Archive for January, 2010

Festival of Stocks #177

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January 25, 2010 | Others | Author Asif

SINLetter is happy to host the Festival of Stocks #177, a weekly blog carnival featuring recent posts by contributing investment blog authors. The last time we hosted this festival was Festival of Stocks #15 way back in December 2006.

Here is the list of submissions for this festival.

Steve Alexander of MagicDiligence.com asks How Diversified Should You Be?

Mike Piper of The Oblivious Investor shows you How to Choose ETFs for Your Portfolio

I play devil’s advocate with my investment in Activision Blizzard (ATVI)

Jeff Rose of GoodFinancialCents presents Lost and Found: Is the 2000’s the lost decade of investing?

Jim from Blueprint for Financial Prosperity presents The S&P500 Dividend Aristocrats

Dividend Growth Investor analyzes the dividend aristocrat Brown-Forman Corporation (BF-B)

Dividends Value presents AT&T Inc. (T) Dividend Stock Analysis

ETF Database provides us with the Ultimate Guide To Agricultural ETFs: Agriculture ETF Investing 101

Trading Stocks discusses the use of Currency Options.

Dan from ETF Base looks at the performance of new ETFs launched in 2009

The Sun’s Financial Diary reviews 2009 Chinese IPO Stock Performance

The Smarter Wallet discusses Price Earnings Ratio: The Cyclically Adjusted P/E Ratio

PT Money goes over the 2010 Roth IRA Conversion Rules

Money Smart Life presents Capital Gains Tax Q&A

Manoj Bhagra reminds us about the Lessons In Investing From the Ancients!!!

And finally, Aussie from down under presents his thoughts about the Best Shares To Buy in 2010.

The next festival will be hosted by Compounding Life. Submit your entries here.

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Activision Blizzard: Playing Diablo’s Advocate

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January 25, 2010 | SIN Picks | Author Asif

There are two sides to every story and when it comes to investing in individual stocks, for every logical argument that one could provide for buying a stock, there may be an equally strong reason for avoiding it. My last article about gaming company Activision titled Ten Reasons I am Buying Activision Blizzard (ATVI), generated a healthy discussion on Seeking Alpha with 33 comments following the article and also resulted in a TV interview with a Canadian station called Business News Network.

While I briefly touched upon some of the risks of investing in Activision in my previous article, I did not get a chance to elaborate further and have for some time now wanted to write this post, playing devil’s advocate to my long case for Activision.

The Industry:

The original thesis for investing in Activision Blizzard was not just the potential of Blizzard’s pipeline of games and Activision’s strong franchises but also the notion that the video game industry is traditionally resilient in recessions by providing one of the cheapest forms of entertainment ($0.60/hour when compared to $2/hour for DVD rentals). However the Great Recession we just experienced was not kind to the video game industry. The industry saw sales decline by 8% in 2009 to $19.66 billion from $21.4 billion in 2008, which was incidentally a record year. Software sales fared even worse with an 11% year-over-year decline to $10.5 billion.

The troubled video game giant Electronic Arts (ERTS) not only lowered its forecast for the quarter ended December 31, 2009 but lowered its non-GAAP earnings forecast for its full fiscal year, which ends in March, down to $0.40 to $0.55 from an earlier forecast of $0.70 to $1.00. EA executives expect industry sales to be flat to down 5% in 2010. The interesting thing about this forecast is that Electronic Arts has some highly anticipated games coming out in the current quarter including Mass Effect 2, which is the top selling game for XBOX 360 on Amazon even before its release date of January 26, 2010. It is nice to see Activision’s Call of Duty: Modern Warfare 2 in second place on the best seller list after spending 268 days in the top 100.

Despite EA’s gloomy outlook and the slump in the industry, we may still be on the money with Activision as the company reaffirmed its 2009 outlook when it reported results for the third quarter. This was before Call of Duty: Modern Warfare went on to register $1 billion in worldwide sales.

