Archive for July, 2009

Towerstream Catapults 40%

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July 24, 2009 | SIN Picks | Author Asif

While configuring a Dell (DELL) laptop earlier this month, I noticed that Dell was now offering WiMax as an option for the wireless card in its Inspiron line of laptops. To borrow a line from a comment following Dell’s May 5, 2009 announcement regarding the availability of WiMax on two of its computers, “if Wi-Fi is a beard then Wi-Max is like a full body beard, with all over coverage.” It has been a long journey for some of us early WiMax investors but it looks like mobile WiMax may finally be within reach of consumers. Whether WiMax continues to benefit from its lead in the consumer sector or gets eventually eclipsed by competing standards like LTE and HSPA+ remains to be seen.

While Clearwire (CLWR) along with its partners Sprint (S) and Intel (INTC) targets the consumer sector, Towerstream (TWER) has carved a niche for itself providing wireless T1 services at very competitive prices to businesses. Beyond T1 lines, Towerstream also provides a whole spectrum of services that targets everyone from small businesses to Fortune 1000 companies with fractional T1s with speeds of just 512 Kbps to high capacity connections with speed of up to 200 Mbps. Beyond the competitive rates that Towerstream provides, the true redundancy offered from a wireless connection that does not depend upon the copper lines of incumbent carriers like AT&T (T) is certainly attractive to IT managers in a business environment where an “always on” internet connection is critical.

I got a chance to speak to Towerstream’s CEO Jeff Thompson last Thursday about a number of questions that were on my mind following the company’s announcement that it had signed a record number of contracts in June. These questions were partly the result of a discussion in the comments section of my November 2008 article about the company called Towerstream Trading Below Cash and partly on account of a conversation I had with an ex-employee who had been laid off from Towerstream.

In anticipation of high growth last year, the company had put together a sales team in excess of 100 sales representatives. As economic conditions changed and investors became more risk averse, Towerstream shifted its focus towards breaking even and proving out its business model. Despite this shift in focus and weak economic conditions, the company has consistently increased revenue over the last four quarters and even managed to improve gross margins to 76% last quarter. In addition to reducing the size of its sales team through attrition and smaller rounds of layoffs, the company laid off 35 employees from its work force in early June. The represented a 21% reduction in head count and could end up saving the company between $1.2 million to $1.6 million in operating expenses.

The key question on my mind was the ability of Towerstream to sign a record number of contracts in June despite laying off a substantial number of employees from its sales and marketing departments. Jeff mentioned that the company continues to retain its top sales performers who brought in more than 90% of the business and were also able to fine tune certain marketing strategies with very good results. He elaborated on these strategies and I got a chance to see them in action.

Since business internet service contracts are usually at least a year or two in duration, the sales cycle for this industry is not very short as the San Francisco Towerstream sales representative who has been persistently calling me for the last 18 months can attest to. This would imply that some of the contracts that were closed in June could have very well been in the pipeline from before the layoffs. The corollary from this statement is that sales could flatten in coming quarters if the marketing strategy management discussed does not continue to bear fruit as expected.

Satisfied with the response to the June contracts question, I asked Jeff about the size of the federal broadband stimulus program and if Towerstream would consider entering the retail consumer segment in light of this stimulus program. Jeff told me that the federal broadband stimulus program is $7.2 billion in size and that Towerstream plans to apply for these grants. The company however does not have any plans to enter the retail segment and wants to retain its focus on the business sector.

I also asked management about the increase in churn to 1.68% in the first quarter of 2009 when compared to 1.23% in the fourth quarter of 2008. Jeff attributed the increase in Q1 churn to weak economic conditions and mentioned that management is closely monitoring churn. Since sales is all about relationships, I am concerned that we might see an increase in churn following the June layoffs. The company reports second quarter results on August 5th and it will be interesting to see if the churn number holds below 2%.

The last time I spoke to Jeff, I asked him about the WiMax equipment providers that Towerstream uses and he told me that Alvarion was one of their key suppliers. Since Alvarion (ALVR) is a SINLetter model portfolio and also in my personal portfolio, I asked Jeff if they were continuing to work with Alvarion and it was reassuring to hear that Alvarion is still their preferred provider for equipment up to 5 Mbps.

