MMI August 2019

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MMI August 2019

 

A bull or a bear market is just a tweet away

Yields crash and stocks are now a "relative" screaming bargain. 
With interest rates crashing yields on Treasury bonds approaching one and a half percent on 10-year issue and BBB corporate bonds at 3.3 %, the relative attractiveness of equities has increased significantly in the last month. The caveat is we may only be as good as the next tweet or shift in China's currency fixing. With those two overhangs in mind we can start tiptoeing back into the equity Waters.

Sentiment

As volatility increase the vix and vxn indicators spiked above 20 and put to call indicators spiked to 1.15 both bullish oversold levels. Therefore the level of fear has reached a basic minimum to generate a mildly bullish reading.

(VIX spikes on sell off)

(VIX spikes on sell off)

 

Technical indicators.

At best, neutral in late July. The nascent August sell-off flipped all our internal indicators to the bearish side. However, the S&P 500 held above its 200-day moving average while other major market indices most significantly small-cap oriented fell below support into bearish territory.

sp

(S&P500 hold at 200 day moving avg.)

 

Liquidity indicators:
neutral
Earnings season and blackouts have interrupted strong share buyback programs, which will accelerate now that the EPS yield is significantly above borrowing costs for most S&P 500 companies.

While mutual fund and ETF Equity inflows have been negative the big shift and reallocation has been to bond funds to the tune of a net +$10 billion dollars last month. As a cautionary flag, NYSE margin account indicators show a high amount of leverage.  This is more than offset bye overly large cash balances  in mutual funds that exceed $ 3.2 trillion dollars underscoring  high aversions to  Equity Market risk. 

EPS momentum
positive
With Q2 earnings nearly complete the Outlook is favorable better-than-expected reports have dominated at 76% this beats the long-term mean by 6% Q2 revenue growth also has been strong up 4.1% although Q3 revisions are slightly negative at plus 72% versus a 70% long term mean, Q4 estimates return to the positive with earnings expected to be up 4.5% providing a positive backdrop and foundation for a year-end rally.

Valuations.
positive
As bond yields have plummeted over the last month equities have increase the relative attractiveness.

The estimated earnings yield on forward 12 months is nearly 6 percent. This compares very favorably to a triple b corporate bond yield of 3.3%.

On an absolute basis comparing the value of the equity market to overall GDP, the market is at the higher end of the spectrum at 1.4 x GDP slightly below our overvalued neutral level of 1.5.x 

Growth and tech  have outperformed value by a margin not seen since 2000- 01 bubble. Our proxy of the New horizons small cap growth fund trades over 30 times earnings, at a 100% premium to the S&P 599.  Highlighting this divergence, the Russell 2000  equal weighted trades approximately 15 * earning,  micro caps are even cheaper with the Russell microcap index trading 14.3 x.

Monetary indicators 
positive
The well-publicized yield curve has inverted.  However, when we look at the shape of the curve on a 2-year to 10-year basis it does have a positive slope the message here is the Fed will be cutting aggressively. 

Our monetary indicators show a stimulative backdrop for monetary policy just slightly,  at plus .40 bps.

Forward rates in the treasury short term bond market support an further cuts of approximately 40 basis points at this time. This is supported by fed funds futures showing a 63% chance of a September cut in a 62% chance of a January cut.

Misc;
positive
Latest data from the Federal reserve shows that individuals on average , are under invested in equities, currently having less than 37% of total non-financial assets in the equity markets this compares to the recent generational high in the year 2000 of 60%.

In summary, we would look to buy the sell off to get more bullish going into Q4.  Many things favor the upside...  We don't want to fight the Fed, earnings surprise and upward revisions are positive, equities are attractive relative to bonds and cash,  and the massive share Buy-Backs now look like a tour-de-force to keep the bulls on top through year. end

 

yields

 (Yields collapse)

 

BULLISH +60 score out of possible 100 max.

market indicators

 

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Summer Solstice Small Cap Investor Conference

 

 June 27, New York City, Westin Grand Central

 

At Singular Research, we focus on small and micro-cap stocks that are undercovered on Wall Street. We look to find the hidden gems that are often overlooked by analysts and portfolio managers. These stocks have had massive returns over our 14-year history and our performance shows it. We have nearly outperformed the Russell 2000 on a two to one basis since our inception in 2005. Please see below some of our top ideas for 2019 that will be presenting at our research conference in New York City on June, 27.

 

Presenting Companies

 

Luna Innovations (LUNA)

 

Luna Innovations Inc. develops and markets fiber optic sensing and test and measurement products worldwide. The company has two operating segments. The products and licensing unit sells the company’s commercial fiber optic test and sensing equipment and the technology development segment performs contract R&D for U.S. government agencies.

