Archive for March, 2008

SINLetter – March 2008

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March 1, 2008 | Newsletters | Author Asif

Welcome to edition 31 of Suria Investment Newsletter (SINLetter), a free monthly investment newsletter. The objective of this newsletter is to provide you with unbiased initial research and basic facts about individual stocks and other financial instruments so that you can research them further before deciding to add them to your portfolio or not. If you are reading this and are not a subscriber, 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.

Stock Contest Update:

With under a month to go before the stock contest ends, “Raja” continues to hold the top position but his gains have dropped to 22.95% when compared to 74.72% at the end of last month. RonPaulFan confidently declared “That wii is mine” when he joined the contest and at second position he just might get his wish. You can check out his returns along with the rest of the contestants here. The contest ends on March 31st and it is still not too late to try and win one of the two prizes shown below. For all the details about this contest, check out the blog entry Two Contests, Three Months, Four Prizes.

First Prize: Second Prize:

Portfolio Performance:

February marked the fourth consecutive month of declines for the major market indices with the Nasdaq and Russell 2000 suffering the most. The 4.95% drop in the Nasdaq this month may not have been that bad unless you consider that this performance was preceded by a 9.89% decline in January and that the Nasdaq has returned just 3.47% since this newsletter was started back in August 2005. The SINLetter model portfolio dropped less than the major indices in February with a loss of 2.33% due to further declines in Suntech Power (STP), WisdomTree Investments (WSDT.PK) and Medifast (MED). On the positive side ICON plc (ICLR) continued its gains, becoming the top performing stock in the SINLetter model portfolio with a gain of 77.21%.

Performance Metric Dow S&P 500 Nasdaq SINLetter
February 2008 -3.04% -3.48% -4.95% -2.33%
Since Inception (Aug 2005) 15.47% 7.71% 3.47% 103.05%

Suntech Power like most solar stocks has seen a rapid decline in its value in recent weeks. It is hard to believe that at the start of the year, our position was up 240% but has now declined to a “mere” gain of 43.35%. While I regret not selling our entire position earlier, I am glad I took some profits in November. All through this decline, I have received emails from subscribers asking if it was a good time to initiate a new position in Suntech and I told most people that since I still hold half my original Suntech position in my personal portfolio, I was staying on the sidelines. However at this point I believe that the selling has been over done and if you don’t already have exposure to alternative energy in your portfolio, Suntech is worth a close look. Another “alternative” to consider is the alternative energy ETF, PowerShares Wilder Clean Energy (PBW), which has healthy exposure to solar stocks.

Since adding Umpqua Holdings (UMPQ) to our watch list (my thoughts on Umpqua were discussed in Umpqua Holdings: Can the free cookies last?), the stock has dropped nearly 14% and is getting near levels that I find attractive. With housing showing no signs of improvement and the inventory of unsold homes rising even in the Pacific Northwest, I am inclined to stay on the sidelines just a little longer with Umpqua Holdings.

For quite some time now I have been convinced that Gold bulls will attempt to take the precious metal to $1,000 an ounce and this may soon become a reality. Gold closed the month of February at $974.30 per troy ounce, a gain of $51.00 or 5.52% for the month.

Portfolio Readjustment:

As discussed below, I am going to add 1,000 shares of Lionsgate Entertainment and 500 shares of Tata Motors to the model portfolio. This will bring down our cash position from $49,154 or 24% of the portfolio to $30,984 or 15%.

Lionsgate Entertainment (LGF) $9.41

The Story:

Watching the movie that is described as the best western since Unforgiven, 3:10 to Yuma reminded me of the British movie Lock, Stock and Two Smoking Barrels despite the vastly different genres these movies come from. The first half of 3:10 to Yuma was slow; taking its time to establish characters but then brilliantly executes in the second half. Investors who follow the stock of Lionsgate Films (LGF) will recall that the theatrical release of 3:10 to Yuma last Fall helped Lionsgate’s stock register a nearly 15% jump in share price from $9.34 to almost $11. The stock has since settled down lower partly because of market conditions, partly because their aging Saw horror movie franchise (part 5 is due out in October 2008) has lost the punch of the first two parts and partly because the Hollywood writer’s strike was affecting all movie studios.