I think the big wild card with Towerstream is accessibility to the broadband stimulus dollars, which as Jeff very cleverly reminded me is a grant and not a loan that has to be repaid. As to what caused the 40% spike in the price of the stock yesterday on volume that was more than 10 times average daily volume, your guess is as good as mine. The stock is up 143% since my November 26, 2008 call about Towerstream trading below cash and as I mentioned in my previous blog entry The Timeless Question: To sell or not to sell, taking profits from time to time is never a bad idea. The ex-employee I spoke to was clearly unhappy about what happened and felt that the company was “top heavy” but nothing in the conversation raised any red flags for me. Management sounded very confident on the call last week and I continue to remain bullish on the stock.

Voluntary Disclosure: I am long Towerstream in my personal portfolio.

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Special Report 2 Update: CALM Rises

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July 15, 2009 | Special Updates | Author Asif

Barron’s published yet another very bullish article about the country’s largest egg producer and the subject of our second special report Cal-Maine Foods (CALM) last night and the stock is up over 5% to $26.84 today. If you do not subscribe to Barron’s and would still like to read the article, just Google the title of the article Cal-Maine Shares Are Ready To Take Flight and click on the link that shows up under the news section.

The article mentions that egg prices have fallen about 30% for the industry and feed costs have now been slumping ...

The rest of this blog entry is only accessible to Special Report Subscribers. Click here to subscribe to Special Reports

The Timeless Question: To sell or not to sell

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July 9, 2009 | SIN Picks | Author Asif

I received a question from a subscriber earlier this week that resonated with another question I received from a subscriber shortly after I sold one-half of our position in Indian mining company Sterlite Industries (SLT) for a gain of 95.12% a couple of months ago. Both these questions were related to the trading axiom “Let your winners run but cut your losses quickly”. In the eyes of both these subscribers I had violated this axiom.

The subscriber who wrote to me about Sterlite Industries and Tata Motors (TTM), wanted to know if I felt any seller’s remorse after selling 100% of my position in Tata Motors and 50% of my position in Sterlite right before a rally in Indian stocks that saw Sterlite’s stock move up to $11.57 just days after I sold it for $9.19. He was quite clearly referring to the “Let your winners run..” part of the trading rule of thumb I mentioned above.

While I did feel some amount of seller’s remorse at selling half my position in Sterlite, years of experience have taught me that I am usually much better off taking profits (or losses) periodically based on a combination of company fundamentals, sector fundamentals and sentiment (fear like we had few months ago when I purchased Sterlite and euphoria at the time I sold it). I finally sold the second half of my position in Sterlite last week for a gain of 167% as mentioned in the July 2009 investment newsletter.

I pointed the subscriber to a comment that someone left at the bottom of this article that Seeking Alpha republished from the SINLetter blog entry Taking Profits in Umpqua Holdings. Oregon based regional bank Umpqua Holdings (UMPQ) was trading at $16.47 when I sold it for a gain of 35.78% and had appreciated by, get this, 56 cents to $17.03 when the commenter made the statement “Missed out on that one, huh? Oh ye of little faith! Expect money to continue into this stable, divi-paying player”. The stock went on to hit a high of $19 before crashing to its current price of $7.62. Given that the company cut its dividend to 5 cents per quarter and the stock is now available for less than half our selling price, I am not exactly certain who missed out.

Something similar occurred back in mid-2006 when I sold weight loss company Medifast (MED) for gains of over 230%. Had I held off on selling Medifast, I would have seen those gains cut in half at Medifast’s current price of $10.04. At one point last November, Medifast dipped down to $3.52. Even investors who are just starting out realize that “buy low and sell high” is a myth as it is neither possible to consistently get in at the absolute bottom or sell at the exact top. If you get a chance to sell at a decent profit based on sound fundamental and/or sentiment related reasons, taking some money off the table is not a bad idea.

If I have a weakness, it is not selling my losing positions soon enough. This was the subject of the question I received from another subscriber earlier this week who wanted to know why I do not use some sort of loss limiting strategy to eliminate stocks that have dropped 25 to 30% and preserve the capital to invest in other stocks that could turn out to be winners.

