SINLetter – December 2005
Welcome to the fifth 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 or comments, feel free to write to me.
The SINLetter portfolio is up 9.81% since its inception less than 4 months ago with a cash position of $100,000. This compares with a gain of 1.14% for the Dow Jones Industrial Average, 0.72% for the Nasdaq and 0.43% for the S&P 500 over the same time period. While I expected every single stock in our model portfolio to do well, I am surprised to see every stock in the green as of market close on November 30, 2005. It looks like Wall Street’s fear about flash memory replacing hard drives in consumer devices like the iPod has subsided a little. The hard drive maker, Seagate Technologies (STX) which was featured in last month’s SINLetter is showing impressive gains of 30.57%. Another big gainer, ATI Technologies (ATYT), appreciated 25.36% thanks to the release of its latest high-end graphics processor X1800 XT (referred to by the folks at ATI as the fastest graphics processor on the planet). The much awaited launch of the Microsoft (MSFT) gaming console XBOX 360 which uses an ATI graphics chip also helped prop by the price of ATI.
In the past, we have featured Wipro (WIT), an ADR (American Depository Receipt) of an Indian technology company and in this edition we are going to feature Tata Motors (TTM), another ADR of an Indian company. If you are interested in researching other ADRs of Indian companies, here is a list to help you get started.
|Dr Reddy’s Labs Ltd||RDY||$21.18||196.18|
|HDFC Bank Ltd||HDB||$49.59||31.37|
|ICICI Bank Ltd||IBN||$25.47||-|
|Infosys Technologies Ltd||INFY||$72.06||82.07|
|Mahanagar Telecom Nigam Ltd||MTE||$6.25||16.95|
|Satyam Computer Services Ltd||SAY||$35.24||33.12|
|Videsh Sanchar Nigam Ltd (VSNL)||VSL||$15.61||41.36|
** P/E represents trailing P/E obtained from Ameritrade as Yahoo Finance is currently not displaying P/E information for a majority of these ADRs.
A silicon valley based investment partnership called Infinity Capital Ventures decided to buy Satyam Computer’s (SAY) 31.61% stake in Sify (SIFY) for $5.60 per share recently and the stock appreciated almost 40% in less than two weeks. When I look at Rediff.com (REDF) it reminds me very much of Yahoo (YHOO). While Rediff.com does look very richly valued, there still appears to be potential upside to this stock as more and more of India’s population comes online and becomes comfortable with E-Commerce. VSNL (VSL) and Sify (SIFY) are internet service providers and are in some sense similar to AOL and Comcast. After following VSNL since 2003, I missed an opportunity to start a position in VSNL a little over a year ago when the stock was trading at about $7 and sported a low P/E. It now trades for $15.61 and sports a P/E of 41.36. Dr Reddy’s (RDY) is a generic drug manufacturer and while it has shown some recent gains, a friend who works in the Biotech industry suggested staying away from Dr Reddy’s.
Given the high exposure to technology stocks in the SINLetter model portfolio, I have decided to continue diversifying the model portfolio by adding another international stock and a domestic weight management company.
Tata Motors (TTM)
Tata Motors is a company that belongs to the large Tata conglomerate which has a piece of almost every pie in India. Tata Motors originally built large trucks and buses in India before branching out into making cars in the 1990s. Tata Motors has been very successful in this endeavor and now ranks as the second largest car manufacturer behind Maruti Udyog (a joint venture between the government of India and Suzuki Motors). Its strong lineup of cars currently caters to the middle-class, luxury and commercial markets. A large number of factors have come together to make Tata Motors an interesting investment for the long term.
- Thanks to a burgeoning economy, India now has one of the fastest growing middle-classes. Tata Motors existing models Indica and Indigo specifically target this market.
- India is one of the youngest nations in the world with two thirds of the population below the age of 35.
- The present government is attempting to improve India’s infrastructure and new highways are being built to connect the largest metropolitan areas.