Getting visibility into the drug pipeline of a large biotech like Amgen (AMGN) can be difficult but the same cannot be said of movie studios like Lionsgate. Looking into the movies Lionsgate is slated to release in the next couple of years, it appears that The Bank Job and Harold and Kumar 2 could ring up high box office returns while Rambo (or Rambo 4 as it is known in India and Singapore) might register good DVD sales. “Harold and Kumar 2″ is a movie produced by Mandate Pictures, which was acquired by Lionsgate in August 2007. It will also be interesting to see how Ayn Rand’s book Atlas Shrugged translates to the big screen, especially with Angelina Jolie playing the role of Dagny Taggart.

Sales of the 3:10 To Yuma DVD have been strong and more than two years after its release, Lionsgate’s brilliant Academy Award winning movie Crash remains at the top of Blockbuster Online’s list of most rented movies. In true Lionsgate fashion, the company has decided to gain maximum mileage from Crash by teaming up with Starz Encore to release a 13 episode TV series based on the movie. The Crash mini-series will join two other critically acclaimed Lionsgate series “Weeds” and the recent Golden Globe winning “Mad Men”. However the value in Lionsgate lies not in the next high grossing movie it might release or the next Oscar winner like Crash but on account of The Long Tail of movies through its rather large library of movies. Every new digital delivery service could mean potential revenue for Lionsgate and while Apple’s entry into movie downloads may not bode well for Netflix (NFLX) or Blockbuster (BBI), it will help studios like Lionsgate. In fact Lionsgate expects revenue from digital delivery to increase from less than 1% right now to almost 15% by 2010. The company also expects to benefit from the decision of most movie studios to back the high definition Blu-ray format, after Toshiba accepted defeat in the Blu-ray vs. HD DVD war. High definition DVD sales are expected to triple to $1 billion in 2008 from $300 million in 2007.

The Numbers:

I think a big concern for investors like me was how Lionsgate will hold up next quarter when its results are compared to the quarter ending March 2007, which included a big jump in DVD sales after Crash won three Oscars last year. I expressed this concern when I wrote the blog entry Stocks That Almost Made The Cut: March 2007 last year and have been periodically checking in on the stock since then. It looks like investors who were worried about the fourth quarter results (Lionsgate’s fiscal year runs from April through March), were reassured when Lionsgate announced that it expects to report more than $400 million in fourth quarter revenue, well above analyst estimates of $344.3 million. The company also revised upwards its full year revenue estimate to over $1.2 billion, giving the company a Price/Sales (P/S) ratio of just 0.92. The month of January was very kind to DVD sales of Lionsgate movies with the company capturing 4 out of the top 8 DVD titles in North America.

However the news was not all positive. The company reported an 88% plunge in third quarter profits as it increased its marketing and film making budget. Despite the $110 million in free cash flow Lionsgate expects to post in full fiscal year 2008, the company will still report negative earnings for 2008. Things are expected to get much better in fiscal 2009 (ending March 2009) as the company expects to report earnings before interest, taxes and amortization (EBITA) of $64.3 million. Assuming no taxes on account of the fiscal 2008 loss and interest plus amortization of roughly $20 million (interest in Q3 2008 was $4.09 million), we get earnings of approximately $44.3 million and a forward P/E of 25.06, which is a little lower than the forward P/E of 28.53 reported on Yahoo Finance. Please note that these are rough calculations based on assumptions and a lot can change in terms of earnings or the debt on Lionsgate’s balance sheet.

A forward P/E of 25.06 may appear a little on the expensive side especially in this market until you consider that the company expects revenue growth of 25% in fiscal 2008, generates strong cash flow from operating activities and has maintained a 30% annual growth rate since 2000. Lionsgate also sells for a much lower Price/Sales and Price/Free Cash Flow ratio when compared to competitors Dreamworks Animation (DWA) and Marvel Entertainment (MVL).

Interest in Lionsgate has been building recently with a few institutional funds acquiring shares. The stock actually posted a 2.17% gain on Friday when almost everything was getting butchered and the Dow dropped 315.79 points. The company’s earnings are volatile and the stock is equally volatile but exhibits a lot of support at the $9 level.

