Archive for April, 2007

May 2007 Edition of SINLetter Delayed

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April 30, 2007 | Others | Author Asif

Due to some personal constraints, the May 2007 edition of the investment newsletter has been delayed and will be sent out a week later that usual.

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Tata Consultancy Services Listing on the NYSE?

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April 24, 2007 | Stocks | Author Asif

Less than two years ago, Ratan Tata, the head of the Tata group, made the following comment about listing Indian consulting and outsourcing firm Tata Consultancy Services (TCS) on an international market,

“We always visualized TCS as needing an international listing and expect to have an international listing. The underlying reason is that if TCS wanted to make acquisitions, it would need currency.”

As you can see from this list, while the Tata group as a whole has been on an acquisition binge since 2001, TCS made just one small acquisition in 2006 by taking over Australia based TCS Management for AUS $15 million (to be paid over a 5 year period). In contrast, competitors Wipro and Infosys were more active. Wipro acquired Portugal based Enabler for $53.3 million; Finland based Saraware for $32 million and Quantech Global for an undisclosed sum. Infosys acquired Citibank’s 23% stake in Progeon Limited for $115 million, making Progeon a wholly owned subsidiary of Infosys.

While both Wipro and Infosys have an adequately stocked acquisition war chest with well over a billion dollars in cash and investments on their rock solid balance sheets, TCS only has roughly $266 million ($1 = 41.65 Rupees) in cash and short-term investments on its balance sheet. An international listing would certainly help TCS go after bigger acquisitions as organic growth slows down and there have been rumors that TCS may list its shares on the NYSE soon.

With 2006-2007 annual revenues of $4.3 billion and net income of $950 million, a NYSE listing for TCS is likely to generate a lot of interest. I have created a table that compares the key statistics of the major Indian IT firms using the 2006-2007 income statements just like I did in the June 2006 edition of SINLetter.

Comparison of Indian IT Companies (April 23, 2007)

Infosys (INFY) Wipro (WIT) Satyam (SAY) TCS (TCS)
Price/Earnings 36.02 35.27 27.91 29.51
Price/Sales 9.91 6.88 5.70 6.54
Annual Revenue Growth 43.59% 45.24% 33.30% 40.68%
Annual Earnings Growth 53.15% 48.39% 19.65% 43.30%
Annual Revenue $3,090 million $3,467 million $1,461 million $4,300 million
Annual Earnings $850 million $676.77 million $298.4 million $950 million
Profit Margin 27.51% 19.52% 20.42% 22.09%

Based  on its growth and margins as well its leadership in revenue, TCS appears to be attractively valued when compared to Wipro or Satyam. The higher valuation of Infosys appears justified on account of its industry leading profit margin and strong balance sheet. However if you are an institutional investor or a Non-Resident Indian (NRI), you would be better off buying TCS on the Indian market rather than waiting for an NYSE listing because of the premium usually associated with the American Depository Receipts (ADRs) of Indian IT companies.

Infosys ADRs currently trade at a 7.97% premium to its closing price on the Bombay Stock Exchange (BSE), while Wipro trades at a whopping 21.79% premium to its closing price on the BSE.

It is important to note that there are multiple risks associated with buying TCS at this point,

  • The Indian rupee, which has long been pegged against the dollar, has been gaining strength in recent weeks. With more than 50% of revenue coming in from the United States, this is going to hurt earnings at TCS and other Indian IT companies.
  • Employee turnover continues to remain high with an attrition rate of over 11%.
  • Rising inflation (residential mortgage rates are over 12.5%, yikes!), rising wages and a highly volatile stock market are some of the other risks that to be kept in mind while investing in India at this juncture.

Full Disclosure: I hold a long position in Wipro but have been slowly reducing my stake over the last few months.

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Hans Wagner’s Response

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April 10, 2007 | Stocks | Author Asif

For those of you who have been following the discussion sparked by my previous blog entry titled Imitation, The Best Form of Flattery?, given below is Mr. Wagner’s response reproduced here with his permission.

“This situation was brought to my attention by one of my members. First, I take full responsibility for this problem. I do not condone any type of copying or plagiarism. In my next email tonight I will ask Seeking Alpha to remove the EMC article, taking responsibility for what happened, explaining how this happened, and what steps I am taking to assure it will not happen again.

Now I want to explain how this occurred. I hire Business graduate students from a local university to perform some research for me on a part time basis. I like to use students to help me as it provides them a way to learn about investing and gives them some work experience. This is with the approval of a professor who sponsors the students. Normally each student works about 5 to 10 hours a week, depending on their class schedule.