 

Q1:19 Highlights

 

  • Q1:19 revenues were $14.8 million, up 69% versus Q1:18, largely attributable to revenue growth in both the Product and Licensing (+98% YOY) and Technology Development segments (+43% YOY).
  • LUNA reported a 79% YOY increase in gross profit to $6.8 million for Q1:19. Gross margin expanded 200 bps YOY to 46% in Q1:19.
  • Adjusted EBITDA improved to $1.0 million for Q1:19, compared to a loss of $(0.1) million for Q1:18.
  • Net income for Q1:19 was $1.0 million or $0.03 per diluted share versus $0.1 million in Q1:18.
  • For the full year of 2019, LUNA expects revenue to be between $60-$65 million, and adjusted EBITDA to be between $6.0-$6.5 million.
  • We marginally adjust our estimates based on the results and management commentary. We maintain our BUY rating and increase our target price to $5.50, with an implied capital appreciation potential of 28%.

 

Emergent BioSolutions (EBS)

 

Emergent BioSolutions (EBS) is a global specialty life sciences company that develops and commercializes vaccines, drugs and devices that address biodefense threats. The Company is a preferred provider of biodefense products and services to the U.S. government under multi-year contracts. Its most valuable product, BioThrax is the only FDA-approved anthrax vaccine. The Company’s products are sold mainly in the U.S. as well as internationally.

 

Q1:19 Highlights

 

  • Product sales rise 102% YOY to $153.0 million due primarily to sales of NARCAN nasal spray and ACAM 2000. Contract manufacturing revenues declined 39% YOY to $15.9 million and contracts and grants revenues increased 36% to $21.7 million.
  • In coordination with the US government, EBS is beginning the transition away from BioThrax to next-generation anthrax vaccine AV7909 (formerly NuThrax). The new vaccine has a shorter dosing regimen than BioThrax and a rapid immune response. Because of this transition, the Company expects FY19 revenues and profits this year to be more heavily weighted towards H219.
  • EBS anticipates a similar ramp-up for smallpox vaccine ACAM2000 as deliveries are completed under its existing contract. Deliveries under a new contract currently being negotiated are anticipated to commence in H219.
  • On the clinical front, EBS posted good interim results from Phase II trials of its chikungunya virus vaccine candidate, which could advance to pivotal trials next year. Patient enrollment for Phase II trials of EBS’ FLU-IGIV therapeutic are wrapping up and trial data from this product candidate could be available later this year.
  • EBS ended Q119 with $137.2 million of cash and equivalents. Long-term debt declined to $732.4 million from $784.5 million at year-end 2018. In October of last year, the Company incurred $768 million of debt and used $119 million of cash to acquire PaxVax and Adapt Pharma.
  • EBS is guiding for 2019 revenues between $1.06-$1.14 billion, net income ranging from $80-$110 million and adjusted net income between $150-$180 million. We update our FY19 sales and adjusted EPS estimates, introduce of 2020 estimates and reiterate our Buy rating and $70 price target.

Alamo Group (ALG)

 

The Alamo Group is a global leader in design and manufacture of high-quality agriculture equipment for farms and ranches and infrastructure maintenance equipment for government and industrial markets. The company has 26 manufacturing locations in the U.S., Canada, England, France, Australia, and Brazil.

 

Q1:19 Highlights

 

  • Q1:19 revenues were $261.9 million, up 10% YOY, attributable to revenue growth in the Industrial (+19.9% YOY) and European divisions (+6.3% YOY). This growth was partially offset by weakness in the Agriculture segment (-9.3% YOY).
  • Q1:19 gross profit increased 5% YOY to $63.3 million. Gross margin was 24.2% for Q1:19, down 90 bps versus 25.3% in Q1:18.
  • Net income for Q1:19 was a record $15.3 million, or $1.30 per diluted share, compared to $14.6 million or $1.24 per diluted share in Q1:18.
  • Even though the stalled agriculture market and lower farm incomes will continue to dampen sales, margins should continue to improve moving forward.
  • Management noted that they are optimistic about 2019 growth prospects. Growing demand in the Industrial Division should continue to drive results in the coming quarters.
  • We marginally adjust our estimates based on the results and management commentary. We maintain our BUY rating and our target price of $126.50, with an implied capital appreciation potential of 31%.

 

Harsco Corporation (HSC)

 

Harsco Corp is a diversified, multinational provider of industrial services and engineered products. The company's operations consist of two reportable segments: Harsco Metals & Minerals and Harsco Rail. The company has locations in 30 countries, including the United States.

 

Q1:19 Highlights

 

  • Q1:19 revenues were $447 million, up 10% from Q1:18, largely attributable to an increase in the Rail (+15% YOY) and Industrial segments (+40% YOY), partially offset by the Metals & Minerals (-1% YOY) segment.
  • HSC delivered non-GAAP operating margin of 9.3%, compared to 9.4% in Q4:18 and 9.0% in Q1:18. Adjusted operating income increased ~14% to ~$42 million.
  • HSC announced a series of transactions (acquisition of Clean Earth and sale of Air-X-Changers) which accelerate its shift to an environmental solutions-focused company comprised of higher-growth businesses with enhanced margin profiles and reduced cyclicality.
  • HSC noted that the backlog trend across segments is positive which should boost revenue in FY19.
  • For FY19, HSC raised its guidance with adjusted operating income at $207-$222 million (earlier $200-$220 million) and adjusted EPS at $1.35-$1.53 (earlier $1.29-$1.47).
  • We marginally adjust our estimates based on the results and management commentary. We maintain our BUY rating and increase our target price to $32.25, with an implied capital appreciation potential of 29%.