The Good:

  1. Various business units at Lionsgate films ranging from movies and home entertainment to stage plays such as Dirty Dancing appear to be executing well.
  2. The Long Tail of entertainment is clearly working in Lionsgate’s favor. The company’s growing library of films and TV serials such as Weeds and Mad Men is expected to generate $90 million in free cash flow on $250 million in revenue in fiscal 2008.
  3. Movies such as 3:10 to Yuma, War, Good Luck Chuck and Saw IV helped Lionsgate capture 4 out of the top 8 DVDs sold spots in January.
  4. The Saw and Tyler Perry franchises have proved highly successful for Lionsgate with the Saw franchise alone bringing in over half a billion dollars in revenue worldwide. Lionsgate expects to capitalize on the success of Crash by launching a 13 episode mini-series in partnership with Starz.
  5. The company expects to increase its cash and cash equivalents to $350 million by the end of fiscal 2008 and is attractively valued with a forward P/S of 0.92 and Price/Free Cash Flow of 10.

The Bad:

  1. Lionsgate’s earnings are volatile and the company expects to report a net loss for fiscal 2008 ending March 2008.
  2. The aging “Saw” franchise may not deliver the kind of returns the first four parts delivered.
  3. Increasing digital delivery of content and piracy will cannibalize DVD sales.
  4. Lionsgate’s balance sheet may not appears very strong on first glace with nearly $600 million in long-term debt. However almost $269.37 million of that is film obligations and the rest is convertible bonds at a cost of capital of just 3.31%. The company expects interest from its cash position to cover the interest payments on the debt and with closer inspection, the debt does not seem so bad.

Voluntary Disclosure: I currently hold a small position in Lionsgate and will add to my position after this newsletter goes out to subscribers.

Tata Motors (TTM) $17.52

A lot has changed at Tata Motors since I wrote about it more than two years ago in the December 2005 edition of SINLetter. The company unveiled its much anticipated small car called the Tata Nano, introduced a new line of armoured vehicles, struck a deal with Boeing to make parts for the 787 aircraft and is said to be very close to acquiring Jaguar and Land Rover from Ford Motor (F). Despite getting almost 50 miles per gallon, the Tata Nano has irked environmentalists both in India and outside the country. Maybe one day we will see an “air powered” Nano or a hybrid Nano thanks to Tata’s $30 million investment in Air Car developer MDI and its joint effort with Chrysler to develop an electric version of its Ace mini truck.

On the financial front, the company increased both revenue and earnings as well as increased its dividend (current yield is 2.1%). Unfortunately the company has also taken on a lot of debt to fuel its growth and operating margins have declined. Exports have also slowed and the company faces tough competition at home from Mahindra and Mahindra. Hopefully the launch of the Nano in fall and the acquisition of Jaguar and Land Rover will help Tata Motors address competition in the domestic market while improving its international presence and brand name.

As you can see from the historical trades section, I sold Tata Motors from the SINLetter model portfolio when it was trading at $19.7 on 10/31/2007 for a gain of 64.99%. The stock has declined 11% since then and with a P/E of 12.43, a P/S of 0.77 and PEG of just 0.76, the company looks cheap. The Indian market has been highly volatile lately and as I write this the BSE Sensex has dropped another 908 points or 5.17% but Tata Motors appears to be holding its own with just a 1.6% drop. This may have to do with the recently released Union budget that did not please the capital markets but is perceived to be beneficial to automobile companies that make small cars like Tata Motors.

The release of the new WisdomTree India ETF (EPI) provides investors the ability to hedge their risk by shorting the ETF and going long a select group of Indian ADRs like Tata Motors (TTM), Wipro (WIT) and Sterlite Industries (SLT), which was featured in the India: Emerging Market Opportunity section of the January 2008 investment newsletter. When I wrote the January newsletter, I felt that the Indian market was overvalued and highly speculative but after a more than 4,000 point or 20% drop since early January, I am no longer comfortable shorting the Indian market and am ready to initiate long positions in high quality companies like Tata Motors.