Using stop losses or monitoring a position so that you get out if the position drops by a certain percentage is a very good strategy. I used to be more nimble in the past and at one point sold Brazilian aircraft company Embraer (ERJ) and healthcare service provider Unitedhealth Group (UNH) for small losses when the underlying business fundamentals changed. Both companies eventually went on to lose more than half their value.

Unfortunately during this bear market, which has been characterized by high volatility and 900 point swings in the Dow in a single day, I have not stayed on top of taking losses in positions. I did close out losing positions like ETF provider WisdomTree Investments (WSDT.PK) and Barclays Bank (BCS) but as is often the case Barclays appreciated right after I sold and the loss on Barclays right now would have been much lower had I held on.

It was Warren Buffett who once said something to the effect “If you can’t handle your investment dropping by 50%, you should not be investing”. In a market like this, selling a position just because it has dropped 50% makes little sense. I am constantly evaluating each position in the SINLetter model portfolio and continue to have confidence in most of them. The two that I will most likely sell in the near future are Textron (TXT) and Blockbuster (BBI) as both of them have dropped precipitously and it is unlikely they will recover to the levels we bought them at.

Overall my outlook remains bearish at this point as mentioned in the July investment newsletter. If you have not had a chance to read the latest installment of gloom by Nouriel Roubini (also fondly known as Dr. Doom), you can check it out in the Forbes article titled Brown Manure, Not Green Shoots. It looks like UC Berkeley professor and former Secretary of Labor Robert Reich shares Dr. Doom’s gloomy outlook. I started my first short position since late 2008 in the form of put options in the Special Reports Portfolio on June 18 and added to those puts in my personal portfolio a week later.

I continue to look for both long and short opportunities but at this point sitting still and letting your investments play out like the speculator Jesse Livermore suggested might be the best idea.

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SINLetter – July 2009

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July 1, 2009 | Newsletters | Author Asif

Welcome to edition 46 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.

Note About June: Between the birth of my daughter and the birth of a new venture related to iPhone app reviews called AppStruck, I was not able to publish the June newsletter. Hopefully I can get back to my regular monthly schedule starting this month.

Book of the Month: Reminiscences of a Stock Operator by Edwin Lefèvre

Originally published in 1923, Reminiscences of a Stock Operator is a very lively, entertaining and informative biography of the speculator Jesse Livermore who made and lost multi-million dollar fortunes many times over from the early 1900s through the 1930s. Jesse got his start in the 1890s by speculating in unregulated pseudo-brokerages called Bucket Shops, which were outlawed in the 1920s, before moving on to Wall Street and becoming one of its most famous traders. Oddly enough during my last visit to India when the Bombay Stock Exchange Sensex was peaking around 21,000 (it hit a bottom of just over 8,000 fourteen months later), I heard of people trading in bucket shops there. Even though the book recounts the actions of a speculator nearly a century ago, it is peppered with pearls of wisdom like the following,
It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine–that is, they made no real money out of it. Men who can both be right and sit tight are uncommon.

While there is a lot about the book and Jesse’s trading style that rankles my investment philosophy, a self-made man who made millions by being short the market in 1907 and once again in 1929 right before the crash that kicked off the great depression, deserves respect and attention. My key take aways from the book were to act with conviction when you believe you are right and to stick with your winners as mentioned above. Hopefully the winner of the stock contest in July will both learn from and enjoy this book, which is written in a very easy to read narrative style.

Stock Contest #3 Update

When I was looking at the stock contest rankings the other day, I noticed that “d2cold” had jumped to the top of the ranking due to a gain of over 900% in paper and wood products company Domtar Corporation (UFS). Upon closer inspection, I realized that Domtar had a 1:12 reverse stock split and hence the massive increase in the price per share. Adjusting the purchase price by the same ratio as the split, moved d2cold to the fifth spot and “Raja” once again to the top. I had meant to put in a rule that said a winner cannot win again for the next three months but must have forgotten to include it under the rules and conditions of the contest. I am going to make this change effective immediately.

Prizes: Since we did not pick a book for June, Raja will also win a copy of the current Book of the Month Reminiscences of a Stock Operator by Edwin Lefèvre. If you would like to displace Raja from his throne click here to enter the stock contest. Each month we plan on reviewing an investment related book and the monthly winner will receive this book along with a free one year subscription to the SINLetter Special Reports, a $120 value. The grand winner at the end of the year will get all the books reviewed in these newsletters from April through the end of the year, a lifetime subscription to the SINLetter Special Reports and a surprise prize.

