Volatility up at Start of Q3:05 Earnings Season, but Our Research List Notches Another Gain in an Otherwise Down Market

October marked a return to our winning ways. The Singular Research List rose 0.26% in October versus a decline of 1.59% for the S&P 500. With earnings season upon us, there was more volatility in the list than we usually experience. Within the list, performance ranged from up 27% to down 25%. Since much of the volatility in the list was driven by news flow, let me start by recapping the earnings announcements.

Eleven of our companies reported in October, with five beating our expectations, and six missing. Utah Medical Group (UTMD:BUY) missed our estimate by 6.4%, but the miss was overshadowed by the news that the company won its lawsuit against the FDA. Since the specter of an unfavorable outcome had been depressing the stock, the successful conclusion helped the stock pop almost 17% for the month. Travelzoo (TZOO:SELL) came up short of our analyst's (and consensus) $0.15/share estimate which was just what we wanted to hear for a SELL-rated stock. TZOO dropped 16.1% for the month.

NVE Corporation (NVEC:SELL), another one of our SELL-rated stocks beat our estimate by a penny or 14.3%, but investors were not impressed with the reported results and sent the shares down 11.7% during the month. Image Sensing Systems (ISNS:BUY) reported results a penny less than we expected, but investors liked the future outlook for a recovery in international product sales and bid up the shares by 9%. Rimage (RIMG:BUY) reported blowout Q3:05 results, 30% ahead of our estimates, and well ahead of the $0.31/share consensus estimate, and the stock rose 8.7%. Acme United (ACU:BUY) reported results below our expectations due to higher than expected air freight costs as a result of robust customer demand, but investors were pleased with management's forward guidance and drove up the shares 2.9% for the month.

Five of the eleven companies which reported in October declined in value. Psychemedics (PMD:BUY) reported in line with our estimates, but declined 5.6% nonetheless. Our analyst believes that PMD is well positioned for a change of federal guidelines to hair and saliva drug testing as alternatives to urine drug testing. Our price target implies 67% upside. Atrion (ATRI:BUY) reported better than expected results, yet declined 6.1%. The company is showing excellent cost control, 20%+ EPS growth and trades at just 11.8x our 2006 EPS estimate of $5.20. Our price target implies 39% upside. Preformed Line Products Co. (PLPC:BUY) also beat our estimates, yet declined 7%. The company is benefiting from strong demand ($3 million in sales in Q3:05) for its utility products from the storm ravaged Gulf Coast region. Investors may be overlooking a one time gain from Q3:04 which made GAAP EPS decline 24%. Backing out the one-time gain from a year ago, Pro Forma EPS grew 9.3%. At just 11x our 2006 estimated EPS of $3.93, PLPC is 37% below our price target.

Duratek (DRTK:BUY) and NeuroMetrix (NURO:SELL) were the two worst performers of the month. DRTK missed our estimate by a wide margin. The company is struggling to replace commercial projects that are finishing. One major source of PLPC's profits, Gulf state utilities, have been a source of DRTK's woes. With hurricane damage to utility infrastructure, firms are delaying dealing with waste buildup in favor of getting power lines back up. The good news is that waste will have to be taken care of at some point, and it continues to build up not just in the U.S. but around the world. DRTK has numerous future contract opportunities with the DOE as well and we still like the name. At 11.8x our 2006 EPS estimate of $1.23, we still find the shares attractive and believe the sell-off is overdone. The company has a unique expertise in a growing market and we expect a return to growth next year. Our price target of $20 implies 38% upside for patient investors.

NeuroMetrix is a challenging company to cover. The firm just turned profitable so it is difficult to estimate the earnings potential and operating leverage inherent in the company's business model. NURO beat our estimates by 3¢ and crushed the consensus estimate which was for a loss. The company gives no guidance and analysts really have no clue about how the firm might grow. We tend to focus in on customer growth which at 40% is substantially below the 90% growth in sales. If sales growth slows to 40%, investors better look out below. Also, as the company aggressively adds new sales staff, Sales and Marketing spending may restrain EPS growth more than the market expects. Our price target implies 28% additional downside from current levels.