This semester I hired two students who do some basic stock research. Normally, they follow my thoughts, though I also encourage them to come up with their own ideas and bring them to me. We meet weekly to discuss current ideas and they present the research that they have performed. We then decided what stocks to work on over the next week.

One of these students brought ICON Clinical Plc (ICLR) to me in early February. I liked the idea as I often seek unknown companies that have the potential to do well. After more extensive research I added ICLR to my watch list and on February 15, 2007 I added it to my Premium Aggressive portfolio informing my members by email of the decision. I set the price at 42.90, the high of the day to help account for slippage and commissions. I did not know that you had also recommended ICLR. I also was unaware that you mentioned the ICLR article in your March 2007 newsletter. While I am a subscriber to your newsletter, it is placed in the “reading when I have time” folder. I rarely get to these emails, including yours and usually end up deleting the emails after several weeks.

I do not hold anything against this student for using your newsletter to get stock ideas. I just would have liked to known the source. I was told by this student that he got the idea from a recommendation from a friend who works for a biotech firm. He said his friend has contracts with this company and likes their service.

Regarding EMC Corporation (EMC) I had identified this company in my Themes for 2007 commentary for my Premium Members. I believe that in general technology companies do not do well in the first half of the year and then do much better in the second half of the year. My intention was to do more complete research on EMC later in the spring or early summer of 2007.  If I liked what I found, I would  add it to the Premium Members Watch List.

After reading about the EMC IPO of VMware in early March, I became more interested in researching the company earlier than I originally planned. In our weekly meeting with the two students in the middle of March 2007 I asked the same young man mentioned earlier to do some basic research on EMC. I use much of their material as well as my own research to prepare a detailed write up of each company I decide to include on my watch list. I also try to write an article on the company that I send to Seeking Alpha. These students know how the material is used and they also know of the articles I write. This student asked if he could help with the article and I said that would be fine. I had completed most of the work on the detailed write up on EMC and had scheduled to release it on April 4, 2007. It usually takes a couple of weeks of work to complete these write ups, as there is a lot of reading, listening to conference calls, etc to do. The next week on April 3rd, he came back with a draft of an article that was quite good (it turns out that this article was a copy of your piece on EMC from your news letter). I inquired how he did such a good job on this article and he replied, just hard work. I congratulated him on a job well done and asked if it would be a problem if I did not use it verbatim. He did not mind, though I told him he should plan on writing an article on another company in the near future. I rewrote parts of this student’s draft article and submitted it to Seeking Alpha to coincide with the release of the EMC write up on my watch list for Premium Members. That is the one you discovered that looked just like yours. I also added some lines from this article to the detail write up on EMC. I will remove these and make other adjustments as well to remove any hint of a copying problem. I am considering removing EMC from my watch list as well; to further separate my site from the problem.

I apologize for this problem and as I said at the beginning I do not condone copying of any kind. I am a graduate of the US Air force Academy and I live by the Honor Code they have: “I will not lie, steal or cheat, not tolerate those among us who do.” I am meeting with this student and his professor on Tuesday to address the problem. I am also developing procedures to prevent this type of problem from ever happening again. Unfortunately, it will probably entail limiting the kind of work I can ask of these graduate students, but that is the price we must pay.

I am also reviewing all your emails to be sure there have not been any other problems. I do not suspect any, as in my quick look at the companies in your portfolio; ICLR and EMC were the only ones that showed up. To be sure you are comfortable that I am not copying your ideas I am giving you full access to the Premium Members site for life. Should you find any problems, please bring them to my attention and they will be corrected immediately. I believe you are an honorable man and will not borrow my ideas inappropriately.

Regarding my site, I believe I offer a quality service that includes substantial research on each company with only 20-30 ending up on the Watch List. I then let every member know in advance of when I am making a buy or sell via email. Each buy is priced at the high of the day to allow for slippage and commissions. Each sell is at the close of the day. I also offer updates on the companies including stops, when to sell part of the shares and other pertinent information. Every trade is documented and made available. Each member receives a weekly market commentary that includes a thought for the week, as well as economic and trend analysis of the markets. I also include personal service answering each member’s questions. One of my goals is to teach members how to invest so they are more prepared to handle this important task on their own. They cannot depend on their company pension plan or the government to provide financial independence. I receive very good feedback and have a very high renewal rate. I believe the site offers a very good value, when compared to all the other fee based sites. I welcome your comments and critique.

