Argonaut 2000 Partners LP
The Argonaut Fund
The Argonaut Fund utilizes the equity research conducted by Singular Research in
managing the fund. The Argonaut management team has been integral to the strong equity performance at Singular Research.
Argonaut only invests in companies that Singular Research has under coverage. Singular Research has provided fundamental equity research to institutional investors since August 2004. We initially describe the Singular Research process and then the process by which a company becomes part of the Argonaut Fund.
Step 1: Singular Research Coverage
The fundamental equity research from Singular Research is different in that it focuses on un-followed and under-followed small cap and micro cap companies. Another key difference is that a significant component of an analyst’s compensation is alpha generation based and the firm does not directly engage in banking or trading activities. For many companies, Singular is the only source of in-depth fundamental equity research. The four criteria for Singular to initiate equity research on a company are
- Zero to three analysts covering the company
- There is good access to management of the company
- Stock price is undervalued relative to Singular’s fundamental forecast for the company
- There is a catalyst driving revenues and earnings that will attract investor attention
Un-covered / Under-covered Companies: At the time of initial coverage, most of the companies that Singular follows have none or perhaps one other analyst publishing research on the company. Companies with little or no coverage from Wall Street typically trade at a 25 – 30% discount due to the lack of knowledge within the investment community about the company.
Good Access to Management: When a company has minimal or no other exposure to security analysts, the Singular Research equity analysts are able to establish a good working relationship with the executive management team. Direct management access is important in gaining insight into the fundamental trends and/or changes for companies followed. This does not happen for companies where 10 or more analysts cover it, due to corporate management’s time constraints. The benefits of being one of the few analysts with access to the executive management team includes (a) insight into the nuances of a company’s performance over time, and (b) insight into subtle changes in management’s outlook. This assists in creating forecasts, establishing price targets and in the timing of when to cover the stock.
Undervalued Stock Price: A detailed financial forecast is made for each company, and fair value is assessed for the stock based on the fundamental forecasts. We use several different valuation methodologies, the most commonly used are a PE, PEG and DCF analyses. For initiation coverage, a company must be undervalued by a minimum of 30%. Fundamental forecasts for a minimum of two years are formalized and the valuation analysis is performed based on the forecast data.
Catalyst Necessary: We must identify a catalyst that can be monitored, which drives the revenue and/or earnings growth for the company. This can be a proprietary technology, a unique service, a new product, the industry cycle, or an unknown story. Catalysts are monitored and as they change the attraction for the stock may change.
Step 2: Inclusion in the Argonaut Fund
The Singular Coverage List is typically 40 – 60 companies, but the number of companies in the Argonaut Fund is 20 – 50 at this time. Equities must pass the investment committee scrutiny for inclusion in the Argonaut fund. The investment committee is made up of the three senior personnel at Singular Research. The investment committee assesses the downside risk for each position and eliminates those companies that the committee perceives as high risk. The factors used to assess risk are:
- Proprietary Macro Market Indicators
- Assessment of industry cycles
Macro Market Indicators: This is a proprietary conglomeration of many indicators to assess the overall attractiveness and risk of investing in equities. Over 50 individual indicators are utilized and organized into six categories. Each category has its own weighting to define its contribution. The categories are Liquidity, Monetary Policy, Valuation, Earnings, Market Sentiment, and Technical Analysis. When the Major Market Indicator is identifying a risky equity environment, the fund may reduce equity holdings. The net results of the Macro Market Indicator are published by Singular Research several times a year.
Industry Cycle Assessment: Industry cycles are assessed to determine whether an industry is at the early, middle, late, or bottoming stage of a typical cycle. If a company is at the late stages, the Argonaut Fund typically does not invest, and may sell a stock even though the stock still appears undervalued.
Step 3: Sell Discipline
Stocks are sold based on several different criteria
- If investment thesis becomes negated, typically by economic or industry changes or lack of company execution
- Company misses our estimate for two consecutive quarters
- Fundamental underperformance (usually associated with investment thesis negated)
- Stock price reaches target price range
The Investment Committee for the Argonaut Fund is comprised of the top three contributors to Singular Research. A brief profile of each Investment Committee member follows.
Robert Maltbie Jr., CFA
- Managing Director & Founder of Singular Research
- Chief Investment Officer for the Argonaut Fund
- V.P. Investments & Portfolio Manger at Smith Barney 1992-1999
- Frequent guest contributor to Fox Business News, CNBC, Bloomberg, Barron's & Wall Street Journal, Columnist for Forbes
Gregory P. Garner, CFA
- Director of Research for Singular Research
- Managed mid to large cap equity funds from 1987 to 2002
- Consistent top quartile performance in managing equities, with average annual alpha of 439 bps over long term
- Performance driven asset growth at Noroian Capital Management - equity AUM grew from $25 million to $260 million
- Five Star rated analyst by Star Mine
William Jones, CFA
- Senior Equity Analyst for Singular Research
- Senior VP, Valuation Research Corporation - Managed engagements for blue chip clients including Goldman Sachs, Blackstone and Prudential
- Equity Research with Dresdner Kleinwort Wasserstein and Credit Suisse
- Start-up of staffing business, DentalForce.net
Previous Research Calls
There have been several research calls made by Singular Research in the past few years that were recorded in the media. We highlight several research items to show the uniqueness of Singular Research and value added which is captured in the Argonaut Fund.