 

Daktronics Inc. (DAKT)

 

Daktronics, Inc. is the world’s leading supplier of electronic scoreboards, large electronic display systems, and digital messaging solutions for use in sports, transportation, and communications.

 

Q3:19 Highlights

 

  • Q3:19 revenues were $115.0 million, down 11.7% from Q3:18, as a result of weak performances from Live Events (-33.6% YOY) and International (-34.3% YOY), partially offset by solid gains from Commercial (+4.7% YOY), Transportation (+37.5% YOY) and High School & Recreation (+29.1% YOY). DAKT ended the quarter with a $168 million backlog.
  • Gross margins declined 30 basis points to 21.6% in Q3:19 from 21.9% in Q3:18 due primarily to higher commodity costs.
  • Overall orders rose 7.1% in Q3:19 compared with Q3:18. Orders increased in the Commercial, High School Park and Recreation and Live Events business units and decreased in the Transportation and International business units.
  • Loss per share declined to $(0.07) in Q3:19 from $(0.14) in Q3:18.
  • DAKT is guiding for flat to slightly lower sales in Q4:19 compared with last year. As a result, we expect modest near-term EPS growth.
  • Taking into account recent guidance, we reduce our FY:20 EPS estimate to $0.28, while maintaining our Buy rating and $10 price target. At the recent roughly $8 share price, this implies 12-month capital appreciation potential exceeding 20%.

 

Acme United Inc. (DAKT)

 

Acme United Corporation is one of the largest worldwide suppliers of innovative cutting devices, measuring instruments and safety products for the school, home, office and industrial markets. The company has facilities in the U.S., Canada, England, Germany, Hong Kong and China. Acme sells its products in countries. It had 421 employees at the end of 2017.

 

Q1:19 Highlights

 

  • Q1:19 revenues were $31.4 million, down 1% from Q1:18, on account of initial shipment to a large distributor in Q1:18 that did not repeat in Q1:19. The performance across regions were mixed with US ( down 1% YOY), Europe (up 6% YOY) and Canada (down 9% YOY).
  • ACU is expanding production capacity again at its DMT diamond sharpening plant and plans to launch new Camillus knives offerings in Q3 and Q4:19.
  • Gross Margin for Q1:19 was 37.6%, which was down 60 bps compared to 38.2% in Q1:18.
  • Operating profit improved 12% YOY on account of cost savings initiatives implemented in late 2018.
  • Earnings per share in Q1:19 was $0.24 vs. $0.21 in Q1:18, an increase of ~14% YOY.
  • Management reiterated its sales guidance of ~$140-$143 million, net income of $5.0-$5.3 million and earnings per share of $1.41-$1.50.
  • We introduce our FY:20 earnings estimate of $1.61 per share factoring in the latest management commentary. We maintain our BUY rating and increase our target price to $23.50, with an implied capital appreciation potential of ~18%.

 

 Waseco Resources (WRI.V)

 

Waseco Resources’ current lead project is a highly prospective gold property on the prolific Battle Mountain Trend, in Nevada. The Company has also partnered with Areva to explore a series of highly prospective Uranium properties in the Quebec Labrador Trough. Concurrently, the properties are being explored for gold, copper and diamonds.

 

Management plans to create shareholder value by

 

  • Continuing cost-effective exploration on its prospects
  • Continuing efforts to acquire properties of merit that have the potential to host ore bodies
  • Working with the local communities to ensure both environmentally responsible and sustainable operations
  • Ensuring that all decisions, operations and policies are to the best industry standards and are fully transparent and socially responsible

 

Operating Accomplishments

 

  • Thirty years of exploration without injury
  • Trading as a Tier 2 company on the TSX Venture Exchange
  • Trading on the Frankfurt Stock Exchange
  • $ 2Million of airborne geophysics, ground geochemistry and compilation work completed on the Quebec Labrador Trough Properties since 2005

Comtech Telecommunications (CMTL)

 

Comtech Telecommunications Corp. designs, develops, produces and markets innovative products, systems and services for advanced communications solutions. Comtech sells products to a diverse customer base in the global commercial and government communications markets. Comtech believes it is a leader in most of the market segments that it serves.

 

Q3:19 Highlights

 

  • Net sales for the third quarter of fiscal 2019 were $170.4 million as compared to the $147.9 million achieved during the third quarter of fiscal 2018, representing an increase of $22.5 million, or 15.2%. Net sales for the first nine months of fiscal 2019 were $495.4 million as compared to the $403.2 million achieved during the first nine months of fiscal 2018, representing an increase of $92.2 million, or 22.9%.
  • Bookings during the third quarter of fiscal 2019 were $331.2 million, with a company-wide book-to-bill ratio (a measure defined as bookings divided by net sales) of 1.94 with both its Commercial and Government Solutions Segments achieving book-to-bill ratios in excess of 1.00.
  • Backlog as of April 30, 2019 reflects a record high of $747.1 million.
  • Adjusted EBITDA for the third quarter of fiscal 2019 was $24.0 million. Adjusted EBITDA for the first nine months of fiscal 2019 was $65.2 million as compared to the $47.7 million achieved during the first nine months of fiscal 2018, representing an increase of $17.5 million, or 36.7%.
  • Non-GAAP EPS for the third quarter of fiscal 2019 would have been $0.42 which was 23.5% higher than the Non-GAAP EPS of $0.34 for the third quarter of fiscal 2018. Non-GAAP EPS for the first nine months of fiscal 2019 was $1.05 or 208.8% higher than the Non-GAAP EPS of $0.34 for the first nine months of fiscal 2018.

