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SINLetter – October 2005

Welcome to the third 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, you can subscribe by going to www.sinletter.com/subscribe.aspx 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. For additional resources or to view previous editions, please visit the archives section of the SINLetter website at www.sinletter.com.

As mentioned in last month’s SINLetter, real estate stocks (mostly new home builders) continued their downward trend. We identified St Joe’s (JOE) as one of the most overvalued stocks in this sector and it took one of the worst beatings falling from $75.21 to $62.45 in a month. Anyone who bought either put options or started a short position in St Joe’s probably made a tidy sum of money. I would like to reiterate once again that 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.

Three out of the four our stocks in our model portfolio are showing gains with Online Resources (ORCC) up more than 10% since we added it to our portfolio in September. I continue to hold all four stocks in my personal portfolio as well. Since our model portfolio is heavily weighted towards technology, I decided to look for stocks from other sectors to feature in this month’s SINLetter.

While screening the vast universe of stocks, I came across an interesting company called Suburban Propane (SPH) which has an impressive dividend yield of 8.3%. If you haven’t already figured out what this company does, Suburban Propane provides propane to customers in rural communities. It is currently trading at $28.69 and according to morningstar.com the fair value estimate for this stock is $37 per share. Suburban Propane sports a forward looking P/E of 14.87 and a Price/Sales ratio of just 0.56. On the surface it appears to be a no-brainer stock to add to our portfolio but digging deeper brought up a few red flags. The company is carrying over $500 million dollars in long-term debt, has very little cash on hand and is currently hurting from high energy prices as it is not able to pass all of the increased cost to its customers. The balance sheet also appears muddled to me. On the positive side, Suburban Propane has low customer attrition rates and it does not appear to be at risk of defaulting on its loans anytime soon. If the dividend yield looks very attractive to you, I would suggest doing further research on Suburban Propane before adding it to your portfolio. For right now, I will continue watching Suburban Propane without adding it to our model portfolio. Without digressing further, lets explore the two stocks I have highlighted in this edition.

Peet’s Coffee (PEET)

The Story:

Peet’s Coffee was founded in Berkeley, California in 1966 and has come a long way since then. You can buy its coffee beans from specialty stores and certain mainstream retailers or you can also try out their coffee, lattes and large assortment of over 30 kinds of teas in one of their stores. In fact I am hooked to their “Assam Golden Tip” tea and from the long lines I have observed at some of their stores, it looks like a large number of other customers are also hooked. In an industry that appears saturated and with a Starbucks on almost every block, you have to wonder how Peet’s Coffee can survive and grow. Quality and freshness along with steady, measured growth seems to be the key to Peet’s. Peet’s is currently growing at a rate of over 20% a year and had plans to open 20 new stores in 2005. If you visit their store locations page here, you will notice that apart from the West coast, they have very few stores in other regions and there is tremendous room for growth.

Peet’s Coffee has a current P/E of 42.45 and a Price/Sales ratio of 2.62. At first look it does look overvalued but given its double-digit growth, profit margins that match Starbucks and a strong balance sheet with no debt, the high P/E appears to be justified. Also the recent drop in coffee futures could bode well for Peet’s. The main risk to owning Peet’s stock is its high valuation which reflects the high expectations that Wall Street has for this company.

About three years ago when Starbucks (SBUX) was at about $25 per share, you could find a Starbucks at almost every corner. This made me wonder how much higher the stock could go as it looked like Starbucks had already exhausted its growth prospects. Starbucks then decided to go international, acquire competitors like Seattle’s Best and expand into other areas such as music. The stock has never looked back and is currently trading at $50.10 per share. I do not want to make the same mistake with Peet’s. I started tracking Peet’s at $27 a share over 4 months ago and watched it go all the way up to $36.80 in under two months. It has retracted to $30.61 now, providing a good opportunity to start a long position or to add to an existing position.

Competitors:

Peet’s closest public competitors are Starbucks (SBUX) and Diedrich Coffee Inc (DDRX). Apart from these large competitors, Peet’s also faces competition from local coffee shops and specialty coffee retailers.

The Good:

1. A strong balance sheet with $9.7 million in cash and no debt
2. A high growth rate of over 20% year-over-year.
3. With a little over 100 stores and a variety of excellent products, Peet’s still has tremendous room for growth.

The Bad:

1. Strong competition from Starbucks, Diedrich Coffee and other local coffee shops.
2. If Wall Street’s expectation of continued high growth is not met, the stock could drop precipitously.

The Numbers:

Nokia (NOK)

The Story:

Almost all of us have at some point either owned or wanted to own one of those candy bar shaped phones that Nokia is well known for. We have also seen Nokia’s market share erode to Samsung and more recently to Research In Motion (RIMM) the maker of the famous Blackberry device and Motorola (MOT) after its launch of the sleek Razr phone.

While some people consider the mobile growth story a thing of the past, recent camera phones (Samsung created a 6 megapixel camera phone a few months ago) and phones that can play MP3s has sparked growth in the segment again. But that is only half the story. There is red-hot demand for mobile phones in Africa, China and India. Nokia’s recent press release showing improved growth and margins seems to reaffirm that Nokia is benefiting from this trend. Apart from cell phones, Nokia has diversified into computer networking (among many other areas) and as mentioned in the first edition of SINLetter stands to benefit from emerging technologies like WIMAX.

Motorola recently released its Itunes enabled phone called Rokr to lukewarm response. Nokia will soon be releasing the Nokia N91 which has the capacity to store 3000 songs and also has various other applications in a very small form factor. If the N91 does not look like a winner to you, the whopping $16 billion in cash and short-term investments that Nokia has on its balance sheet combined with a dividend yield of 2.7% were compelling enough for me to start a position in Nokia for my personal portfolio. Nokia’s stock is currently almost at the same level it was three years ago while the Dow and Nasdaq have both made a good comeback in the same period. I feel that Nokia is ready to break out and could be great long-term investment.

Competitors:

Samsung continues to create amazing products and recently even surpassed Sony (SNE) in revenue (2004 revenue for Samsung was $71.6 billion when compared to Sony’s $66.6 billion). Apart from Samsung, Nokia also faces stiff competition from Palm (the makers of the Treo line of phones), Research In Motion (RIMM), Ericsson (ERICY) and Motorola (MOT). As more and more cell phones are beginning to offer music playing capabilities, sales of the popular IPods by Apple could erode and hence there is speculation that Apple Computers (AAPL) may also start making cell phones.

The Good:

1. Strong balance sheet with $16 billion in cash and less than $500 million of short-term debt.
2. Recent improvement in both sales and profit margins.
3. Diversification into emerging technologies like WIMAX.

The Bad:

1. Strong competition from Samsung, Palm, Research In Motion and Motorola.
2. Possibility of Apple (AAPL) making cell phones.

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 (September 30, 2005 for the October 2005 newsletter).

* Price and number of shares adjusted for Wipro to reflect split.

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

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.