October was a busy month for our research list and even companies that did not report seemed to have market moving news flow. Parlux Fragrances (PARL:BUY) reported that Q2:06 results would come in lower than we had originally expected. However, even the reduced guidance implies 74% revenue growth and 70% EPS growth. Also, the firm did not change its FY:06 guidance of sales of $190 - 210 million and EPS of $2.00 - 2.20. The stock was down 21% and we believe it is a great bargain at just 11.6x FY:06 estimated EPS of $2.10/share. Our price target implies 63% upside.

Other significant movers during the quarter include Hardinge, Inc (HDNG:BUY) a classic value stock that has been steadily beating our estimates and moved up 13.7% in October. Our last note on HDNG from August highlighted the ridiculously low 2006E EPS multiple of 6.5x, and it looks like the market agreed. Our price target implies another 38% upside. Arrhythmia Research Technology, Inc. (HRT:BUY) was up 11.2% in October on no news. Our price target implies 49% upside. Maxwell Technologies Inc. (MXWL:BUY) was down 11.2% on no news. Our price target there implies 34% upside.

October was an eventful month on both the micro and macro front, but we try to stay focused on the longer term picture. Year to date our research list is up 30.5% versus the S&P 500's -0.3% return. We continue to believe these are the best ideas from the Microcap space and we will be introducing more in the coming months. We are grateful for our customer's support and will keep striving to bring you the best unbiased investment research anywhere.

Singular Research Gears up for What Promises to be an Exciting Q3:05 Earnings Season

September was the first month since October 2004 that we failed to beat the S&P 500. The Singular Research List declined 1.39% vs. the S&P 500's 0.60% increase. While we are disappointed, we'd note that the Singular Research list is up 30.1% vs. the S&P 500 which is up 1.33% year to date. Moreover, for the third quarter, our research list was up 4.7% vs. the S&P 500 up 2.8%. While we are disappointed anytime performance lags, we think many of our names are well positioned for exceptional price appreciation in the coming months.

September's underperformance was driven by both some bad news for a few of our names and some price declines on no news. First, the bad news. Duratek (DRTK:BUY) announced that revenues would be lower than expected for 2005 and the stock declined 12.8% in September. Specifically, the company announced that it now expects revenues for full year 2005 to be in the range of $280 - 286 million due to a lower than expected contribution from the Commercial Services subsidiary, a lengthening sales cycle for federal work, and lack of international projects. We view the selloff as overdone and would point out that DRTK trades at just 13x 2004 and 2005E EPS. Today, the company announced a new strategic partnership with TriVis, Inc. to provide services for commercial spent nuclear fuel dry storage to the U.S. nuclear utilities marketplace, a new $100 million opportunity. We'd also note that the stock is already up almost 14% from the low on the date the company announced its new outlook. Our price target implies 31% additional upside from current levels.

Amrep (AXR:BUY) reported lower than expected Q1:06 results and the stock declined 9.3% in September. Our analyst lowered his estimates and price target, but maintained his BUY rating. Revenues from the company's' Kable fulfillment services subsidiary continue to be soft as earlier expected customer losses materialize. Real estate revenues were also light for the quarter although these are notoriously lumpy and difficult to predict. Largely lost in the bad news, was the announcement of a one-time gain of $3.6 million or $0.54/share which will be paid out to shareholders as a dividend. Our price target implies 38% upside for AXR.

Acme United (ACU:BUY) declined 17.8% on no significant news. The company did announce that this quarter would include a non-recurring charge of $1.7 million, but the stock had already declined 15.6% before the announcement. The share price decline is baffling to us and the only reasonable expectation is that some shareholders are taking profits in a stock which is up 48% in the last year even after the recent price decline. This is an excellent buying opportunity for a small growth stock which we expect will report strong back to school results for the third quarter. ACU has grown earnings by 178%, yet trades at just 12.4x our 2005E EPS and 10.2x our 2006E EPS and our price target implies 97% upside.

On the plus side, two of our names put in double digit price increases. Credo Petroleum (CRED:BUY) increased 33.8% in September. This has been a great time to own any stock with the word "petroleum" in its name and Credo is no exception. Credo's sales were up 50% last quarter and EPS was up 70%. Our analyst raised his estimates and price target. The new price target implies a further 29% upside. Rimage (RIMG:BUY) was up 10.5% in September. While the stock was up on no news, we continue to believe the story is very compelling. RIMG is up 33.5% since we launched on it in late June and our price target implies an additional 20.8% upside.