 

We believe these small cap stocks are mispriced because they are undercovered. They are not well followed in the stock market; therefore, investors do not understand the inner mechanics of the company. Since these companies are small cap, domestic stocks, they have less international exposure and trade war risk than from what most stock market participants perceive. As a result, these stocks have been unfairly sold off and therefore pose great investment opportunities. For more information on these stocks and our investment research, please go to SingularResearch.com where you can sign up for our June offer of a 50% discount on our trial subscription. There, you can also register for our webinar broadcast of these companies that will be presenting on our June 26 investor conference. Thank you for your time in reading this article.

 

Commentary & Strategy by:
Robert Maltbie, CFA
President - Singular Research
LinkedIn

 

Visit https://singularresearch.com for a 50% discount subscription offer throughout June.

Deal or No Deal?

This is the deal that no one really believes. On one side you have Caesars Entertainment (CZR) combining middle-market and premier properties in Vegas, Caesars and Harrah's getting the lipstick treatment from renowned raider and veteran greenmailer, Carl Icahn with a 28.5% stake , accumulated late 2018 and early 2019 at an average cost of $9 per share, sans big hedge funds , managed by Appaloosa Capital, Soros and Canyon Capital and ABC, Icahn has his management put in place and his directors on the board the goal is to make this company and lean and mean . And I know you have a Mount Everest equivalent 600% debt to equity ratio, a staggering $ 18 billion dollars of long-term debt .

d or nd 1

 

Enter the liquidator, a tough operator with a trained eye on the bottom-line, CEO Tom Reeg, an M&A specialist at El Dorado (ERI). Reeg is high rolling on a string of successful acquisitions cutting out the excesses, extracting every extra iota of EBITDA.
El Dorado management has aspirations of building the next great gaming powerhouse, shooting for an operating income above $1 billion, well positioned to leverage outsized growth potential in sports gaming with significant stakes in agreements with the major infrastructure builders, William Hill (WIMHY ) and The Stars Group (TSG).

 

d or nd 2

 

But how will they ever manage to buy on a company four times their size and digest $18 billion of debt. ? They would need to raise a minimum of $2 billion to finance this gargantuan play, creating a new neo- behemoth in gaming. The combined company would have over a $ 1 billion of operating revenue, over $ 3 billion of ebita and have a combined enterprise value over $32 billion dollars.

Icahn is in at $9. Many think he would want at least $13 to let go. Eldorado is offered $10.50. There is a big spread in the bid- ask in this potential deal. Rumors abound that Icahn may take a lower offer. Management at E Dorado may be creating a war chest for this deal at present, raising nearly $ 4 hundred million by selling non-core properties in the Midwest and in West Virginia last week. Enter the friendly “White Knight”, VICI Properties ( VICI), the major buyer of these El Dorado properties, the entity that just so happened to be the specialty REIT that Caesar’s and Harrah's shuffled their properties over to when they deleveraged in 2017

Eureka ! We have just found our third party facilitator, endowed with low cost financing at 5% cost of capital. Will Icon take $12 to exit gracefully? To accomplish this it may require $600 million to $1.2 billion in fresh capital. At $11, CZR would not be dilutive to ERI . A bump up only slightly to $12 based on ev / sales ratios of the two enterprises could work based on cost efficiencies achieved by Reeg’s cost cutting management style. Still, the market doesn't see it happening therefore the significant discount to the speculated deal price.

 

d or nd 3

 

Many risks exist. What is the possible timing of such a deal? Well, Icahn isn't getting any younger and may finally want to hang it up. This would be a nice way to go out on top. What if the deal doesn't happen? You will own a highly levered company with one of the world's most successful activists, with his management team squeezing out costs to generate improving ebitda, trading at a premium of 10%.to industry comparables.

With a Dow Jones industrial Average that's fairly valued at 3000 a 10 to 20% return should not be underestimated. I am long CZE.

 

Commentary & Strategy by:
Robert Maltbie, CFA
President - Singular Research
LinkedIn

 

Visit https://singularresearch.com for a 50% discount subscription offer throughout June.

Singular Research Director's Letter: June performance 2019

SingularLogo

June 2019 Director’s Letter

 

Major market indices recover from May sell off.

