Volatile Month, but Singular Research List Beats S&P 500 by 2.0%
June was a month full of volatility as market participants weighed the potential for inflation expectations to grow against the prospect of slowing economic growth brought on by Fed rate hikes and stubbornly high energy prices. Our list was not immune with six of our stock moving by double digit percentages. Fortunately for us and our clients, five of those six were up double digits with only one double digit decliner. For the month of June, the Singular Research List returned 2.06% versus the S&P 500’s 0.09% return leading to another positive alpha month and 1.97% of outperformance. We are proud to report that year to date our list is up 17.1% versus a 1.9% return for the benchmark; from inception, our stocks are up 141.1% versus a 15.3% return for the S&P 500 index.
The best performer of the month was Excel Maritime Carriers (EXM:BUY) up 27% in June. This was a nice surprise as the stock has been our single worst performer. We were initially attracted to EXM by its impressive growth in revenues and earnings coupled with very low price multiples. However, many of its time charters were at rates higher than prevailing shipping rates and as ships came off old charters and signed new ones at the lower rates, performance rapidly deteriorated. We believed that the stock price decline was unwarranted and that as older ships got scrapped, leading to a smaller global fleet, shipping rates would firm up. That is exactly what happened in June with shipping rates exceeding our estimates. We would not be surprised to see an upside quarter reported for Q2:06.
Loud Technologies (LTEC:BUY), one of our newest initiations, was our second best performer gaining 23.3% on the month. The company is in the process of a turnaround and is well positioned to benefit from Guitar Center’s (GTRC:NR) growth. GTRC is adding 35 – 40 new stores a year and growing revenues at 17%, figures likely to rise as international expansion plans get underway. LTEC is the market leader in branded professional audio and other music products.
Amrep (AXR:HOLD) increased 22.4% in June before we downgraded the stock from BUY to HOLD on valuation concerns. Amrep has a confusing combination of businesses including a real estate development subsidiary and a magazine fulfillment business. While results from the magazine fulfillment business have been lackluster, results from the company’s real estate subsidiary have been stellar. Our analyst was concerned that comparisons were becoming more difficult and that the stock had gotten ahead of itself. Amrep was up 123.7% since our February 2005 initiation.
Acacia Technologies (ACTG:BUY) gained 17.4% in June. Acacia signed numerous licenses in Q2:06 with such companies as Fujitsu, Philips Electronics and Intel just to name a few. The company has ramped up its acquisition of patent portfolios and now has 47 different patent portfolios although only around ten have been converted to active licensing programs. Acacia remains one of our best ideas and is at the vanguard of an entirely new industry of intellectual property acquisition and licensing companies. Since our December 2005 initiation, the stock is already up 108.3%.
On Track Innovations Ltd. (OTIV:BUY) rose 16.6% for the month. OTIV has been a bit of a disappointment since our December 2005 launch, as the company could benefit from a better investor relations strategy. The company needs to better describe its business model to investors. That said, the opportunities for the company in its Smart ID, contactless payment solutions, and petroleum solutions product lines is almost open ended.
Our only double digit decliner for the month was Parlux Fragrances (PARL:BUY) down 29.7% in June. Parlux has been a very controversial story with a great deal of mistrust in company management. Sixty-three percent of the float is short. While the company reported better than expected Q4:06 and FY:06 results, the company has delayed the filing of its 10K as it struggles to comply with Sarbanes-Oxley requirements for internal controls. Both of our competitors have downgraded the stock to HOLD. We feel this is a mistake. Management’s guidance for FY:07 implies 32 – 36% earnings growth, and the company has a history of beating its guidance. Trading at just 7.5x FY:07 EPS and with so much of the stock already short, we feel downside is limited here. If management is found to be fraudulent, then clearly all bets are off, but we do not see compelling evidence of this yet and believe the risk/reward profile of PARL is attractive. Despite the recent decline in the share price, Parlux is still up 133.5% since we launched on it back in August of 2004.
June was also a busy month for our research team in terms of new initiations. Early in the month, we launched on a new short call, Baidu.com (BIDU:SELL) with a $50 price target. BIDU has the honor of appealing to speculators in two ways: one as a play on the fast growing Chinese market, and secondly as a major player in online search. The company has been crowned the “Chinese Google” by fans who have driven the valuation into the stratosphere. When we initiated coverage on BIDU, it traded at 95.2x our Street high 2006 EPS estimate of $0.91, and 142x 2006 consensus EPS. While we believe the company will experience rapid growth, it is priced for perfection and the market is discounting all the potential risks to its business plan which we laid out in our report.
We also added American Software (AMSWA:BUY) to our list in June. The company has a very attractive enterprise software business model complete with recurring revenues and high gross margins. The company is the industry leader in its supply chain planning niche and we believe the economy is poised for a return to information technology spending by corporations both in the U.S. and abroad. Moreover, the enterprise software space has seen rapid consolidation leading us to believe that American Software may get acquired at an attractive premium to current levels. Finally, the company pays investors a 4.3% dividend yield while they wait.
One of the most interesting and attractive investment ideas we have seen in awhile is Premier Exhibitions, Inc. (PRXI:BUY). The company has an attractive and profitable legacy business in exhibiting artifacts from the RMS Titanic shipwreck. With a new permanent exhibition planned for lower Manhattan which could generate $8 million per year in gross profit, this business alone is set to grow nicely in FY:07 and FY:08. However, the real growth story is the company’s “Bodies” exhibitions, showing carefully dissected and preserved cadavers in various poses. This is a unique, hugely popular, and surprisingly profitable business. The company currently partners with another company on the exhibits, but once the partnership ends (probably FY:08), these exhibits will get even more profitable. We forecast revenue growth, 90.2% in FY:06, will accelerate to 161% in FY:07.
We continue to be cautious on the outlook for stocks for 2H:06 and believe it is unlikely that interest rate hikes will abate any time soon. Stocks seldom perform well in a rising interest rate environment. 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 hard 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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