We added three new recommendations in September, two long and one short. Utah Medical Devices (UTMD:BUY) is in the midst of litigation with the FDA which our analyst believes in undeservedly depressing the stock price. She expects a favorable resolution to the litigation and a return to more normal multiples for this small profitable medical devices company. UTMD trades at just 13.8x our 2005E EPS and our price target implies an additional 20% upside. Excel Maritime Carriers (EXM:BUY) is a dry goods bulk shipper and, as such, is a great play on global demand for such commodities as iron ore, coal and wheat. Demand from developing nations in the Far East such as China and India looks set to drive shipping rates upward. In our opinion, EXM is well positioned to profit from the relative shortage of large cargo vessels. EXM trades at just 4.2x our 2005E EPS and 3.6x our 2006E EPS and our price target implies 37% upside.

Lastly, NeuroMetrix (NURO:SELL) designs and manufactures equipment to replace traditional nerve conduction studies for patients with suspected neuropathies. The company is unprofitable, although we expect that to change, and ttm sales are just $25 million. While we expect the company to have a large measure of future success, revenue growth far exceeds customer growth and we believe that investors will ultimately be disappointed. The company is priced for perfection at 630x our 2005E EPS, 54x our 2006E EPS, 14x revenues, and 11x book value. We'd note that our estimates are far more aggressive than other analysts who cover the stock, and our long-term assumptions include sustained (over seven years) 43% return on capital, a feat few companies in history have achieved. Even with these heroic assumptions, our price target is just $17, 46% below current levels. In addition to the aforementioned Acme United, other names on our list with large expected price appreciation include Arrhythmia Research Technology, Inc. (HRT:BUY) 86.5% room to target and Span-America Medical Systems (SPAN:BUY) 85.4% room to target.

We continue to believe that the current financial landscape is one of low returns. In such an environment, passive index investing is the equivalent of accepting sub par returns and accepting higher savings rates in order for investors to reach their goals. This is a stock picker's market, and no where is that more true than in the vast uncovered Microcap space. Our analysts will continue to pour over the thousands of companies that deserve to be priced cheaply and find the overlooked nuggets that show genuine promise. We are excited for Q3:05 earnings season as we expect strong results from our companies as a group, and encourage our customers to check back frequently with our website for expected earnings dates and conference call information. As always, we are grateful to our customers without whom none of this would be possible.

August Marks the 10th Month in a Row of Singular Research Beating the S&P 500

August marked another month of outperformance for the Singular Research List, up 0.71% while the S&P 500 declined 1.08%. Seven of our companies reported earnings during August and results are summarized below.

Overall, we are pleased with the earnings results. Misses were small and positive surprises more numerous and larger. August was a difficult month for the markets and it should come as no surprise that our best stock in August was one of our SELL recommendations, TZOO down 23.3%. This is the stock which keeps on giving as it is now down 75.4% since we recommended investors short the name. As we can only get 100% on our short calls, this is about as good as we can expect. Nonetheless, our analyst has lowered his price target on TZOO to $14 from $23 representing 40% downside from current levels. Our short call on NVEC also did well, up 11.5% for the month.

Of our long calls, only CRED was up more than 10%. This is one of three new stocks we added to the research list in August and I will get to them in a minute. Finally on the downside, we had three significant disappointments. ATRI was down 17.9% on the heels of a weaker than expected earnings report at the end of July. We feel the sell off is overdone and this represents an attractive entry point on the stock. Our price target of $85 represents 30% potential upside, and we'd note that ATRI is still up 38.5% from where we recommended investors buy it.

DRTK was down 15.8% for the month also on weaker than expected earnings reported at the end of July. The company now trades at just 11.3x our 2006 EPS estimate of $1.86. Just yesterday, the company announced a new $16 million contract to cleanup a nuclear power plant in Wisconsin. HRT was our last double digit decliner down 14.1% in August. While we were disappointed that the company missed our estimates right out of the box (we initiated with a BUY August 12th). Our analyst believes HRT can generate mid teens type sales and earnings growth and his price target of $19 implies 68% upside from its current price.