Singular Coverage List continues to lead.

singular list

A dovish Fed signals rate cuts to stimulate stalling economic growth. The Singular Research Coverage list continued to lead the S&P500 & Russell 2000 YTD, although the major indices slightly outperformed bouncing back from the May correction. Although, the small caps and unweighted indices have not kept pace, we will wait to see if this lag becomes a divergence.

top 5 performer for the month

Our top performers in June were led by Geospace Technologies Corp. (GEOS), Management announced strong second quarter results with revenue up 36% YOY driven by OBX rental demand. Our next chart topper was Salem Media Group (SALM). Total revenues declined 5.2% YOY to $60.5 million in q1 19 as a result of drops in Broadcast, Digital Media and Publishing revenues. At a significant discount to book value at $8, SALM looks to have found some fans. Acme United Corp (ACU) gave positive forward guidance after a difficult TTM outlook, Management reiterated its sales guidance for CY 2019 of ~$140-$143 million, net income of $5.0-$5.3 million and earnings per share of $1.41-$1.50.

worst 5 performers for the month

Our worst performers were led by Floor & Décor Holdings Inc(FND), a short call that suffered both from profit taking and covering as the June rally in the overall equity markets gained traction. Harvard Bioscience, Inc. (HBIO) continued to fall in June, GAAP revenues improved 5% in Q119, but organic revenues fell 4% and adjusted EPS declined YOY from $0.03 from $0.02. HBIO expects a challenging H119 and improving results in H219. Daktronics, Inc. (DAKT) reported fourth quarter fiscal 2019 results below our projections.Management guided for slightly higher sales for Q1:20. However, we expect near-term EPS growth to remain muted amid trade tensions. We cut our rating to Buy/Long Term and lower our target price to $6.50.

In June, we initiated coverage on LB Foster (FSTR) LB Foster Co. engages in the manufacture, fabrication, and distribution of products and services for the transportation and energy infrastructure. We caught a nice move up powered by strong Q1:19 results with EBITDA increasing ~92% YOY driving FSTR up 11% and into our top five for June.

At Singular Research we wish to thank our clients and followers for their continued commitment and support of our unbiased, independence research model as we strive to consistently deliver Alpha generated from the lack of coverage out- performance anomaly.

 

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MMI June 2019

Bearish with a Bounce

 

As of press time the market has enjoyed a 2%-3% rally, albeit on lower volume, spurred by a dovish stance by the Fed Chairman Powell, whom is standing by to cut rates if needed, which is seen as a supporting move if there is a global economic slowdown caused by trade skirmishes.

 

Sentiment Indicators: Positive 

 

Several rounds of selling in May has driven most sentiment indicators to an extreme negative reading with the recent two day rally reversing some of the May sell-off.

Volatility indicators VIX and VXN are at elevated levels.

 

mmi image 1

 

The bull to Bear ratio is now positive with bears at 40% bulls at 25%. This is a contrarian indicator, the put to call ratio on the S&P 100 and the CBOE is reflecting an oversold market. Put buying has been elevated.

 

AAII Index

 

  • Bullish 24.8% 24.7% 29.8%
  • Bearish 40.1 36.1 39.3
  • Neutral 35.1 39.2 30.9

Technical Indicators: Negative

 

The 580 point Dow rally has moved some of these indicators into neutral territory. We are waiting until next week to see if we find confirmation of a bullish reversal, a follow-through rally on stronger volume. Before the rally, all major indices were below their 200-day moving average connoting a bearish environment. Tuesday's massive rally took the S&P 500 and NASDAQ, the New York composite and the unweighted S&P 500 above their 200-day moving averages.

 

mmi image 2

 

Liquidity Indicators: Negative

 

Significant withdrawals were spurred by the May sell-off, set off by Trump trade war tweets. Mutual funds and ETFs experienced approximately $20 billion in outflows in May. Adding to this was an increase in issuance in the IPO market, led by Uber (UBER) at $8 billion and Beyond Meat (BYND) at over a $1 billion.

Share buybacks were a feeble $4 billion and M&A was non-existent. The only activity was strategic bolt- on acquisitions of public companies buying private firms.

 

Valuation Indicators: Positive

 

Due to the market sell-off, combined with an earnings season that has been better than expected, the general equity market now has more upside potential over the next 12 months. The earnings yield projected over the next 12 months is approximately 6.5% compared to a BBB corporate bond yield of 4%. Thus, equities look attractive vs fixed income.

The projected for 12 month PE ratio is approximately 16 versus a five-year average of 16.5. However, the overall Market appears slightly overvalued based on our modified version of the Tobin's Q ratio with the current total market cap exceeding 1.5 x GDP. This is below the year 2000 bubble of 2x but above out indicator high mark a fair value at 1.25 times. This elevated figure is palatable due to the current high net profit margins.

Discounting for Equity risk, we derive a market multiplier of 18x times’ earnings, our estimate for fy.2019 is $168 for the S&P 500, an increase of 3% EPS y/y. Thus, we see we see fair value on the S&P 500 at 3024.

 

Monetary Indicators: Negative

 

Our excess liquidity indicator shows virtual parody, with zero stimulation to economic growth at present. The well followed yield curve is negative. The shape of the curve may be instructive with a dip about twelve months out and then a reversion to a normal upward sloped yield curve. The message may be that the trade wars will cause GDP to flatten out or skew slightly negative, to be cured later on in the year evidenced by increasing normalize rates.