These factors have combined to make the whole auto sector a high-growth area in India with almost 30% growth in the passenger car segment. This explains why Ford Motors (F), General Motors (GM), Toyota Motors (TM), Honda Motors (HMC) and Hyundai have entered the Indian market over the last decade. What makes Tata Motors stand out amongst this group is its current research to build a people’s car for 100,000 Rupees. This translates to roughly $2,200 and is a vision very similar to Henry Ford’s vision of the Model T almost a century ago. Tata Motors is currently testing this car for safety as the car is made of non-conventional materials to keep costs low.
Revenue for 2004-2005 came in at $4.548 billion for Tata Motors and net income came in at $304 million. With operating income of $430.8 million, the operating margin works out to 9.4% which is quite impressive for an automaker.
The primary competitors of Tata Motors are Ashok Leyland in the commercial heavy vehicle segment and Maruti Udyog in the passenger car segment. Hyundai is also a strong competitor in the passenger car segment. Volvo has been increasing its investment in the automotive sector in India and so have a wide range of other international companies from Europe and America.
- Attractive current valuation with a P/E of 21.66 for a company that is experiencing high double-digit growth.
- A strong balance sheet with $1.5 billion in cash and long-term investments versus $653 million in short-term and long-term debt.
- Tata Motors has been increasing exports and reported a jump of 121% in exports during the quarter that ended on September 30, 2005 when compared to last year.
- Ford, Toyota and Honda are steadily gaining market share in the luxury passenger car segment as they continue to develop cars that are suitable for the Indian market.
- The research and development of the inexpensive “peoples car” could impact profit margins for many years to come. It is an admirable vision but remains a risky endeavor.
|P/E||21.66||Long Term Debt||$587.6 Million|
Medifast Inc (MED)
Medifast is a company that sells various weight management and health products. If reading the first sentence evoked feelings of “weight management companies are a dime a dozen”, then you are not alone. Many diet and weight management fads come and go. The most notable recent example was the low-carbohydrate Atkins diet that gained huge popularity and then vanished almost overnight. What warrants a closer look at Medifast is the fact that research studies at the National Institute for Health and Johns Hopkins University have shown the plan to be very effective as well as medically safe. Apart from these studies I have personally noticed how effective their plans were because a number of people I know were on the Medifast diet plan. You have probably often heard the saying that a great company may not make a great investment. Let me now make the case for why Medifast looks like a very interesting investment to me.
While Medifast appears richly valued with a P/E of 42.11 and a Price/Sales ratio of 1.91, its high P/E is easily justified once you look at its growth rate. According to the latest earnings release the company grew revenues by 51% year-over-year and also raised its full year guidance. Companies often achieve such high growth by sacrificing profits. However Medifast continues to remain profitable over 24 consecutive quarters. Medifast is a small company with a market cap of just $68.23 million and is still not on Wall Street’s radar. Hence institutional ownership of this stock is just 3%. The million-dollar question regarding Medifast is whether it can grow fast enough to ever show up on Wall Street’s radar. If they can continue to maintain the excellent growth experienced over the last two quarters, there is a good chance it will. To handle future growth, Medifast has already started implementing an enterprise management solution.
Medifast’s direct competitors are Slimfast (a division of Sara Lee), Jenny Craig and Weight Watcher’s International (WTW).
- Attractive quarterly revenue growth of 51% year-over-year.
- A proven weight loss product that is backed by research at highly reputed institutions.
- Small company that has not yet been noticed by Wall Street.
- Medifast is a micro-cap stock and is thinly traded. Hence it can be susceptible to large price swings.
- Trouble converting high revenue growth into profits.
|P/E||22.04||Long Term Debt||$4.3 Million|
Every month we will add the two stocks that are highlighted into a model portfolio started with a cash position of $100,000 on August 2, 2005. To keep calculations simple, trading costs are not included. Prices reflect the closing price as of the last day of the previous month (November 30, 2005 for the December 2005 newsletter).
|Stock/Cash||Number of Shares||Cost||Current Value||Difference($)||Difference(%)|
* Price and number of shares adjusted for Wipro to reflect split.
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- Suria Investments, Inc. does not comprise any solicitation to buy or sell securities.
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- We suggest you check with a broker or financial advisor before making any investment decisions.