Voluntary Disclosure: I continue to hold the position I initiated in Tata Motors in December 2005.

Model Portfolio – February 29, 2008

Long Stocks

Stock Symbol Number of Shares Cost Current Value Diff ($) Diff (%) Date Added
Lionsgate Entertainment LGF 1,000@9.41/share $9,410 $9,410 $0 0% 2/29/2008
Tata Motors TTM 500@17.52/share $8,760 $8,760 $0 0% 2/29/2008
Canon CAJ 200@45.83/share $9,166 $8,972 $-194 -2.12% 12/31/2007
Barclays PLC BCS 200@42.27/share $8,454 $7,514 $-940 -11.12% 11/20/2007
Powershares Water Resources PHO 400@22.10/share $8,840 $7,900 $940 -10.63% 10/31/2007
Marcus MCS 500@19.94/share $9,970 $7,970 $-2,000 -20.06% 9/14/2007
Ultrashort Russell 2000 TWM 50@71.00/share $3,550 $4,214 $664 18.7% 9/7/2007
Blockbuster BBI 1,500@4.59/share $6,885 $4,560 $-2,325 -33.77% 7/9/2007
Gymboree GYMB 200@42.02/share $8,404 $7,918 $-486 -5.78% 6/14/2007
Unilever Plc UL 200@32.53/share $6,506 $6,296 $-210 -3.23% 5/11/2007
EMC Corp EMC 600@13.85/share $8,310 $9,324 $1,014 12.2% 3/31/2007
ICON Plc ICLR 250@37.30/share $9,325 $16,525 $7,200 77.21% 1/31/2007
Diamond Offshore Drilling DO 80@76.65/share $6,132 $9,666 $3,534 57.64% 1/3/2007
Alvarion ALVR 1000@6.87/share $6,870 $7,570 $700 10.19% 1/3/2007
WisdomTree Investments WSDT.PK 1000@7.40/share $7,400 $2,950 $-4,450 -60.14% 11/30/2006
Teva Pharmaceutical TEVA 300@35.05/share $10,515 $14,721 $4,206 40.00% 9/1/2006
Suntech Power STP 250@25.93/share $6,483 $9,292 $2,810 43.35% 7/31/2006
Procter & Gamble PG 180@55.60/share $10,008 $11,912 $1,904 19.03% 6/30/2006
Johnson & Johnson JNJ 200@57.65/share $11,530 $12,392 $862 7.48% 2/28/2006
Medifast MED 1000@6.955/share $6,955 $4,200 $-2,755 -39.61% 11/30/2005
Cash $30,984
Total $203,050 $103,050 103.05%

Voluntary Disclosure: From the stocks that are currently in the model portfolio, I own shares of Lionsgate Entertainment (LGF), Tata Motors (TTM), Canon (CAJ), PowerShares Water Resources (PHO), Barclays (BCS), Medifast (MED), Suntech Power (STP), Teva (TEVA), Alvarion (ALVR), WisdomTree (WSDT.PK), Unilever (UL), Gymboree (GYMB), BlockBuster (BBI) and Marcus (MCS).

Music That Helped:

It takes me anywhere from 8 to 12 hours to write these newsletters and they are usually binge writing sessions where I sometimes write all night long. Something that helps me burn the midnight oil is familiar music playing in the background. Since I have not written a music blog entry like this one in a long time, I figured I would just list out some of the songs and albums I am currently listening to.

  1. Dive Deep by Morcheeba. Check out the songs “Gained The World” and “The Ledge Beyond The Edge”.
  2. The Insider – Movie Soundtrack. Michael Mann’s finest movie has a brilliant soundtrack.
  3. Kill To Get Crimson – Mark Knopfler. Includes the single “Punish the Monkey”.

For all you Mark Knopfler and Dire Straits fans, Mark is touring once again to promote “Kill To Get Crimson” and he will be playing at the Greek Theatre in Berkeley on June 28, 2008. I watched him at the Greek Theatre in 2005 during the Shangri-La tour and highly recommend this concert. You can find North American tour locations here. I was pleasantly surprised to learn that for each pair of tickets, you get a CD of “Kill To Get Crimson” free.

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