 

mmi image 3

 

Miscellany

 

The LEI (Leading Economic Indicators index) is still positive but barely at + .11% month to month. We could be seeing a changing of the guard as the five-year dominance of big cap tech more specifically the “FAANG” as being the one stop trade, maybe in jeopardy. The U.S.Jjustice Department has initiated an antitrust investigation into the aforementioned “FAANG”. At present, it seems to be a unifying topic, politically. These companies have powerful lobbyists and it remains to be seen whether they will face heavy fines, litigation and be broken up. Perception could be more of an impact than reality over the next year or two. We will be watching to see if the broader markets and small caps can start to re-emerge and lead the market as the “FAANG” trade unwinds.

 

Commentary & Strategy by:
Robert Maltbie, CFA
President - Singular Research
LinkedIn

 

Visit https://singularresearch.com for a 50% discount subscription offer throughout June.

Shelter from the storm: With Trade War is back on, will small caps outperform ?

The trade war with China and the potential for a slowing global economy has provided a unique investment opportunity for domestic small-cap companies that are more insulated from this. Here we focus on five unique investment opportunities that have strong potential in 2019. These companies are both growth and value oriented and are under followed by Wall Street.

 

Luna Innovations, Inc. (LUNA)

Price Target: $5.50

Percent Upside: 25%

 

Luna Innovations, Inc. develops and markets fiber optic sensing and test and measurement products worldwide. The company has two operating segments. The products and licensing unit sells the company’s commercial fiber optic test and sensing equipment and the technology development segment performs contract R&D for U.S. government agencies.

 

First quarter highlights include:

 

  • Q1:19 revenues were $14.8 million, up 69% versus Q1:18, largely attributable to revenue growth in both the Product and Licensing (+98% YOY) and Technology Development segments (+43% YOY).
  • LUNA reported a 79% YOY increase in gross profit to $6.8 million for Q1:19. Gross margin expanded 200 bps YOY to 46% in Q1:19.
  • Adjusted EBITDA improved to $1.0 million for Q1:19, compared to a loss of $(0.1) million for Q1:18.
  • Net income for Q1:19 was $1.0 million or $0.03 per diluted share versus $0.1 million in Q1:18.
  • For the full year of 2019, LUNA expects revenue to be between $60-$65 million, and adjusted EBITDA to be between $6.0-$6.5 million.

 

 Primary Risk

 

  • The company operates in a space which is prone to rapid technological changes. New technology or the emergence of new industry standards could render existing products obsolete.

 

Anika Therapeutics (ANIK)

Price Target: $45.00

Percent Upside: 22%

 

Anika develops and manufactures therapeutic products for tissue protection utilizing hyaluronic acid (HA), a naturally occurring polymer in humans. Products address osteoarthritis, advanced wound care, and surgical issues. Anika HA products are unique from several perspectives.

 

First quarter highlights include:

 

  • Q1:19 revenues were $14.8 million, up 69% versus Q1:18, largely attributable to revenue growth in both the Product and Licensing (+98% YOY) and Technology Development segments (+43% YOY).
  • LUNA reported a 79% YOY increase in gross profit to $6.8 million for Q1:19. Gross margin expanded 200 bps YOY to 46% in Q1:19.
  • Adjusted EBITDA improved to $1.0 million for Q1:19, compared to a loss of $(0.1) million for Q1:18.
  • Net income for Q1:19 was $1.0 million or $0.03 per diluted share versus $0.1 million in Q1:18.
  • For the full year of 2019, LUNA expects revenue to be between $60-$65 million, and adjusted EBITDA to be between $6.0-$6.5 million.

Primary Risk

 

  • Anika has and can potentially face unfavourable test results which can hinder new drug performance.

 

Transcat, Inc. (TRNS)

Price Target: $27.75

Percent Upside: 16%

 

Transcat, Inc. is a leading provider of accredited calibration and laboratory instrument services and a value-added distributor of professional grade test, measurement and control instrumentation to highly regulated industries.

 

Third quarter highlights include:

 

  • Q3:19 revenue increased ~1% to $40.8 million impacted by weakness in the Distribution segment. Revenue from the Distribution segment was down 6.2% YOY while the Service segment grew 9.2% YOY. Both the Service and Distribution segments saw margin contraction amid softness in Canadian operations, an unfavorable mix, and productivity challenges. The overall gross margin contracted 60 bps, while the operating margin declined by 70 bps.
  • Operating income decreased 9.8% YOY to $2.4 million.
  • Service revenue increased 9.2% to $20.4 million, comprised of ~5.2% organic revenue growth. Higher revenue was the result of new business from the life sciences market and growth in general industrial manufacturing.
  • Distribution revenue declined 6.2% YOY to $20.3 million due to tough comps.

Primary Risk

 

  • TRNS’s results can be negatively affected by volatility in the oil & gas industry, weak economic activity, timing of customer orders, foreign exchange fluctuations, and competitor pricing.

 

Olympic Steel, Inc. (ZEUS)

Price Target: $17.00

Percent Upside: 20%

 

Olympic Steel is a leading U.S. metals service center focused on the direct sale and distribution of large volumes of processed carbon, coated and stainless flat-rolled sheet, coil and plate steel, aluminum, tin, pipe and tubular products.

