of our short calls returning double digit returns. The Singular Research List returned 2.96% in May versus a negative (2.91)% return for the S&P 500. Year to date, our list is up 14.8% versus the S&P 500’s 1.8%.

It was not only short calls which helped propel our May performance. Three of our long calls bucked the market trend and returned double digit performances. Topping the list was Hansen Natural Corp (HANS:BUY) which was up an impressive 42.8% in May. The company continued its longstanding trend of beating analysts’ expectations in Q1:06 with revenues doubling and earnings growing by 130%. We continue to be very positive on HANS and have raised our price target to $240. Since inception, HANS is up 1,369%.

Our second best long call was Iris International (IRIS:BUY) up 20.1% for May. While the company’s core business is growing at a healthy clip, and remains a large opportunity, it is just a $350 million market. IRIS has taken steps through new distribution agreements, new product introductions and recent acquisitions to address a much larger $2 billion market. Our price target implies 48% additional upside.

Arrhythmia Research Technology, Inc. (HRT:BUY) rose 15.3% in May as the company reported better than expected Q1:06 earnings results. Organic revenue growth was 37.4% prompting our analyst to raise his price target. Our new 2007 estimates imply 19% EPS growth, yet the stock still trades at just 12.9x those earnings. Our price target implies 38% further upside.

As previously mentioned, all five of our short positions had big months, starting with XM Satellite Radio (XMSR:HOLD) down 28.9%. The company is now facing lawsuits and an FTC inquiry among other problems. It continues to hemorrhage cash and profitability seems ever farther away despite strong revenue growth. The company may also be losing share to its rival, Sirius Satellite Radio (SIRI: Not rated). Losses per share were actually aided by massive shares outstanding dilution. Since we launched on XMSR with a SELL rating at the end of last year, the stock has been cut in half.

Our short call on Foxhollow Technologies, Inc. (FOXH:HOLD) returned 26.1% in May. Not only is the company rudderless as it struggles to find a new CEO (now five months into the search), but losses continue to be greater than expected and revenue growth is slowing. However, after declining 48.6%, our analyst felt the shares were now more appropriately valued and upgraded his rating from SELL to HOLD. Shares of NeuroMetrix Inc. (NURO:SELL) fell 22.8% in May as the company reported much weaker than expected Q1:06 results. We were looking for $0.15/share and the company reported a penny. Revenues missed as well. Our thesis has long been that sales growth will slow to the rate of customer growth and that 2005’s growth rate of 91% was not sustainable in light of just 50% customer growth rates. The company has a nice business model but at 56x our street high estimate for 2006 earnings, it is poised to fall further.

Travelzoo Inc. (TZOO:SELL) came back to earth after the short squeeze last month, falling 22.7% in May. The story here remains the same. Decent business model, but priced for perfection, especially in light of rising customer acquisition costs. One new wrinkle is the CEO sold $120 million worth of his holdings into the short squeeze raising the float to greater than 6 million. Our hunch is that this will temper future short squeezes and keep the stock steadily heading toward our price target of $16 implying an additional 46% return. NVE Corp. (NVEC:SELL) declined another 12.5% in May as investors get tired of waiting for MRAM revenue which seems eternally just over the horizon. Importantly, St. Jude Medical (STJ:not rated), a major customer of NVEC, has recently reported very disappointing results, driven by slow sales of the products that NVEC’s equipment goes into, namely pacemakers and defibrillators. Investors should not overlook the potential problem of inventory building at STJ that might impact NVEC’s sales in coming quarters.

May also had some double digit decliners. Topping that list was Miller Industries Inc. (MLR:BUY) down 27.9%. We launched on the stock in April and now wish we had waited a month. Nonetheless, we believe the market is misinterpreting management’s comments regarding the upcoming quarter. Miller gets orders from the US government all the time and a sizeable order will slip from Q2:06 into Q3:06 due to Pentagon procurements issues. The company actually reported much better than expected Q1:06 results beating our revenue estimates by $10 million and our EPS estimates by 13%. Just as we thought IRIS was a screaming bargain before it went up 20% this month, so MLR is now on the for sale rack. It is confounding to see a company that grew sales and earnings 49% and 156% respectively trading at just 10x our 2006 EPS estimate. We doubt it will stay like that for long.

On Track Innovations Ltd. (OTIV:BUY) fell 24.2% in May as investors are unhappily surprised that profitability seems further off than previously expected. Part of the problem is how little concrete information the company provides. Not only does the company give opaque guidance, but even such basic metrics such as how much the company’s smart cards are sold for is unavailable. That said, revenues did increase 38% in Q1:06 double the pace of the quarter before and gross margins jumped 1,600 basis points. With metrics like those, we expect the company will be profitable by Q1:07. Moreover, the markets the company is targeting are enormous, and the opportunity is almost open ended if the company can execute. Our price target implies 80% upside.

Hardinge, Inc. (HDNG:BUY) declined 11.9% in May on disappointing Q1:06 results. One bright spot here is sales growth which adjusted for currency was actually up 15%, very healthy for this value stock. Due to recent acquisitions of former partners, the company’s expense structure will be markedly different over the course of the next two years and we continue to believe investors are not expecting the kind of earnings growth we forecast. Despite relatively modest revenue growth projections, we see earnings growth of 73% and 91% respectively for 2006 and 2007. Expense reductions include $2.5 million of minority interest expense, $300 – 500K/year in SG&A costs, and reduced royalty expense of $1.5 million per year. Even with no sales growth, these operating cost cuts would lead to 50% EPS growth, yet the stock trades at just 10.5x our 2006 EPS estimate and just 5.5x our 2007 EPS estimate.

Amrep Corp (AXR:BUY) declined 10.7% in May which normally would lead me to highlight it as a good name to look at adding or building a new position. Unfortunately, or fortunately depending on whether you already own it or not, the stock was up 22% yesterday and is above our price target. Our BUY rating is under review. CREDO Petroleum Corp. (CRED:BUY) fell 10.3% in May. It was poised for a breather after a monstrous run that still leaves it up 77% since we launched with a BUY rating last August. The company reported a great first quarter beating our analyst’s already lofty expectations as energy prices remain high. Our price target implies another 48% upside for this Microcap energy stock.

While we dropped Foxhollow Technologies, Inc. from our list, we added a new name, LOUD Technologies (LOUD:BUY). Our analyst believes the name is poised for a turnaround over the next few years, and our price target implies 80% upside. We believe that May, once again, illustrated the wisdom of our dual alpha strategy, profiting from both long and short ideas in a market likely to return mediocre results overall. Since we started, our average recommendation has returned 67.2%. We continue to believe that in a low return market environment, stock selection is more important than ever. Opportunities abound in the Microcap space for those diligent and savvy investors willing to put in the work. Here at Singular, we do that work for you. As always, we thank our clients for having faith in us and hope that we continue to earn your trust.

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