I hope you understand how this problem occurred and recognize that it was not intentional nor part of an effort to copy your intellectual property. Please let me know what I can do to further correct this situation. I look forward to hearing from you.”

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Stocks That Almost Made The Cut: April 2007

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April 6, 2007 | S.T.A.M.T.C | Author Asif

The focus of the April 2007 edition of SINLetter was spinoffs and I only considered companies that had either been spun off from a parent or were planning on spinning off a subsidiary. Hence I decided to feature EMC Corp (EMC) and Sally Beauty Holdings (SBH) in the April investment newsletter and very briefly looked into two other companies.

A subscriber suggested one of these companies to me and it is a REIT called American Home Mortgage Investment Corp (AHM). According to this subscriber, the subprime mortgage meltdown has adversely impacted other companies in the mortgage industry even though they have strong fundamentals and AHM happens to be one of these companies.

AHM has lost more than 25% of its value year-to-date even though it has very little exposure to the subprime market (less than 2% of its business) and insiders who already own 20% of the company have been buying shares on the open market. This company also had an annual dividend of $4.48 or a yield of over 17%. I asked a contact of mine in the mortgage industry about the company and he thought it looked like a solid company. However the reason I decided not to feature American Home Mortgage Investment  was because of my continued negative outlook on the housing and mortgage industries. As I mentioned in the April newsletter,

“the sector is not likely to recover this year and any bounce in home builder or mortgage lender stocks is likely to be a dead cat bounce

This is the reason I still hold put options on the mortgage lender Countrywide Financial (CFC) and I would have contradicted myself by starting an investment in AHM at this time. My caution about AHM appears to have been well founded since the company reduced its first quarter and full year 2007 forecast today and cut its dividend to 70 cents a share, dropping the dividend yield to 10.84%. The company was also downgraded by Bear Sterns analyst Scott Coren yesterday. I am going to continue exploring AHM and if I feel that the mortgage industry is near a bottom (it is impossible to call the absolute top or bottom), it may make it into a future edition of SINLetter.

The other company I briefly considered was one of the surviving CLECs Covad Communications (DVW). I recently had to purchase a dedicated T1 internet line for a business and I found that Covad had an excellent rate and a very friendly and knowledgeable sales team. I was intrigued by the possibility that Covad may make a comeback like CMGI did this year. The focus of the company used to be wholesale telecommunication services provided through partners like AT&T, AOL and Verizon but over the last three years, the company has shifted its focus to the retail side. Retail now accounts of 38% of total revenue when compared to just 5% three years ago according to Chris Dunn who used to be Covad’s CFO until he resigned on Tuesday.

An excellent rate for the consumer usually means low margins for the company and I was not surprised to see that the company has been posting losses for the last three years despite posting revenue gains every year. While the balance sheet is not as debt laden as its pre-bankruptcy days, it still has $173 million in short and long-term debt when compared to $81.5 million in cash and short-term investments. The company’s 2006 purchase of fixed-wireless internet service provider NextWeb is going to strengthen its retail focus and give it a foothold in the rapidly growing wireless ISP space. However the company expects to post a wider loss of $15 to $39.5 million in 2007, despite continuing to grow revenue and I decided to put Covad on the back burner for now.

Our April pick, EMC Corp (EMC) has gotten off to a good start with a gain of 4.26% in the SINLetter model portfolio and I plan to post a follow-up blog entry soon.

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The Elusive Subscriber Number 1,000

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April 4, 2007 | Others | Author Asif

We reached our 1,000th subscriber in March but my attempts at contacting him were futile and so I contacted the next subscriber but did not hear from him either. Beyond the $100 Amazon.com gift certificate that I had planned for subscriber number 1,000, James Altucher and Michelle Leder had agreed to donate autographed copies of their books Trade Like Warren Buffett and Financial Fine Print respectively.

In case you are not familiar with James Altucher, he is a contributor at TheStreet.com, the founder of Stockpickr.com, managing partner at “alternative” asset management firm Formula Capital and the author of several books. Some people ask me how I manage to write these investment newsletters and create websites like MustFeed.com while doing a full time job and I in turn wonder how James manages to do all the things that he does.

Michelle Leder, is a freelance journalist and author of the very popular blog Footnoted.org. I plan to give this gift certificate (after bumping it up to $200) and books to subscriber number 2,000 instead if I do not hear back from both the subscribers I contacted.

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