 

Third quarter highlights include:

 

  • Q1:19 revenues were $446 million, up ~19% from Q1:18, reflecting momentum across all three company verticals - Carbon Flat (+15.6% YOY), Specialty Metals Flat (+34.4% YOY) and Tubular & Pipe Products (+14.6% YOY).
  • Operating income was $6.0 million in Q1:19, versus $12.3 million in Q1:18. There was no LIFO expense in Q1:19.
  • Excluding the LIFO expense and other adjustments, ZEUS reported adjusted net income of $2.1 million or diluted EPS of $0.18, compared to net income of $7.9 million or $0.70 per diluted share in the year ago period.
  • Management noted that the integration of the acquisition of McCullough Industries completed in January 2019 is progressing well.
  • Management anticipates a relatively steady demand environment QoQ in Q2:19 with a slight uptick in Specialty volumes while the Carbon business will be flat.

 

Primary Risk

 

  • Client concentrations remain a key risk. A loss of a key client or a failure to renew a large contract could significantly impact financial results.

 

Banco Latinoamericano (BLX)

Price Target: $33.00

Percent Upside: 60%

 

Banco Latinoamericano de Comercio Exterior, S.A., a multinational bank, primarily engages in the financing of foreign trade in Latin America and the Caribbean. The company operates through two segments, Commercial and Treasury. It offers short and medium-term bilateral, structured and syndicated credits, and loan commitments; letter of credit contingencies, such as issued and confirmed letters of credit, and stand-by letters of credit; and guarantees covering commercial risk and other assets.

 

First quarter highlights include:

 

  • Bladex reported Profits of $21.2 million for the 1Q19, a 47% YoY increase, reflecting improved total revenues (+4% YoY), a 31% reduction in operating expenses and lower provisions for credit losses.
  • The Bank’s quarterly Profits were up from $20.7 million in 4Q18, a 2% QoQ improvement, on the absence of impairment losses on non-financial assets and lower operating expenses (-20% QoQ).
  • Net Interest Income (“NII”) increased to $28.0 million (+5% YoY; relatively stable QoQ) and Margins (“NIM”) of 1.74% (+6bps YoY; +13bps QoQ), on an improvement in net lending spreads and lesser low-yielding liquidity balances QoQ.
  • Fees and Commissions income totaled $2.4 million in 1Q19 (-23% YoY; -56% QoQ). The decrease in fees and commissions reflects a seasonally slower first quarter of the year, and the uneven nature of the loan syndication business.
  • Quarterly operating expenses were $9.9 million, a decrease of 31% YoY (1Q18 expenses were impacted by non-recurring charges). Expenses were 20% lower QoQ, benefitting from a first quarter seasonal effect. The Bank’s Efficiency Ratio improved to 30.8% in 1Q19, compared to 46.6% in 1Q18 and to 36.3% in 4Q18.

 

Primary Risk

 

  • The economy in Central America remains a key concern. Factors such as currency devaluation and government legitimacy are hard to predict and can adversely affect stocks located in the region.

 

Of course, consult your financial advisor before investing. Small & Micro cap stocks are more volatile and entail high risks.

 

We will be hosting these companies on our upcoming webcall on Thursday, May 30. To register for this webcall, please click here.

 

webcall intro report

*Time Period for Singular Research’s performance is from August 31, 2004 to December 31, 2018.

 

Commentary & Strategy by:
Robert Maltbie, CFA
President - Singular Research
LinkedIn

How to play The China Syndrome

The China Syndrome was a 1979 movie thriller starring Jane Fonda that was prescient in that the Three Mile Island occurred 12 days after the movie was released. Although the movie disaster was averted, there was much stress and potential disaster; we think the corollary could be the current trade war with China.

We will present a handful of ideas to make money on the short side to hedge your portfolio during this "War" that could play out a bit longer than most expect.

Since the total amount of direct impact on GDP if U.S./ China trade went to zero would be about 1 to 2% on each economy, we believe the real risk here is overstated. We will also place our chips on the U.S. to win this battle as Trump is a very experienced negotiator and businessman and could be successful in rallying the rest of the world against China. In fact, he just held out an olive branch to Canada and Mexico to mend the fences and close the recent trade proposal, the USMCA, with both countries. The other fact that supports our belief is that China has much more to lose then the US when we ponder the trade gap and imbalance that currently exists.

Here are the trades that we feel are most exposed to this ongoing drama.

 

Apple Inc.: (AAPL)

 

aapl 1

 

One of the most exposed US companies, Apple, currently derives nearly 20% of its revenue from China and much of its expected future growth. Apple already is burdened by higher prices, potential market saturation, an ongoing trade war with China, will not help. Analysts estimate Apple earnings will decline 4% in 2019 and then rebound 11% in 2020 to nearly $13 a share. Should the trade war persist combined with these other negative elements, Apple earnings may go flat or possibly declined further. The mean Apple Wall Street estimate is $11.49 for 2019 Furthermore; it is likely that a protracted trade war with these higher-risk elements will compress the Apple PE ratio another 5-10% to the 14 to 15 area providing further downside to the $140- $150 level. Since trade war rumblings reemerged from the Trump tweet last week, Apple has declined approximately 8%. To throw more gasoline on the fire, the technical picture has turned ugly with the stock breaking down through 50-day moving average and 200-day moving averages on huge spikes in volume.

