July was a Volatile Month with Some Great Companies Now on Sale
July was another volatile month, and a difficult one for our small growth names. Our research list underperformed the S&P 500 by 3%. The Singular Research list was down 2.5% Vs. the S&P 500 return of 0.5%. Year to date, our research list is up 14.2% Vs. the S&P 500’s 2.3%. As 2nd quarter earnings come out, so far we have mostly been pleased with results from our companies. While the bulk of earnings will come in August, of those companies which reported in July, eight beat our analysts’ estimates, one tied, and three came up short. However, while our companies beat by an average of 6.2%, the stocks rose by an average of just 0.3%.
As mentioned above, July was a very volatile month with twelve of our stocks moving by double digits. Our top gainer was Rimage (RIMG:BUY) up 19.2% on the month. Rimage has become very adept at lowering expectations and then beating those lowered expectations. The company had guided to a range of $0.18 – 0.23, and reported $0.33, well ahead of our estimate of $0.24. Sales of producer units to large retail chains like Wal-Mart continue to hold out the promise of significant gains in future quarters. In the meantime, consumables revenue (up 23% in Q2:06) is driving top line growth.
Our second biggest gainer was Span-America Medical Systems (SPAN:BUY) up 14.4% in July after reporting earnings results that beat our estimates by a wide margin. SPAN reported EPS of $0.26 vs. our $0.16 estimate, a 63% upside surprise. While custom product sales continue to struggle, high margin medical sales grew almost 40%, and expenses were well managed leading to a doubling of the company’s operating margin and 72% profit growth. At just 11x our 2007 EPS estimate of $1.11, we believe the stock has plenty more room to run.
The last two biggest gainers were both short calls, not surprising given how growth stocks struggled in July. Our short call on XM Satellite radio (XMSR:HOLD) returned 13.5% last month as the company missed expectations and lowered guidance again. At this point, our analyst felt the risks of a buyout outweighed the potential for a further stock price decline and we upgraded XMSR to HOLD from SELL. Since we launched on XMSR last December, the stock has returned 59.1%. Baidu.com, Inc. (BIDU:SELL) returned 13.1% in July as it reported lower than expected results. We had forecasted EPS of $0.25 and EPS came in at $0.21. Our thesis was that BIDU was priced for perfection, and so far, we have been right.
On the down side, the biggest loser was On Track Innovations Ltd. (OTIV:BUY) down 16.8%. While the company has reported some new customer wins, it was rejected in its bid to supply new US passports utilizing its technology. The company intends to appeal the decision. Nonetheless, investors are waiting for concrete proof that this technology can translate into profits at some point. This decision provides just the opposite. The company does itself no favors by its poor investor relations effort. However, we continue to believe that the ultimate market opportunity for OTIV is too big to ignore, and we expect profitability in 2007 and movement towards profitability in 2H:06. Our price target implies 85% upside.
NVE Corp. (NVEC:HOLD) returned -15.8% in July as the company reported much better than expected results from its core business. While our thesis that MRAM was not a near term commercial opportunity turned out to be correct, we underestimated the improvement in the company’s core business. Our analyst upgraded NVEC from SELL to HOLD. Since our initiation last October, NVEC returned 53.1% for our subscribers.
The next largest decliner was Acacia Research (ACTG:BUY), down 14.2% last month. This is baffling considering the stellar performance the company reported for Q2:06. Not only did revenue rise 436%, but the company reported its first quarter of GAAP profitability, $0.04 Vs our breakeven estimate. The drop in ACTG is inexplicable in light of its fundamentals and can only be explained by its low visibility and small cap tech profile. This is a great buying opportunity for a first rate business that is temporarily on sale. The stock is already up 71.4% since we launched on it last December and our price target implies an additional 41% upside.
Excel Maritime (EXM:BUY) shares fell 13.1% in July as the market did not like the continuing earnings decline the company reported yet again. While the company reported better than expected revenue, earnings missed our estimate by a penny. Nonetheless, we see the selloff as an overreaction. Shipping rates are firming and vessel prices are rising. Our price target implies 33.5% upside. Miller Industries (MLR:BUY) declined 10.9% last month on no news. The company is now priced at just 9.1x our 2006 EPS estimate of $1.98. This seems awfully cheap for a company with a dominant and defensible position in its niche, 156% earnings growth last year and 22% earnings growth projected for 2006.
American Software (AMSWA:BUY) was also caught up in the small cap tech selloff, dropping 10.7%. One of the attributes we especially liked about AMSWA was its generous dividend which should provide some downside protection. The dividend yield now stands at 4.8%, which should attract both value and growth investors to this name. The company has an impressive customer list and is in a consolidating industry. Our price target implies 66.7% upside.
Premier Exhibitions (PRXI:BUY) shares fell 10.6% despite beating our earnings estimates. Premier is poised for significant long term growth which is already in evidence. Revenues grew 130% and earnings were up 76.3% last quarter. Attendance at the company’s “Bodies” exhibitions is far surpassing expectations and is growing. The company’s operating leverage will only improve once its agreement with Jam productions ends and it begins to recognize all of the revenue from its shows. This is a great name on sale and we don’t expect it to stay here long as investors come to better understand the story. Hardinge (HDNG:BUY) was our last double digit decliner down 10.2% on no news. Its earnings call is scheduled for August 9th and we are looking for 10% sales growth and 27% earnings growth, yet the stock trades at just 9.7x our 2006 EPS estimate of $1.38. HDNG is a great name for value investors to take a look at. Our price target implies 51% upside.
While we are never pleased with any month where we failed to beat our benchmark, out of 24 months this marks just our 5th month of underperformance, a remarkably consistent record. Moreover, we are heartened by the fact that in many cases, we see no good reason for our stocks to be down, other than general market currents. 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 24%, yet trade at just a median PE of just 15x. 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 58% 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.