SINLetter – February 2006
Welcome to the seventh 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.
Seagate Technology (STX), the top performing stock in the SINLetter model portfolio with gains of 79.99% continued its rapid rise after it reported profits that more than doubled from last year. These profits were driven by an increase in demand from the consumer electronics division of Seagate as discussed in the November 2005 edition of SINLetter. The overall SINLetter portfolio is now up 28.48% since its inception in August 2005 with a cash position of $100,000. This compares with a gain of 2.27% for the Dow Jones Industrial Average, 5.03% for the Nasdaq and 3.62% for the S&P 500 over the same time period. The two stocks featured in last month’s SINLetter have also performed well. Ford is up 11.14% while Pfizer is up 10.12%. Wipro (WIT) continued to perform well after releasing excellent results and adding 61 new clients in the latest quarter. Wipro is now registering gains of 49.85% in little over 5 months after it was added to the SINLetter portfolio.
I am once again presented with the difficult task of selling some of our positions to finance the purchase of this month’s featured stocks. To make room for another technology company in our portfolio, I have decided to sell Online Resources (ORCC) and recognize the 38.69% gain since we added it to our portfolio five months ago. I continue to like Online Resources and plan to hold it a little longer in my personal portfolio. I have also decided to sell Peet’s Coffee (PEET) and realize the small 0.69% gain posted over a period of four months. I decided to sell Peet’s Coffee after watching the price of coffee futures go up by over 25% in the last few months. This affected Peet’s results last quarter and unless they went long on coffee futures since then, they are likely to face the same problem this quarter. One of Peet’s competitors, Caribou Coffee (CBOU) also issued a disappointing forecast for 2006. I still believe that Peet’s Coffee has excellent potential over the long term. The proceeds of these two stocks will finance this month’s featured stocks, VA Software and UnitedHealth Group.
Other Interesting Events:
While Nokia’s new N91 phone did not measure up to expectations, another product is generating a lot of interest in Nokia these days. The Nokia 770 Internet Tablet, is a tablet PC that allows users to browse the internet using a Wi-Fi connection and runs on a flavor of linux. Its current price of about $380, good looks and Linux operating system seem to make it an irresistible device. The Nokia 770 is currently sold out and Nokia has had to increase production to meet this demand. I expect Nokia to spruce up its limited current capabilities by adding additional features, making this device more appealing to mainstream customers.
Chipotle (CMG) finally made its debut on Wall Street at a price of $22 per share and doubled on the first day of trading to close at exactly $44 per share. I expected the IPO to do well, but its 100% rise on the first day of trading was shocking. I am sure the question of everyone’s mind is whether Chipotle will follow Google’s route or if it will fizzle after the initial sizzle. An alternative play to Chipotle could be Mc Donald’s (MCD) as it still continues to hold a 69% stake in Chipotle even after the IPO. Mc Donald’s has risen a little over 15% in the last six months but it still looks appetizing at its current valuation with a current P/E of 17.14 and P/S of 2.15.
The biotech Amgen (AMGN), featured in my blog entry Stocks That Almost Made the Cut: January 2006 fell more than 7.5% in January on account of multiple analyst downgrades after reporting uninspiring fourth quarter results. In contrast, Pfizer is showing gains of 10.12% based on FDA approval for a cancer drug called Sutent and a diabetes drug called Exhubera. Exhubera is an inhaled version of insulin and is hailed as a major innovation since it gives diabetics a welcome alternative to injecting insulin multiple times a day.
Without digressing further, let me present my two picks for this month’s SINLetter.
VA Software (LNUX)
VA Software is an IT company based in the San Francisco Bay Area that develops and sells a software application called “SourceForge Enterprise Edition”. SourceForge Enterprise Edition provides a collaborative development environment for projects that have distributed development teams. The importance of such a product in this age of globalization and outsourcing is obvious and VA Software currently counts Eli Lilly, Agilent, Acxiom and Timex amongst its customers. However the most interesting part of VA Software is the multitude of web properties and E-commerce websites it owns which include,
- Freshmeat.net (not what you think)
- IT Manager’s Journal
The crown jewel amongst these web properties is Slashdot, which could easily be considered a virtual geek Mecca. After you filter out all the noise, Slashdot can often provide excellent information about technology and computer security. Slashdot has seen quite a jump in its website traffic over the last few months and is listed as the most popular blog on many blog tracking websites such as Syndic8. With an increasing shift of advertising dollars from traditional marketing mediums like radio and TV to the internet, Slashdot clearly stands to benefit from this increased traffic and popularity. This was reflected in the latest quarterly results with online media revenues increasing 40% and E-commerce revenues increasing 33% year-over-year.