Arrhythmia Research Technology, Inc. (AMEX:HRT) was one of three new stocks Singular Research launched coverage on in August. The other two were Credo Petroleum Corp. (NASDAQ:CRED) and Psychemedics Corp. (AMEX:PMD). HRT engages in the licensing of medical software to detect and aid in the treatment of potentially lethal arrhythmias. The company manufactures and distributes conductive resin sensors, and metal snap fasteners used in disposable electrodes for diagnostic and monitoring instruments. CRED is an independent oil and gas exploration and development company. The company has two business lines: one locates and drills new oil and gas wells; and one uses its patented Calliope Gas Recovery System to extract the hard to reach remnants of older wells. Finally, PMD provides testing services for the detection of abused substances through the analysis of hair samples. The Company's patented technology provides quantitative and historical data, which can show a pattern of individual drug use over time.

In a down market such as August was, it helps to have stocks which pay dividends. Many investors are initially startled to learn that so many microcaps pay dividends. Dividends can provide a floor under a stock in down markets as Merck investors are unfortunately learning in larger caps names. Below is the list of our companies which pay a dividend. It's important to remember that many of these names as well as our other names have significant share buyback programs as well.

Year to date, the Singular Research list is up 32%, versus 0.7% for the S&P 500. We continue to feel that the broad market will face difficulties closing the year with more than mid-single digit type gains. As a result, security selection will be more important than ever for those investors looking to outperform. We believe few areas of the market offer a better return to traditional fundamental research than the Microcap area does. Finally, in closing we welcome clients to join our Bi-Weekly Monday morning call during we which we discuss our latest research, performance, the economy, and market trends. Additionally, we occasionally invite management teams from our covered companies to discuss their companies for our investors. We hope to see you there.

Mixed Bag on Earnings Results, but Singular Research List Notches Another Month of Outperformance

July marked another month of outperformance for the Singular Research List, despite the strongest month for the S&P 500 this year. Eleven of our companies reported earnings during July, and I would like to briefly recap some of those results.

In general, we would rather have companies exceed our expectations than miss our estimates, but as many investors know, it is what is coming in the future that drives today’s price action. RIMG offers a case in point. Although the company missed our analyst’s earnings estimate, the company announced a large order from Wal-Mart. Our analyst ended up raising his 2005 estimates despite the miss. The stock rallied sharply up 18.4% for the month, and was our best performer for July. On the other hand, IRIS beat our estimate by 50% turning in what we thought was a great quarter, but perhaps because management only maintained its prior guidance rather than raising it, the stock sold off 10% and was one of our worst performers for July. We continue to like IRIS, and with sales up 51%, margins expanding dramatically, and EPS up 196%, what’s not to like?

ISNS reported our worst miss of the month as problems at the firm’s Asian subsidiary that investors had expected to be resolved last quarter lingered on. Following the usual pattern, the stock price declined 10.7% for July, and was our worst performer. We continue to like ISNS, and believe that once the current problems get resolved investors will be surprised at just how profitable this little firm is. As it stands, in the midst of its current troubles, ISNS has 91% gross margins, 36% operating margins, and a 22% Return on Equity. Not bad for a company which is struggling.

For the month, the Singular Research List returned 5.43% vs. 3.33% for the S&P 500. We have quite a streak going since the last time we failed to beat the S&P 500 on a monthly basis was last October. This month we had five stocks return double digit performances. Besides, RIMG mentioned above, HAMP returned 15% perhaps in response to passage of CAFTA which may give the firm more sourcing flexibility. PARL returned 14.8% as the company announced it is putting itself up for sale. A buyer would be lucky to get this firm at current prices as PARL trades at just 13x forward earnings, despite growing EPS at better than 60% last year. MXWL was up 13.3% in July as the company was selected by Orbital Sciences for NASA's 'Glory' Earth Sciences Satellite Mission. Finally, SPAN, our newest company, was up 10.5% for the month, as investors reacted to the long awaited news that the company was launching its Secure I.V. Catheter product this quarter.

While SPAN was our only new stock for July, we did drop a couple stocks from our list after our analysts downgraded them. CBUK was dropped after the company reported weaker than expected Q4:05 results stemming from the company’s golf and corporate channels. The stock was up 7% from our November launch price when we downgraded it. We also downgraded UG after receiving a disappointing update on the firm’s new product development initiatives. Our analyst felt that with the stock up 26% and future prospects iffy at best, money was better put to work elsewhere.