 

Nike Inc. Cl B: (NKE)

 

nke 

 

China is Nike's most important growth opportunity and revenues have been increasing 20% to 25% as of late. Although sales have held up recently, this may not persist with another 10% to 20%price markup due to the trade war. Nike may be particularly vulnerable to a sell-off since it trades at a lofty PE ratio of 33 times earnings and it's even higher PEG ratio of 5.5 times 2019 earnings growth. While Nike (NKE) has gone to great lengths to reduce its manufacturing and distribution exposure from China, it may have the greatest downside due to its high valuations. A couple of consecutive negative surprises may cause a compression in the PE multiple and a reduction in earnings growth expectations. If, hypothetically, Nike earnings were to go flat in 2019 and it traded down to its historic PE multiple, a 20% premium to the S&P 500, that would collapse Nike stock to trade at 24 x $2.40 per share earnings per share. That would render a price target of $50. From a technical perspective, should Nike close below $80.50 per share on high volume this would penetrate the 200-day moving average and show the formation of a head and shoulders top.

 

 Now we present two ETF 's that should provide a One-Stop click to diversified exposure and hedged risk from the China syndrome:

 

Direxion Daily FTSE China Bear 3X Shares (ETF): (Yang)

 

yang

 

On the possibility of a continued and even heightened global trade war versus China, YANG has jumped higher. This targeted ETF provides ample exposure with 3x leverage on the FTSE China 50 index. YANG is up over 11% since the Trump tweet.

 

Direxion Daily Emerging Markets Bear 3x Shares (ETF): (EDZ)

 

edz

 

One strategy that China utilizes to offset tariffs is to devalue their currency. Since the 10% tariffs were imposed by the U.S. , China's currency has been depreciated 8%, nearly offsetting the difference. The side effect of this currency manipulation is increased strength of the dollar which places an extra heavy burden on emerging market economies that are financed by U.S. dollars and are heavily indebted. The 3x leveraged emerging markets inverse ETF is up 14% since the Trump tweet.

 

Next report: longs that benefit from the trade war fears.

 

Commentary & Strategy by:
Robert Maltbie, CFA
President - Singular Research
LinkedIn

A Wall too Tall

As of late the concept of a wall has been a controversial item, causing great discord between political partisans, left and right. Historically, in reference to financial markets the proverbial wall of worry that a bull market faces is a unifying concept.

Our indicators are showing too many big bricks in the wall, at the moment.

This week's renewed trade strife between China and the US may have just put that wall at a level that is hard to scale for any bull.

Let's dissect some of these bricks of worry. The trade war with China is back on.

In efforts to motivate the Chinese to get back to the table with some urgency, President Trump has threatened to restart and escalate a trade war.

Threatening to increase current levels from 10% to.25 % percent on $200 billion and then to ramp that up on the remaining $300 billion of exports from China to 25% ,Trump wants attention now. As of this writing the Chinese trade team still is making its way to meet in the US later this week to discuss possible solutions.

A second ugly geopolitical brick layering was placed on the wall with the outbreak of hostilities this weekend in missile fire between Iran and Israel. With US military peacemaking assets steaming towards the Persian Gulf, a real war although remote, is now a very slight possibility. Although tensions have leveled off as a ceasefire has been called in Egypt between combatants Monday.

Now let's examine the mounting, negative internal indicators that are very disturbing.

Low volatility smacks of overconfidence, the vix indicator of volatility has reached lows not seen since last September preceding a 20% drop.

wall too tall img 1

Overly bullish sentiment. The Citigroup Market Sentiment Panic/Euphoria is again indicating euphoria. After the last buyer has bought who's left? Warren Buffett just announced that he sees Amazon (AMZN) as a value stock and therefore, is taking a large position. He has watched it go nearly up 1000 fold, from a billion to a almost trillion, before he capitulated.

wall too tall img 2

Not to be overlooked, we can mention the old standbys, high insider selling and the flat yield curve to provide more bricks.

wall too tall img 3

wall too tall img 4

Finally, in the tradition of saving the worst for last. The pipeline of IPO issuance this year could blow away the dot com. bubble levels from 1999 and 2000 by a large margin. Uber, the mother of all IPOs will be sucking a lot of the liquidity out of the market, later this week. Uber, Lyft, Palantir and Slack, Airbnb, and others could reach a combined valuation over $200 billion, with Uber the largest by far. This would make 2019 the year of the “Balloonicorm, shattering IPO issuance from the dot.com bubble with 226 companies set to launch of which there are 119 companies that would be classified as “unicorns,” or private companies with valuations over $1 billion. This could more than exceed 1999 and 2000 where just under $100 billion was issued in those years.

https://www.cnbc.com/2019/02/04/a-giant-ipo-wave-is-coming-as-unicorns-whet-investor-appetite.html

A bull market climbs the proverbial wall of worry but this looks like a great wall too high.
We like select shorts (HDGE), gold (GLD) ,Bitcoin (GBTC), as shelter from the storm.
For a free trail please visit us at : https://singularresearch.com/index.php/en/trial-offer

Commentary & Strategy by:
Robert Maltbie, CFA
President - Singular Research
LinkedIn