SINLetter – March 2006
Welcome to the eighth 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.
VA Software (LNUX) is now the top performer in the SINLetter model portfolio after registering gains of 102.73% in just one month, leaving our previous top performer Seagate Technologies (STX) in the dust. As expected, VA Software reported its first quarterly profit after registering a 57% growth in sales. It looks like VA Software is finally on everyone’s radar with volume of shares traded exploding to 13.54 million on the day the quarterly results were released, when compared to just 227,000 when it was featured in SINLetter last month.
Seagate Technology (STX) with gains of 83.37% and Tata Motors (TTM) with gains of 53.52% round out our top three performers, helping the overall SINLetter model portfolio register gains of 40.21% since its inception in August 2005 with a cash position of $100,000. This compares with a gain of 3.48% for the Dow Jones Industrial Average, 3.92% for the Nasdaq and 3.67% for the S&P 500 over the same time period. UnitedHealth Group (UNH), our second pick featured in last month’s SINLetter has not performed as well as VA Software and is currently down 2%. I expect UnitedHealth to do well over the long term and was happy to see it garner the top spot in Fortune magazine’s 100 Most Admired Companies list under the Health Care: Insurance category.
As investment ideas and theories gain popularity, their effectiveness often decreases. The same could be said about the popular Dogs of the Dow theory that was discussed in the January SINLetter. There are many variations of the dogs of the dow that try to improve upon this theory and one such variation mentions selling the dogs in mid-February to maximize gains. Pfizer has gained 12.31% over the two months and I am going to adopt this variation to sell Pfizer (PFE) and make room for another drug stock. I am also going to sell half our position in Wipro (WIT) after its spectacular 40.16% run-up over a six-month period. I still continue to like the intermediate term prospects of both these stocks and plan to continue holding both in my personal portfolios. On an interesting side note, Indian investors have also adopted the dogs of the dow theory and they refer to it as the dividend dogs of BSE-100.
Other Interesting Events:
NutriSystem (NTRI), a company that makes weight management and dieting products posted a four fold increase in fourth quarter sales and the stock resumed its upward march. The stock posted a gain of over 1100% in 2005 (yes, you read that right) and had the distinction of becoming a ten bagger in just one year. Medifast (MED), a company featured in the December edition of SINLetter has a business model very similar to NutriSystem and has returned 29.68% since it was added to the SINLetter model portfolio. If Medifast were to continue its current growth and expand its recent TV advertising on a national scale, the stock could see further appreciation.
The yield curve inverted again and this time it was a little more significant than the last inversion. As mentioned in the last edition of SINLetter, a yield curve inversion is usually a harbinger of recessions. To put the media hype surrounding the recent inversion of the yield curve in perspective, check out this article and the comment following it on SeekingAlpha.com.
Google (GOOG) finally reversed its seemingly undeterred upward streak and the stock closed at $362.62 on February 28, 2006, down over $100 since its peak of $467.11 on January 17, 2006. Uninspiring earnings from Google and Yahoo combined with a comment by Google’s Chief Financial Officer (CFO) that growth was slowing down, lead to this fall. Over the last seven months, we made two negative calls and investors who bought put options based on these calls probably benefited a lot. The first call was made in September 2005 regarding the over-heated real estate market and singling out St Joe (JOE) as one of the most overvalued stocks in that sector. The second negative call was made on Google in January 2006 based on valuation concerns and heavy insider selling.
Continuing our international and healthcare themes, I present this month’s featured stocks.
Royal Philips Electronics (PHG)
Royal Philips Electronics, a global company based in the Netherlands is well known for its lighting and electronics businesses. Apart from these two divisions, Philips has also diversified into semiconductors and the highly profitable medical systems area. Its medical systems division includes products such as ultrasound devices, X-ray systems, defibrillators and even healthcare related IT systems.
My interest in Philips stems not only from its very attractive current valuation but also on account of a company called Lumileds based in San Jose, California. Lumileds was founded in 1999 as a joint venture between Agilent Technologies (A) and Philips to manufacture high-power Light Emitting Diodes (LEDs). In 2005 Philips acquired Agilent’s stake in Lumileds for almost $1 billion. LEDs have traditionally been used as status indicators in devices such as remote controls and toys. Their low power requirements, long life and durability made them ideal for these low-light applications. However recent advances have improved the lighting ability of LEDs while retaining many of its advantages over traditional light bulbs. LEDs are now increasingly used in traffic lights (saving cities millions of dollars), automobiles, projectors and even for business lighting. In the near future, LEDs are going to replace bulbs in homes and offices.