Portfolio Performance:

We have had a good month, good quarter and a good year thus far despite having close to 20% of the portfolio is cash over the last six weeks. The SINLetter model portfolio delivered gains of 8.84% in May followed by gains of 3.04% in June to close out the second quarter of the year with a gain of 24.52%, surpassing the indexes by a wide margin in Q2 and year-to-date. While I am happy about this gain, I am not so sure we will continue to see performance like this in the second half of this year as my outlook is bearish at this point. In keeping with this bearish outlook, I have initiated my first short position since late 2008 in the form of put options in the Special Reports Portfolio.

Performance Metric Dow S&P 500 Nasdaq SINLetter
May 2009 4.07% 5.31% 3.32% 8.84%
June 2009 -0.63% 0.02% 3.42% 3.04%
Q2 2009 11.01% 20.05% 15.22% 24.52%
Year-To-Date -3.75% 16.36% 1.78% 23.96%
Since Inception (Aug 2005) -20.48% -25.58% -16.41% 64.92%

Portfolio Readjustment:

I am selling the second half of our position (1,000 shares) in Sterlite Industries (SLT) for a profit of approximately 164%. I am also going to add 500 share of Safeway to the portfolio as discussed below. The closing price on Wednesday, July 1st will be used as the transaction price for these trades.

Safeway (SWY) $20.37

Investing is a lot of hard work. The time one has to spend staying current on existing positions, analyzing candidates for new positions and staying on top of macroeconomic events that could take a heavy toll on your portfolio despite the quality of your individual investments, can quickly add up. While we have been blessed with a number of powerful tools, we have also been cursed with access to so much information that the signal to noise ratio is rapidly diminishing. When looking for new investment opportunities, I have found it useful to look back at positions I once held but are no longer in the portfolio. If an old position is now at an attractive price, it saves me the time required to familiarize myself with the company, the sector it operates in, seasonal effects if they exist and the price history of the stock.

I recently started thinking about Safeway, a company that we sold from the SINLetter model portfolio back in November 2006 at $30.81 for a gain of 22.65%. The stock has lost nearly a third of its value since last 2006 but at the same time its balance sheet has gotten stronger and its earnings have increased. The world we live in now is quite different from the one we were in 2006 and a deep recession combined with P/E contraction easily explains the drop in Safeway’s stock price over the last two years.

I was originally attracted to Safeway back in early 2006 because of the potential for its “O Organics” line of products. Safeway executed very well with this private label brand by introducing products that not only had a great taste profile (their O Organics Blueberry jam is a personal favorite) but were also positioned right next to conventional products instead of being hidden away in a separate organic section. The brand has been so successful, that the company is now in the process of selling these products through other retailers both domestically and overseas. As mentioned in this Wall Street Journal article, Safeway has already signed up 240 Albertson’s stores, 150 ShopRite stores in South Africa and 100 Exito supermarkets in Colombia. Essentially Safeway is at the verge of becoming a grocery store chain as well as an organic/natural food products company like Dean Foods (DF), all rolled into one.

Safeway is also positioned well for consumers who are downgrading from Whole Foods (WFMI) during this recession. I have been seeing an emphasis on local produce at my neighborhood Safeway and the company is stepping up efforts to source 30% of its produce locally. Based on the product I want to buy, I alternate between Safeway, Whole Foods and Costco (COST) but the majority of my shopping is done at Costco. Every time I enter a Safeway or Whole Foods, I am usually in a state of price shock as they sometimes tend to charge almost twice the price for the exact same products I buy at Costco (lovers of Oroweat Whole Wheat bread probably know what I am talking about). As an investor however, I see this translating into better margins for Safeway. To verify that this is indeed the case, I decided to do a comparative analysis of these three grocery chains and also threw in Kroger (KR) for good measure as you can see below.

Comparative Analysis: When I pulled the numbers for Safeway and compared it with other grocery store chains, they confirmed what I noticed in the stores. Safeway not only has better margins than the rest of the group but also sells at a cheaper valuation when compared to other grocery store chains and sports a higher dividend yield. While Safeway’s overall balance sheet is more leveraged that Whole Foods or Costco, the company has a better current ratio (current assets divided by current liabilities) than Kroger and is almost on par with Costco.