On the macro front, July was an interesting month. GDP came in at an impressive 3.4% for Q2. CAFTA passed. The federal budget deficit shrank $90 billion unexpectedly as tax revenues surged. Despite being larded up with $14 billion in tax cuts for “struggling” oil and gas companies, Congress finally passed an energy bill. Inflation remains restrained. The Fed continues to raise short-term rates, but looks close to being done. Long-term interest rates remain surprisingly low. Corporate earnings, at least for S&P 500 companies have come in much better than expected with three quarters of firms beating expectations. All signs point to a robust economy ahead, and that bodes well for our companies as well.

Year to date, the Singular Research list is up 31% versus an S&P just barely in positive territory at 1.8%. We continue to think the major averages will face headwinds through year-end despite strong earnings as valuations remain historically high. This is truly a stock picker’s market. Finally, I would like to thank our clients, without whom none of this would be possible. We will continue to strive to bring you the best ideas from the brightest minds untarnished by institutional conflicts of interest.

Singular Research List Reports Best Month Yet in 2005, up 6.59%

Sell in May and Go Away? That old saw certainly did not apply to our research list this past month. Investors who sold the stocks on our research list (or covered shorts) would be sorry indeed. June was another extraordinarily good month for our research list companies. We had eight stocks increase by double digit percentages, with only one declining by a similar amount. So let's get right to it.

The biggest winner this month was our Sell rated NVEC which dropped 22%. This is especially gratifying in light of last's month's big increase. Our analyst, however, held to his guns maintaining that the May run up was based solely on hype and rumor and was unjustified by the fundamentals. June seems to have borne that out and NVEC is now within 10% of his target price. Since we launched with a "Sell" rating on NVEC last October, it has declined over 50%.

PLPC was up just over 20% for June on the heels of strong earnings for Q1:05. Sales were up 28%, and EPS was up an impressive 151%. AXR also had a good month moving up 18.6% and was recently included in Fortune Magazine's list of America's 100 Fastest Growing Small Companies (in fact, four of our companies made this prestigious list). MXWL, which we just initiated on earlier in the month, is already up 15.8%. We knew this was a turnaround story and were pleasantly surprised to see the market agree with our opinion so quickly.

Other notable movers included ATRI up 14.3% in June. The company beat our analyst's expectations for Q1:05 and he raised both his estimates and price target. Earnings are growing at almost 80%. HANS put in yet another great month, up 13.7%. Since we launched on HANS last October, the stock is up 239%, but our price target implies another 18% upside. Impressive as this rise in the stock price is, it is still less than earnings which are growing at 286%. ACU rose another 10.8% in June bring its total return from initiation to 112%. EPS was up 55% in the most recent quarter. PARL rounds out the list of double digit advancers for June up 10.8%. But will the company's newest fragrance from tennis phenom Sharapova suffer due to her semi-final loss at Wimbledon? Only time will tell.

HDNG was the sole double digit decliner dropping 11.2%, perhaps as a result of the CFO leaving to join another firm. But with EPS growing at greater than 30%, the company priced at just 10.7x our FY:05 EPS estimate, and 42% upside implied by our price target, we doubt it will stay down for long.

One last note. During the month, we downgraded AE from BUY to HOLD and dropped the stock from our research list at month end. Our analyst felt that the stock was both fully valued and that the outlook for the future was diminished with 2H:05 results likely to disappoint. Since we launched last year with a BUY rating until we downgraded, AE was up 22% handily beating any equity index benchmark.

Singular Research List Reports Seventh Consecutive month of outperforming the S&P 500

One of the most noteworthy aspects of the current market and U.S. economy is the flattening of the yield curve. Despite an unrelenting campaign by the federal reserve to raise overnight rates, long term rates have not moved up but instead have more down. Rarely have investors been offered so little extra yield for tying up their money for longer periods of time. Three month T-Bills yield 3%, and 10 year Treasury Bonds yield just 3.92%. Market participants have different takes on this situation. On the one hand are those who remember from their training somewhere that a flat yield curve indicates slowing future economic growth and perhaps a recession on the horizon. While historically, this has been a decent forward looking indicator, I side with the other camp.

This camp believes that there are unique forces driving down long term interest rates in the U.S. The obvious force is the increasing reserves of U.S. government bonds being held by such foreign central banks as China and Japan. Indeed, this is usually framed as foreigners lending us the money to splurge on what we could not otherwise afford, and is told as a cautionary tale. In my opinion, however, this is a symptom of deeper economic forces at work. Why are foreign central banks buying up our national debt? The answer is they have excess dollars (foreign reserves) that need to be put to work, and stuffing it in the mattress doesn't cut it. Why do they have excess dollars? The short answer is they sell more goods and services to us than we do to them, in other words, they run a trade surplus with us.