Performance During 2008 – 2009
The Argonaut Fund reduced exposure to the equity markets in 2008 and the first half of 2009 due to the extreme negative readings from the Major Market Indicators, described above in Process. This was the direct reason for strong performance in 2008 and early 2009 when the equity markets performed poorly. A return to increasing equity market exposure occurred in late Q2:10 and occurred through the remainder of 2010. For this reason, 2009 performance was slightly behind the benchmark. The total return for 2008 – 2009 was significantly greater than the benchmark. This is the normal sequence when the equity markets experience a Bear Market.
Research Calls Reported in the Media
Singular Research made several media appearances in 2007 and early 2008 which identified the high risk in the financial sector. These are noted below.
Overvalued Financials Include Citibank, Merrill Lynch, Bank of America
In Forbes, 11-14-2007
“S&P Financials will have 2007-08 earnings per share crushed flat, and more exposed components such as Merrill Lynch (nyse: MER - news - people ) and Citigroup (nyse: C - news - people ) could have book values slashed another 10% to 15% when all the subprime slime is exposed and marked to the market. If the meltdown spreads further to credit default swaps and leveraged buyout debt, Uncle Sam may have to step in with a bucket of Treasury cash to stem the tide.
“The write-downs would wipe out much of their equity, putting them in violation of Fed Tier 1 capital requirements, thus generating a significant "margin call," forcing a fire sale of assets, and reducing earnings power even more.”
Equity Research on Goldman Sachs - SELL
In Barron’s, 2-22-2008, Research publish date: 2-20-2008
“THE PRE-EMINENT FRANCHISE IN investment banking, Goldman Sachs, has yet to suffer the fate of others in the industry. We believe that industry fundamentals will weigh on Goldman Sachs. We are initiating coverage with a Sell rating and $126 12-month price target.”
Decline in Financials Not Over: Bank of America Balance Sheet Risk
In Barron’s, 12-18-2008
“We do not doubt that Bank of America will have a No.1 or No.2 market share in many segments of the industry. We do, however, question the ultimate price that the company will pay to achieve this goal. While both of its major acquisitions were thought to be at fire-sale prices, the questionable assets and leverage that came along in these deals will, in our opinion, lead to a very steep price paid for both Merrill and Countrywide.
“Ultimately, we believe that a large portion of these assets will have to be written down, and that the company's net equity position will be at significant risk.”
Stocks in the Argonaut Fund
To provide insight into individual portfolio positions, we highlight a few stocks that were in the Argonaut Fund in 2010. Three of the companies shown here performed well, and we show one that we sold due to a change in the investment thesis.
Company: Twin Disc
Date Purchased: 1-6-2010
Catalyst: O&G leading economic recovery
Company: OYO Geospace
Date Purchased: 1-6-2010
Catalyst: New innovative product
Company: National Presto Industries
Date Purchased: 8-3-2009
Date Sold: 3-1-2010
Catalyst: Defense business is stable / Housewares less susceptible to recession
The investment in APT did not progress as anticipated. The stock appeared attractive to us after declining 50% from its peak. The stock was sold when the stable component of its business changed significantly soon after we initiated a position.
Company: Alpha Pro Tech
Date Purchased: 2-24-2010
Date Sold: 3-30-2010
Buy Catalyst: New under-roofing product / Stable Disposable Protective Apparel
Sell Reason: Loss of primary distributor in Disposable Protective Apparel (change in investment thesis)
The Argonaut Fund is primarily a long only fund, but does maintain the capacity to short mid to large cap stocks it deems are significantly overvalued. Currently the Argonaut Fund has no short positions. The maximum short position is 25% of total portfolio.
The Argonaut Fund will have a mix of both growth and value stocks, but the overall portfolio characteristics describe undervalued growth. Portfolio characteristics of the Argonaut Fund are shown here. Portfolio data is calculated as a weighted average of all stocks in the portfolio.
Portfolio Characteristics – Weighted Average
Singular Research provides fundamental equity research to institutional investors, focusing on un-covered and under-covered companies in the small cap and micro cap space. Singular also identifies mid and large cap stocks that are short candidates. A team of seven analysts under the direction of Robert Maltbie and Greg Garner create the fundamental research that is distributed only to Singular clients. All of the equity analysts have a CFA, and several analysts have both a CFA and an MBA degree. Singular Research does not engage in traditional investment banking, trading, or market making activities. Singular Research is truly an independent research firm. The client list includes many large well known managers of small cap funds.
Sample Singular Client List
With a buy-side orientation, Singular Research is the only provide of research to institutions that tracks performance. Aggregate performance since inception is charted below. Performance is calculated by equal weighting all companies on the Singular List on a monthly basis and assuming a fully invested portfolio at all times. Cumulative performance from inception in August 2004 through the end of February 2011 is shown below.
Some of the top stock selections on the Singular List over the past several years are highlighted below.