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SINLetter – September 2005

Welcome to the second edition of the Suria Investment Newsletter (SINLetter), a free monthly newsletter that highlights two publicly traded companies. The objective of this newsletter is to provide you with unbiased initial research and basic facts about individual stocks so that you can then research them further before deciding to add them to your portfolio or not. For those of you who are reading this and are not already subscribed, please send an email to subscribe@sinletter.com and you will start receiving this newsletter from next month. I have provided relevant links throughout this newsletter but if you have any questions, feel free to write to me.

Both the stocks highlighted in last month’s SINLetter, Airspan Networks Inc (AIRN) and ATI Technologies (ATYT), have retracted a little providing good buying opportunities. In fact I added both these stocks to my personal portfolio in August and remain bullish on them for the long term. In the short term, I am a little bearish on the general stock market because of rising crude oil prices, a stronger than usual summer for the US stock market and the possibility of a real estate bust.

For those of you who are interested in real estate stocks, either to buy put options or to start a short position, here is a list of real estate (mostly new home builders) stocks that I am currently tracking.

Inspite of the tremendous run up that these stocks have seen in the last couple of years they still look very reasonably valued and the only one that looks overvalued is St Joe’s (JOE) with a P/E ratio of over 50. I normally discourage the use of options or short selling of stocks. However these strategies can sometimes prove to be a useful hedge for a long portfolio, especially when the bursting of a bubble looks imminent. Continuing the technology theme from the last SINLetter, I have highlighted two more technology stocks this month.

Wipro (WIT)

The Story:

Over the last two years, certain international markets have done extremely well and have provided handsome returns to investors who invested in them. International investing can be risky but is a very useful tool to increase the diversification of a portfolio and provide significant returns even when the US markets are down. The most common method of investing in international markets is by buying international mutual funds. If you prefer greater control over where your money is invested and also like the possibility of higher returns by investing in individual stocks, you can purchase certain international stocks through an ADR (American Depository Receipt). An ADR simply represents an underlying international stock and can be bought and sold through your broker like any other common US stock. Wipro is a large company based in India that specializes in information technology and BPO (Business Process Outsourcing). Wipro is the third largest IT company in India with revenues of $1.86 billion and net income of $362.5 million during its fiscal year ending March 2005. Its founder Aziz Premji still owns over 80% of the company and such strong insider holding is a very positive factor as it reduces volatility and shows management’s confidence in the company. The recent departure of its vice-chairman and president Vivek Paul has depressed the stock to a great extent in the recent past, creating a buying opportunity. With a Price/Earnings ratio of 36.37 and a Price/Sales ratio of 6.82, Wipro may seem overvalued. However Wipro has been growing at a rate of well over 30% a year for the last three years and is a highly profitable company that is likely to see sustained high growth for many years to come.

Wipro recently announced a dividend and a split (referred to as a bonus in India) of 1:1. The current price of $19.82 reflects the pre-split price and the price will soon be in the vicinity of $9 or $10 post-split. The split is already in effect in India and will be reflected in the ADR very soon. Very strong insider holding does reduce the float available for trading, but the recent split should help increase the float.

Competitors:

Wipro’s closest public competitor is Infosys (INFY) which is also based in India and is an ADR traded on the NYSE. Other competitors include Satyam Computers (SAY) and Tata Consultancy Services which is a privately held company. IBM is Wipro’s largest international competitor.

The Good:

• A strong balance sheet with over $650 million in cash and short term investments. Short term debt of only $12.9 million.
• Very high growth rate of over 30% year over year for the last three years.
• Dividend bearing company with excellent free cash flow.
• Recent drop in price provides a good opportunity to start a position in Wipro.

The Bad:

• Recent management shakeup and departure of its vice-chairman and president Vivek Paul.
• Strong competition from both domestic Indian companies and international companies.
• Diversification into non-core businesses such as lighting and other consumer products.

The Numbers:

Online Resources Corp (ORCC)

The Story:

If we went back to the stone age (read: before the internet), there is a high likelyhood that I would never send in a bill on time. Online banking and online bill pay go a long way towards saving me a lot of time each month. One of the companies that makes this possible for banks, credit unions and other financial institutions is Online Resources Corp. With a Price/Earnings ratio of 32.62 and a Price/Sales ratio of 4.50, Online Resources may also seem richly valued. Once you look at the 42.30% quarterly revenue growth and the strong balance sheet, the valuation begins to make sense. As of the quarter ending June 2005, Online Resources had $48 million in cash and no debt. This represents almost $2 per share in cash.

Apart from organic growth, Online Resources also seems to be pursuing a strategy of growth by acquisition and it recently acquired Integrated Data Systems, a company that provides financial services to credit unions, for approximately $5 million. Online Resources is a small company that only now seems to be appearing on Wall Steet’s radar inspite of recently being added to the Russell 2000 index. ORCC looks like a good buy for the long term.

Competitors:

ORCC’s closest competitor is Corillian (CORI) which is also following the aquisition strategy of Online Resources. S1 Corp (SONE) is another competitor with revenues of over 4 times the revenue of ORCC but much lower operating margins.

The Good:

• Strong balance sheet with $48 million in cash and no debt.
• Very strong quarterly revenue growth of 42.30%.
• Stable industry with low attrition rates.

The Bad:

• ORCC is a very small company that is thinly traded (average volume of less than 200,000) and hence it is suseptible to price volatility.
• The stock price could fall significantly if expectations of high growth are not met going forward.

The Numbers:

Every month we will add the two stocks that are highlighted into a model portfolio started with a cash position of $100,000 on August 2, 2005. To keep calculations simple, trading costs are not included. Prices reflect the closing price as of the last day of the previous month (August 31st, 2005 for the September 2005 newsletter).

* Pre-split price for Wipro.

Voluntary Disclosure: I currently own shares of Airspan Networks (AIRN), ATI Technologies (ATYT), Wipro (WIT) and Online Resources (ORCC).

DISCLAIMERS :

• Suria Investments, Inc. does not warrant the completeness or accuracy of the content or data provided in this newsletter.
• Suria Investments, Inc. does not comprise any solicitation to buy or sell securities.
• Suria Investments, Inc. will not be liable for any investment decision made or action taken based upon the information in this newsletter.
• We suggest you check with a broker or financial advisor before making any investment decisions.