VA Software recently sold off its “Animation Factory” subsidiary for $9.35 million in cash to Jupitermedia Corp. This was an excellent move by management, as the Animation Factory business does not fit in well with the rest of the company and only generated $580,000 in revenue during the latest quarter. VA Software is currently not profitable but over the last three years it has done an impressive job of reducing its cash burn rate down to $4.69 million per year. After recognizing revenue of $1 million in November from the sale of its SourceForge Enterprise Edition to a single customer, VA Software is on track to show a profit when it reports results after close of market on February 21. With $33.7 million in cash and short-term investments on the balance sheet and no debt, the balance sheet is also very strong.
This is a “sleeper stock” with a lot of potential if it were to become consistently profitable or if Wall Street realizes the true value of Slashdot. It should be noted that VA Software currently trades at a low price of $1.83 per share. This low price combined with a three-month average daily volume of 271,367 could make it susceptible to wild price swings.
It is hard to define competitors for a company with such a diverse set of products. Groove Networks is a direct competitor for VA Software’s SourceForge Enterprise Edition product. CNet and Slashdot are competing for very similar advertising dollars. With Microsoft’s acquisition of Groove Networks in 2005 and widespread speculation that CNet is looking for a suitor, there is a possibility that Slashdot could also get acquired in the future.
- Excellent growth potential for VA Software’s SourceForge Enterprise Edition product.
- Increasing traffic and revenue from Slashdot and other E-commerce websites.
- Expected to reach profitability when it reports results in February 2006.
- A strong balance sheet with no debt and $33.7 million in cash and short-term investments.
- VA Software currently trades at a low price and may be considered by some as a “penny stock”.
- If the price of the stock were to drop below $1 for 30 continuous days, VA Software will be issued with a delisting notice by Nasdaq.
- With the recent explosion in blogging (I am guilty as well), there is lot of content out there competing with Slashdot for advertising dollars.
|P/E||N/A||Long Term Debt||$0|
UnitedHealth Group (UNH)
For many years now I have not been very happy with insurance companies. While their importance cannot be understated, it mostly feels like you are paying exorbitant premiums for a service you might rarely ever use. This perception changed recently when I got a chance to experience UnitedHealth’s excellent healthcare services. UnitedHealth is one of the few insurance providers that allow you to directly see a medical expert without getting a recommendation from a primary physician first. A closer look at UnitedHealth revealed a company that is very profitable with $3.3 billion in profits during 2005, a 27% increase when compared to 2004 earnings of $2.59 billion. UnitedHealth also recently increased its earnings forecast for 2006 which is a very positive sign.
UnitedHealth has grown its membership base aggressively over the last few years by providing health insurance services to large companies and currently has about 25 million members. All this growth has not gone unnoticed and the stock price has almost doubled in the last two years from $30 to $59.42 per share. However with a current P/E of 23.95, P/S of 1.61 and 2006 earnings growth projected to be between 21% and 23%, the stock looks reasonably valued.
- A profitable company that generated $3.3 billion in profits last year.
- UnitedHealth recently increased its 2006 earnings forecast.
- Attractive current valuation with a Price/Sales ratio of just 1.61.
- A whopping $9.78 billion in goodwill is listed under assets on the balance sheet.
- Strong competition from WellPoint which recently reported excellent fourth quarter results.
|P/E||23.95||Long Term Debt||$3.85 Billion|
Every month we will add the two featured stocks into a model portfolio started with a cash position of $100,000 on August 2, 2005. To keep calculations simple, trading costs are not included. Prices reflect the closing price as of the last trading day of the previous month (January 31, 2006 for the February 2006 newsletter).
|Stock/Cash||Number of Shares||Cost||Current Value||Difference($)||Difference(%)|
Voluntary Disclosure: I currently own shares of Airspan Networks (AIRN), ATI Technologies (ATYT), Wipro (WIT), Online Resources (ORCC), Nokia (NOK), Medifast (MED), Tata Motors (TTM), Ford (F), Pfizer (PFE), Seagate Technologies (STX) and VA Software (LNUX).
- 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.