And now we get at the nub of the problem. Why do they run a trade surplus with us? Is it because the Chinese peg their currency to the dollar? Is it because of trade barriers? While these may have some impact, the evidence leads me to believe that differing savings rates are the main culprit. Put simply, either Japanese and Chinese citizens save too much and do not spend enough or Americans spend too much and do not save enough. This savings imbalance is unleashing a flood of money looking for investments, and few places are as attractive as the Untied States with its better than average growth prospects, strong credit worthiness, clear rule of law, and protections for minority shareholders.

The decline in interest rates in the U.S. in the face of rising short-term rates is directly related to this flood of savings. Evidence from the TIPS market indicates it is not an inflation/deflation issue as real long term interest rates are falling both here and aboard. So what implications does this have for the U.S. equity market? First, while multiples are historically high, they should be high in an environment where interest rates are at 40 year lows. In a world of 4% risk-free rates, low beta firms will have single digit costs of capital.

Simple math tells us that the risk of rising interest rates outweigh the potential gains from rates falling even further. Nonetheless, until foreigners learn to spend more and save less, and as long as foreign economies are burdened by massive social welfare states which retard their growth relative to the U.S., there will be continued and sustained downward pressure on long-term U.S. interest rates. In such an environment, I believe that stocks will tread water and return mid single digit type performance. In other words, stock price appreciation will come from earnings growth not multiple expansion.

Which brings us back to the Singular Research List. Our companies have performed remarkably well over the last year, but in many cases the price appreciation was simply in line with growth in earnings per share. The following graph illustrates this point.

Few things in the stock market are certain, but the notion that stock prices eventually will follow earnings growth is about as close as we can come.

As the market mood switched from fear to greed in May, the most speculative stocks outperformed. Our research list was impacted by this development, specifically our two short calls NVEC, and TZOO. NVEC was up a startling 66.4% on no news. TZOO was up 19%, also on no news. We continue to recommend short positions in each of these names. Despite this setback, several of our long calls put in excellent monthly performances led by PARL up 48.3% on assumption of coverage by a competitor, ATRI up 37%, HANS up 31.5% and IRIS up 30%. For the month, the Singular Research List was up 4.18% versus the S&P 500's 2.91% performance, an outperformance of 127 bps. Year to Date, our research list has outperformed the S&P 500 by 19.2%

Singular Research List is 17% ahead of the S&P 500 Through April

April was the strongest month yet for the Singular Research List. While the S&P 500 declined 2.96% , our stocks returned a positive 5.15%, for 8.11% outperformance. Not surprisingly in a down market like April, our two short positions helped power our results, but the magnitude of the moves caught even us by surprise. Travelzoo (TZOO:SELL) declined 44.3%, leaving it much closer to our $23 price target. Given that even our $23 price target assumes very aggressive growth assumptions, there may well be room to move down to the single digit midget range on this one. NVE Corp (NVEC:SELL) was another great short call this month, declining right through our already lowered price target of $14 and returning 36.9% performance for April. Our analyst, Sean O'Neill, is evaluating his ratings and price target in light of the company's recent Q1:05 earnings report. Great call Sean!

But even in this down market, many of our long positions held up strikingly well. Iris International (IRIS:BUY) returned 30.8% in April driving by phenomenal Q4:04, and Q1:05 results, raised guidance and an initiation by one of our competitors. IRIS is now up 124% from where we initiated on it last year. A newcomer to the list added just this month, Duratek Inc. (DRTK:BUY) returned 20.9% on better than expected earnings and strong growth prospects. Finally, Acme United (ACU:BUY) continued to show impressive price gains, up 13.3% for April on strong earnings reports, and a more aggressive stock buyback program. Acme has been in our list for some time and has returned 78% since initiation last year.

As always, there were some disappointments, Parlux Fragrances (PARL:BUY) declined 22.2%, as momentum players abandoned the stock after its huge run up from last year through March of this year. Nothing fundamentally has changed with the firm, and we would view the recent pullback as an excellent buying opportunity. Our price target implies 95% upside. Since we initiated on PARL last year, our recommendation is up 103%. Adams Resources and Energy (AE:BUY) also declined sharply down 22.1% in April. Our $30 price target implies 85% upside on AE.

