Small Caps Post Strong Advance

Following a volatile May, small caps found resolution in terms of direction with a solid advance in June. Although final Q1 GDP came in even lower than anyone expected at -2.9%, the market shrugged the data point off, with small caps leading the charge higher. External geopolitical events continue to feature in the news but with small caps less exposed internationally than larger cap peers, the xRussell 2000 index outperformed the S&P 500 by roughly 3%.

In looking for an explanation for the June performance, continued jobs growth looks to be one point that investors can hang their hats on. The most recent non-farm payrolls reading in June came in at 288,000, up from 224,000 in May and 304,000 in April. Overall, the employment report indicates that job growth is gaining momentum which, in turn, bodes well for Q2 GDP.

For June, the S&P 500 was up 1.84%, the Russell 2000 was up 4.94% and the aggregate Singular List was up 3.78%. For the trailing twelve months, the S&P was up 18.3%, the Russell 2000 was up 19.7%, and the Singular Research List was up 18.8%.

We initiated coverage on two companies during June, Nature’s Sunshine (NATR) and QUAD/Graphics (QUAD). Both are BUY-rated, with NATR having a price target of $20 and QUAD a target of $29.25.

Our top five performers in June include companies from a variety of industries and are all BUY rated ideas. As our table shows, the top performing company on the Singular List in June was SA. On a macro level, rising gold prices during the month created a favorable environment for gold-related companies such as SA. On a company-specific level, SA announced a new drill program at its KSM mine.

As with our top performers, our worst performers in June were also from a variety of industries and with a range of reasons for the declines. Given the overall upward trend in the market, our SELL-rated ideas faced a natural headwind which, coupled with company specific news, result in rising share prices during the month. We continue to believe our theses are correct on these companies. VMC, for example, faces the imminent threat of the Federal Highway Trust Fund running out of money, which could be problematic.

At Singular Research we continue to seek out investment ideas that have minimal to no Wall Street coverage. There are a number of uncovered and under-covered names we have been investigating, and we plan to launch coverage on several names in the coming weeks. We thank our clients for your support of independent equity research.

Sincerely,

Jeremy Hellman, CFA
Chief Operating Officer