Comparison of Supermarkets (June 30, 2009)

Whole Foods (WFMI) Costco(COST) Kroger (KR) Safeway (SWY)
Price/Earnings 29.43 18.17 11.15 9.63
Forward P/E 20.63 17.02 9.84 8.78
Price/Sales 0.34 0.28 0.19 0.20
Operating Margins 3.69% 2.53% 3.37% 4.14%
Profit Margins 1.3% 1.54% 1.72% 2.11%
Return on Assets 5.31% 5.37% 6.96% 6.53%
Return on Equity 5.98% 11.94% 24.45% 13.5%
Dividend Yield NA 1.6% 1.6% 1.9%
Current Ratio 1.406 1.089 0.886 1.046
Enterprise Value/Operating Cash Flow 6.36 9.63 7.59 6.68

Risks: The key problem that Safeway faces along with most other supermarkets is declining revenue in a very difficult economic environment. Safeway has been cutting costs but that will only help to a certain point. Hopefully the roll out of the “O Organics” brand to other supermarket chains at a premium price point will help the company grow both revenues and margins through this downturn. The other risk weighing Safeway down is the potential of a worker’s strike in Colorado. The 2004 strike in Southern California hurt Safeway’s results and that episode is still on investor’s minds as they keep an eye on the developments in Colorado.

Conclusion: Shop at Costco but invest in Safeway.

Model Portfolio – June 30, 2009

Long Stocks

Stock Symbol Number of Shares* Cost Current Value Diff ($) Diff (%) Date Added
Precision Castparts PCP 200@51.13 $10,226 $14,606 $4,380 42.83% 12/05/08
Sterlite Industries SLT 1000@4.71 $4,710 $12,440 $7,730 164.12% 11/06/08
Activision ATVI 1200@12.64 $15,162 $15,156 $-6 -0.04% 08/29/08
Towerstream TWER 13000@1.14 $14,769 $12,740 $-2,029 -13.74% 06/30/08
Textron TXT 150@62.55 $9,383 $1,449 $-7,934 -84.56% 05/31/08
Companhia Siderurgica Nacional SID 200@43.15 $8,630 $4,470 $-4,160 -48.2% 04/30/08
Lionsgate Entertainment LGF 1000@9.41 $9,410 $5,600 $-3,810 -40.49% 02/29/08
Powershares Water Resources PHO 400@22.1 $8,840 $5,888 $-2,952 -33.39% 10/31/07
Blockbuster BBI 3000@3.93 $11,775 $1,980 $-9,795 -83.18% 07/09/07
Unilever Plc UL 200@32.53 $6,506 $4,700 $-1,806 -27.76% 05/11/07
EMC Corp EMC 600@13.85 $8,310 $7,860 $-450 -5.42% 03/31/07
ICON Plc ICLR 300@18.65 $5,595 $6,474 $879 15.71% 01/31/07
Diamond Offshore Drilling DO 80@76.65 $6,132 $6,644 $512 8.35% 01/03/07
Alvarion ALVR 1000@6.87 $6,870 $4,470 $-2,400 -34.93% 01/03/07
Teva Pharmaceutical TEVA 300@35.05 $10,515 $14,802 $4,287 40.77% 09/01/06
Suntech Power STP 250@25.93 $6,483 $4,465 $-2,018 -31.12% 07/31/06
Procter & Gamble PG 180@55.6 $10,008 $9,198 $-810 -8.09% 06/30/06
Cash $31,982
Total $164,923 $64,923 64.92%

* Price and number of shares adjusted for Activision Blizzard (ATVI) and ICON plc (ICLR) to reflect splits on September 8, 2008 and August 13, 2008 respectively.

Voluntary Disclosure: From the stocks that are currently in the model portfolio, I own shares of Sterlite Industries (SLT), Activision Blizzard (ATVI), Towerstream (TWER), Lionsgate Entertainment (LGF), PowerShares Water Resources (PHO), Suntech Power (STP), Teva (TEVA), Alvarion (ALVR), Unilever (UL), and BlockBuster (BBI).

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