Lumileds is a private company and hence determining its 2005 revenue is difficult. Based on a presentation done by Philips in 2005, we know that Lumileds had revenue of $280 million in 2004 and a scorching average annual growth rate of 43% over a three year period from 2001 to 2004. Assuming a conservative growth rate of 35% for 2005 and 2006, Lumileds should contribute $510 million in revenue to Philips in 2006. Considering that 2005 annual revenue for Philips came in at $36 billion, the Lumileds revenue may only seem like a drop in the bucket. Given the bright (pun intended) outlook for LEDs and the leadership position Lumileds currently enjoys thanks to its patents, Philips may stand to benefit a lot from Lumileds in the future.
The electronics division of Philips has also been very successful with two of its flat panel TVs making it into recent Consumer Reports best buy lists. When I was shopping around for a HDTV last year, I ended up buying a Philips TV and have been very happy with it. Sonicare toothbrushes, Norelco electrical shavers and SENSEO coffee brewing machines are other noteworthy Philips products.
The stock has also seen a strong upward trend over the last three months and this is a positive sign. The valuation is still very attractive with a current P/E of 12 and Price/Sales of 1.08. While revenue growth for 2005 came in at an anemic 3.57%, Philips still managed to generate net income of $3.4 billion. If management were to meet its 2006 forecast for growth of 5 to 6% while improving their profit margins, the stock could see further appreciation. The current dividend yield for Philips is a nominal 1.6%, which is in line with the average dividend yield of the S&P 500.
Philips faces strong competition in its electronics business from Sony (SNE), Samsung and Matsushita (MC), the parent company of Panasonic. The lighting and medical systems divisions face competition from Siemens (SI) and General Electric (GE). Lumileds faces direct competition from Cree Inc (CREE) and a privately held company called Nichia
- Profitable company sporting attractive current valuation with a P/E of 12 and P/S of 1.08.
- Increasing adoption of LEDs for conventional lighting could be very positive for Lumileds.
- Strong growth expected from the medical systems division.
- A strong balance sheet with $14.07 billion in cash and long-term investments when compared to $5.31 billion in debt.
- A renewed focus on research and development. Almost 49% of 2005 revenue came from products developed in the last three years.
- Anemic growth rate of 3.57% in 2005.
- Very strong competition and pricing pressure in its electronics division.
|P/E||12||Long Term Debt||$3.93 Billion|
Johnson & Johnson (JNJ)
Johnson & Johnson, a company that is over a century old is widely known for its baby products, Band-aid, Tylenol and Acuvue contact lenses. Johnson & Johnson also derives a large part of its revenue from the sale of drugs and medical devices. According to a recent government forecast, U.S. spending for health care may double to $4 trillion by 2015, propelled by an aging population using more drugs, hospital care and technology. The cost of prescription drugs will also double and will amount to $446 billion. With operations in over 50 countries worldwide, Johnson & Johnson ties in well with two established themes that SINLetter is current following, international investing combined with investment in the healthcare sector.
Johnson & Johnson’s failed bid to buy Guidant (GDT) for $20 billion had put downward pressure on its stock, creating an excellent buying opportunity. Johnson & Johnson even walked away with a $720 million break-up fee when the Guidant deal did not go through. Johnson & Johnson is amongst the Top 20 most admired companies in America and recently received a 5 star rating from Standard and Poor’s.
Johnson & Johnson is a highly profitable company with a profit margin of 20.61%. Its dividend yield of 2.3% compares favorably with the 1.92% dividend yield of the S&P 500 and is line with the 2.39% dividend yield of the Dow Jones Industrial Average. JNJ also has a 40-year history of raising dividends.
Johnson & Johnson faces competition from Merck (MRK), Pfizer (PFE) and Switzerland’s Novartis (NVS) in its pharmaceutical business. It faces competition from Procter & Gamble (PG) in its consumer products division and Boston Scientific (BSX) in its medical devices business. Boston Scientific emerged the victor in the bidding war for Guidant after agreeing to pay $27.2 billion.
- A highly profitable company with a strong balance sheet. Total current assets are more than double the total current liabilities.
- Johnson & Johnson is expected to grow sales by 8% and earnings by 10% in the coming years, which is higher than the average growth expected from pharmaceutical companies.
- Attractive current valuation with a current P/E of 16.68 and forward P/E of 14.31.
- Like most large companies, organic growth at Johnson & Johnson could be limited.
- Strong competition for potential acquisition candidates from other cash rich pharmaceutical companies.
|P/E||16.68||Long Term Debt||$2.14 Billion|
Every month we will add the two featured stocks into a model portfolio started with a cash position of $100,000 on August 2, 2005. To keep calculations simple, trading costs are not included. Prices reflect the closing price as of the last trading day of the previous month (February 28, 2006 for the March 2006 newsletter).
|Stock/Cash||Number of Shares||Cost||Current Value||Difference($)||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.