Summer 2015 Commentary

Dear Valued Clients and Friends,

MARKET PERSPECTIVE: If you left the planet several months ago and came back today you would get the impression that the stock market was frozen in time, with the S&P 500 only a few points higher than it was at the end of the first quarter. In that time frame, however, the indexes traded up and down to both ends of their ranges. Just when it appeared that the indexes would launch into new highs, the market abruptly reversed course and turned lower. In some cases, the market made new lows, only to trade back into the trading range.

Relative Strength Graph: Small-Caps vs. Large Caps

Small Caps Coming Back into Favor

(Chart courtesoy of StockCharts.com)

Disclaimer: Any graph presented cannot in and of itself be used as the sole determinant in making an investment decision. Graphs are historical depictions and have inherent limitations in making investment decisions and cannot predict the future results of any investment.

During this period there was no shortage of things to worry about. A possible exit of Greece from the Eurozone, the melt down in the Chinese stock market, the recurring worry that the slowdown in the world economy would ultimately drag the US economy back into a recession, not to mention the Fed’s continuous chatter about ending the era of near-zero interest rates. What does it all mean for stocks, you might ask? Not much, in my opinion. Regarding the “Grexit”, as it is called, they have once again kicked the can down the road to be dealt with later. While the Chinese stock market’s recent decline was substantial and frightening, it should not have been unexpected after the 140% gain over the previous twelve months. While its economy is not growing nearly as rapidly as it typically does coming out of a recession, it is still growing. As far as the Fed is concerned, they may actually raise rates. Personally, I think that they will, although it will likely be met with a giant yawn. One last observation is the noticeable increase in volatility associated with earnings releases. It has not been uncommon recently to have stocks move 10%, 15% or 20% in either direction after reports. This is somewhat concerning. Also of concern is the frenzy in the IPO market, with June being the most active month for IPO’s since August of 2000. All in all, the stock market will most likely remain trapped in the trading range it has been in for most of the year. The direction and magnitude of the market’s next meaningful move is anyone’s guess. Having said that, the chart above suggests an overweight in small-caps.

TECHNICAL PERSPECTIVE: From the technical perspective, many of the major stock indices made new highs recently. However, those new highs did not feature the characteristics I would associate with the beginning a substantial move higher. These characteristics include a great number of stocks making new highs in a wide variety of sectors, with significantly larger than average volume. As an example of this, when the NASDAQ 100 made a new high on July 17th, the move was driven largely by its huge 38% concentration on a handful of popular large cap tech stocks like Apple, Google, Facebook, Microsoft and Amazon. In addition, after my recent review of over 1000 chart patterns, my observation was that many stocks finished unchanged or lower for that week. This confirms that any new high should be treated as suspect. The advance decline line also failed to confirm the new highs. This is not to suggest that the market is poised to fall off a cliff, just that further consolidation or a minor correction is likely in the short term. The sentiment numbers as of late have also been mixed with the professionals, the Investors Intelligence, showing 40% bulls vs. 17.5% bears while individual investors, the American Association of Individual Investor’s Index has 22.1 % bulls vs. 40.7 % bears. It is no wonder that the stock market has remained trendless when taking all this into consideration.

SECTOR COMMENT: After a long overdue consolidation, most sectors related to healthcare industry have resumed their up trends. In fact 5 of the top 10 market sectors recently have come from this industry, lead by strength in the Biotech-Biomed group. We continue to remain nicely over weighted in this sector. The financial sector, led by the regional banks and S&L s, continues to gain ground. We are looking to add to our weightings to this emerging sector. In information technology, we prefer the software sector as the hardware group has come under pressure after a great run.

PORTFOLIO ADJUSTMENTS: Our portfolio was very active in the second quarter. We added 6 new companies to our portfolio that passed our technical and fundamental screening criteria: RingCentral, Inc. (RNG), MiMedix Group, Inc. (MDXG), Vasco Data Security Int’l, Inc. (VDSI), HealthEquity, Inc. (HQY), and Supernus Pharmaceuticals, Inc. (SUPN). We sold IGI Laboratories, Inc. (IG), Constant Contact, Inc. (CTCT), Health Insurance Innovations, Inc. (HIIQ), and Enphase Energy (ENPH) because they broke down technically, fundamentally or both. We were also happy to trim 3 positions: Akorn, Inc. (AKRX), Ambarella, Inc. (AMBA), and BioSpecifics Technologies Corp. (BSTC) because they had grown to become too large a percentage of the portflio.

HEALTH EQUITY INC. (HQY *$34.10) Health Equity, Inc. is a pure play opportunity in the secular shift toward high deductible health plans coupled with a Health Savings Account (HSA). This shift is due to rising insurance premiums, rising health care costs and the Affordable Care Act employer mandate which has led employers to shift the financial responsibility for health insurance to the employees. HQY’s secret sauce is their robust, easy to use platform which enables consumers to pay health care bills, compare treatment options and price, as well as receiving personal benefit and clinical information. This has enabled HQY to grow its top and bottom line at better than a 35% over the last couple of years and consensus estimates suggest their growth should accelerate in the coming quarters and years.

While we remain confident that the long-term trend is up, recent volatility suggests that now is not the time to throw caution to the wind. Bearing that in mind, we will be extremely diligent in plotting our next course of action.

As always, if you have any questions, comments, or concerns do not hesitate to call or email us at any time and we will get back to you promptly. Your continued confidence in Rocket Capital Management is greatly appreciated and we look forward to a long and meaningful relationship.

Sincerely,

J.D. Hurd

President / Senior Portfolio Manager

The use of the S&P 500 and the Russell 2000 Growth plus indexes is to compare the Rocket Capital Small Cap composite to a large capitalization stock index as a general market proxy and use The Russell 2000 Growth Plus as an index more comparable to the portfolio make up of the Rocket Capital Small Cap composite. All indexes and our composite are reflective of dividend reinvestment. Our composite does not represent all accounts of Rocket Capital Management, just those invested in that strategy. Past performance is not an indication of future returns. Individual investment returns may be different than the composite returns presented.

The information concerning the stocks contained herein should not be construed as a recommendation to buy or sell them in your individual investment accounts. The opinions expressed are those solely of Rocket Capital Management, LLC and are subject to change. Accounts at Rocket Capital Management, LLC may hold long or short positions of the stocks mentioned in this publication. In addition, employees, members, or other affiliates of Rocket Capital Management, LLC may hold long or short positions of the stocks mentioned in this publication, which may be inconsistent with the information contained herein. Rocket Capital Managed Accounts performance is net of management fees and transaction fees. Sources: www.horizonpharma.com. *Closing market price on 8/05/2015.