As we have stated from the beginning, we expect the major indices to return mid single digit type performances on average over the next couple of years as valuations, in many cases, are stretched. In this type of environment, we expect the market to move sideways, much as it has. Investors are leering from one fear to the next. Is inflation the problem? Is it stagnant economic growth? High oil prices? Declining dollar? Trade deficit? Budget Deficit? The bigger issue is a world awash in savings that is driving real interest rates down and raising the value of every asset class. Real interest rates in the U.S. as indicated by the TIPS market hover around 2% down from 4% in recent years. Overseas, real yields are similar. Eventually, this pool of savings looking for more places to invest will work its way down to the venture capital and private equity markets spurring new business creation. Signs abound already, in fact, that this is happening. In a market such as this one, successful stock picking will be more valuable than ever. The small cap market remains one of the areas where the return to diligent research is the highest, and we are delighted to discover these great companies before they hit the radar screens of larger firms. Year to date, our research list has beaten the S&P 500 by 17%. We hope to continue this streak through the balance of the year.

Subscribers will find much more inside. Why not sign up for a free one month trial? If you believe as we do, that most asset classes are overvalued, and we're in for mid single digit type returns on the major US indices, then successful stock picking will become even more crucial for market beating returns. Let us help you to a prosperous 2005. Happy trading.

About March 2005 Performance

"Don't fight the Fed" - Unknown

"Rule number one of investing is never lose money. Rule number two is never forget rule number 1" - Warren Buffet.

These two quotes come to mind as we wrap up March and the first quarter. First, it has long been sage advice that trying to make money in stocks as the Fed is in a tightening cycle is difficult, and recent results bear this out. While the Fed only controls short-term rates, normally we expect long-term rates to follow. That they have not up until recently, has been quite an anomaly. Since hitting a near term low of around 4% in early February, the 10 Year treasury is now up 50 bps.

As yields on bonds become more attractive, we would expect funds to shift out of stocks and into bonds. Indeed, the first quarter ends with the S&P declining 2.6%. Moreover, higher interest rates tend to hit the more speculative stocks, whose prospective cash flows are farther in the future, even harder. For example, the NASDAQ is down 8.1% for the first quarter.

For this reason, we think our picks are exceptionally well positioned for relative outperformance in the 2nd quarter. We tend to recommend stocks with positive and growing free cash flow and low valuations. This is where the second quote comes to mind. In an environment where stocks are likely to decline, we want companies that have a margin of error built into their valuations. Our rigorous focus on fundamental intrinsic value has helped us avoid losing money even as the indices have declined. Indeed, our list of stocks put in yet another month of outperformance in March beating the S&P 500 by 1.9%. For the first quarter, our recommended list is up 5.2% versus the S&P500's 1.9% decline, for a 7.24% alpha.

For a change this month, rather than talk about which stocks helped our hurt our performance, I'd like to highlight a few of those stocks with the most room to our analyst's price targets. Acme United (ACU:BUY) remains one of our favorite picks. After a spectacular run for most of lat year through early March, the stock has given back some of its recent gains, on no news, down 20% in March. It currently sits 80% below our $25 price target. This is a great opportunity to build a position.

United Guardian (UG:BUY) is another stock we'd highlight, sitting 60% below our $12 price target. While the company did report disappointing earnings, it has been aggressively returning cash to shareholders, first in a special dividend of $0.25/share last September, and more recently, hiking its regular dividend 20%.UG trades at just 12.3x our forward estimates.

Finally, Travelzoo (TZOO:SELL) remains one of our top short ideas. Despite having declined 42% from our initial short call at $94, we still believe the stock remains hugely overvalued. Our $23 price target implies an additional 58% decline from current prices and the recent jump in the shares, most likely on other's short covering, provides a great entry point. TZOO is a classic case of the kind of stock which should be hurt the most in a rising interest rate environment.

Subscribers will find much more inside. Why not sign up for a free one month trial? If you believe as we do, that most asset classes are overvalued, and we're in for mid single digit type returns on the major US indices, then successful stock picking will become even more crucial for market beating returns. Let us help you to a prosperous 2005. Happy trading.