Three New Initiations Added to Singular List in August Take Advantage of Challenging Market Conditions
August was a tough month for us as the Singular Research list failed to beat its S&P 500 benchmark. Our list declined by 2.4% versus a 1.9% gain for the benchmark. Volume was low in the month as traders were out on vacation, but volatility was high especially among our small growth and tech oriented names. Despite this being the worst month of underperformance for us ever, it was just one of six months where we have failed to beat the benchmark out of 26 months, a remarkably consistent record of outperformance. Moreover, our list remains up 11.4% for the year, still handily beating the S&P 500’s 4.3% return, and is up 131.2% since inception, a 47.2% annualized return. To get a sense of how volatile our list was this month, 15 out of 33 names moved by double digit percentages, with six moving by greater than 20%.
For the sake of brevity, I will focus on only those six that moved by greater than 20% in August. Despite the overall underperformance in August, there were some positive standouts. First among these was Arrhythmia Research Technology, Inc. (HRT:BUY) up 28.7% for the month. The company beat our revenue estimates, reported a 17% upside EPS surprise, our analyst raised his estimate for next quarter by 18%, and he raised his price target. Despite estimated 32% revenue growth and 37% profit growth, HRT trades at just 14.7x our 2007 EPS estimate of $0.95.
The second best performer was Excel Maritime Carriers (EXM:BUY) moving up 28.6% for the month. Despite missing our estimates by a penny, shipping rates are clearly firming up on the back of strong demand for coal, and iron ore from China and India. We raised our 2006 EPS estimates by 37%. The company recently chartered one of its Panamax ships at $28,000/day, versus our estimate of just $20,000/day. Our last 20%+ positive mover was American Physicians Service Group Inc (AMPH:BUY) up 20.2% for August. While the company reported mildly disappointing results for Q2:06, and we lowered our estimates slightly, the market cheered a merger announcement with its long-time client, American Physicians Insurance Exchange. It is too early to know exactly what the impact of the combination will be other than higher revenues and lower margins. Nonetheless, AMPH still has over $9/share in cash and investments.
Our worst performing stock was Parlux Fragrances (PARL:HOLD) down 51% for the month. The company’s investor relations effort borders on dishonesty. While we were able to forgive a late 10K filing and somewhat erratic behavior by the CEO, this was only due to our belief that the core business was performing decently. However, when the company filed a notice with the SEC that its Q1:07 10Q would also be filed late, it slipped in a notice that sales were slowing and prior guidance was unrealistic. Compounding the negative news was the company’s lack of so much as a press release to announce the fundamental changes to its business, let alone a conference call. Our mistake was in not recognizing management’s disdain for shareholders sooner. We downgraded the stock to HOLD and dropped it from our list.
Long time outperformer Hansen Natural Corp. (HANS:BUY) was our second worst performer dropping 40.1% for the month. Investors, long accustomed to the company beating analysts expectations were disappointed when it merely met them. The company did beat our more conservative estimates, and we view this as a good entry point on a great growth story with significant room to run. One reason, HANS did not exhibit greater operating leverage despite 83% sales growth was an aggressive build out of point of sales merchandising equipment ahead of the switch to the Anheuser-Busch distribution system. HANS trades at 20.5x our 2007 EPS estimate of $1.37 despite an expected 62% and 31% growth rate projected for this year and next. Hansen is taking market share in a market growing at 50% and our price target implies 114% upside from current levels. Our last 20%+ decliner was Chad Therapeutics Inc. (CTU:HOLD) down 24.6% in August. Our investment thesis on Chad was event driven, specifically a review by the Board of whether to sell the company or to secure new distribution agreements. When the board opted for neither, investors voted with their feet. We downgraded the stock to HOLD and removed it from our list.
Besides the two downgrades, we also added three new stocks to our coverage list. Aldila Inc. (ALDA:BUY) is a manufacturer of graphite golf shafts. Our analyst believed a sell-off on weak Q2:06 results was overdone and represented a great buying opportunity. The company has leading market share positions in some of its key products and has the great potential operating leverage of a manufacturer. Next, we added a new short name, crowd favorite, CTRP International (CTRP:SELL). Driven to the stratosphere by the dual hype of Chinese stocks and Internet stocks, CTRP boasts a 57.3x PE and trades at 21x sales. While our analyst believes the company does have a bright future, numerous risks exist which are not priced into the stock such as declining operating margins, slowing top line growth, and more general risks associated with investing in China. Our last new stock is Bolt Technology (BTJ:BUY). The company manufactures air guns and underwater electrical connectors used in seismic surveys of undersea oil and natural gas fields. Growth has been phenomenal, but looks set to continue and our analyst believes the market is underpricing this future growth. Our estimates imply 35% and 22% earnings growth this year and next, yet the stock trades at just 13.7x our 2007 EPS estimate of $1.42.
Investing is a marathon, not a sprint, so we are not overly concerned by short-term underperformance. Indeed, many of the best opportunities exist due to so many investors’ obsessive focus on short-term performance. In addition to HANS, already mentioned, we’d cite PRXI, and MLR as two other names with significant room to our price targets. In many cases, we see no good reason for our stocks to be down, other than general market currents, and one thing we believe in here at Singular is that earnings growth drives stock prices ultimately. While multiple expansion is nice, we don’t count on it. Our companies have an average projected earnings growth of 26.4%, yet trade at a PE of just 15.4x. Even these numbers are understated, as they fail to include the companies with explosive revenue growth that are just turning the corner to profitability. The stocks on our list have an average of 52.9% upside to their price targets. We at Singular are working hard to find compelling, actionable and investable ideas in the MicroCap space for our subscribers. As always, we are grateful to our clients and strive to earn their trust.