Current Games and Pipeline:

The worldwide success of Call of Duty: Modern Warfare 2 foreshadowed some of the recent misses in the Activision lineup. The critically acclaimed DJ Hero did not live up to its expectations when it was released last quarter and neither did Tony Hawk Ride, which was panned by both critics and gamers alike. The $120 price tag for the game (now $99.99) probably did not help much either. Guitar Hero Van Halen, which was released right before Christmas hardly struck a cord with customers. Unless Activision signs up bands like U2, the Guitar Hero series appears to be running out of steam. The only title from Activision that looks interesting for 2010 is time travel sci-fi game called Singularity that reminds me of a few episodes from Lost: Season 5.

The good news is that the Blizzard division might pick up the slack in 2010 thanks to the highly anticipated release of Starcraft II and an expansion pack for World of Warcraft called Cataclysm. Starcraft II will be split into three parts (one game for each of the three races Terran, Zerg and Protoss) and hopefully at least the first part will ship in the first half of 2010. There is also the possibility of Diablo III in 2011 (or beyond), expansion packs for each of the three Starcraft II games and another Massively Multiplayer Online Role-Playing Game (MMORPG) along the lines of World of Warcraft. Call of Duty or Diablo may translate well into a MMORPG.

Fourth Quarter Earnings:

Activision Blizzard is scheduled to report fourth quarter and full year 2009 on February 10th. Expectations for non-GAAP earnings in the fourth quarter are running very high with analysts expecting the company to report earnings of 41 cents per share on revenue of $2.23 billion. In contrast the company generated non-GAAP revenue of $2.34 billion in Q4 2008 but that was as a result of three big hits, Guitar Hero: World Tour, Call of Duty: World at War and World of Warcraft: Wrath of the Lich King, in a single quarter.

The recent success of Call of Duty: Modern Warfare 2 may not be sufficient to help Activision meet or beat the street consensus for earnings this quarter. However the reason Activision Blizzard is the largest position in both the SINLetter Model Portfolio and my personal portfolio has little to do with the company making its numbers this quarter and more to do with buying an industry leader with a strong pipeline at an attractive valuation.

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Verizon or AT&T?

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January 15, 2010 | Stocks | Author Asif

I received a question from a subscriber about Verizon asking if I would consider picking up Verizon’s stock over AT&T. I started this analysis for the December 2009 investment newsletter but did not get a chance to finish it back then and hence am publishing it as a blog post instead. While his question was only about Verizon and AT&T, I included both Sprint and Comcast in the comparison tables listed in the valuation section below. With the baby bells increasingly moving into bundled offerings that include TV service and Comcast offering phone service, I figured it would be a good idea to see how Comcast stacks up against the baby bells.

Growth for Verizon and AT&T is being driven primarily by wireless and service bundles that include TV, phone, internet service and cell phone even as they are losing wireline business. The focus of this post is the valuation comparison tables at the bottom but I have briefly touched upon the two factors that are driving growth at these companies.

FiOS or U-verse?

Verizon had planned on investing $18 billion by 2010 to build out its fiber optic network and launch the FiOS service. I still recall the stock dropping back in 2006 when that news came out but the carrier had no choice to invest or be left behind. FiOS is generating $1.4 billion in quarterly revenue right now with Average Revenue Per User (ARPU) of $137/month when compared to standard consumer ARPU of $75/month. Using the quarterly revenue and monthly ARPU number provided, Verizon had approximately 3.41 million FiOS subscribers by the end of the third quarter of 2009. They expect to add a million new FiOS subscribers a year. Even if Verizon ends 2010 with 5 million FiOS subscribers, this would still be well below the 7 million subscribers estimated by the company back in 2006 when they started investing in FiOS. The investment in FiOS will be “substantially” complete by the end of 2010.

AT&T’s equivalent service called U-verse is tracking well behind Verizon with 2 million subscribers as of December 9, 2009 but is growing at a much faster clip. Revenue from U-verse is expected to top $2 billion in 2010 and customers who purchase these services are less likely to leave AT&T, thereby reducing churn. Looking at the bundles offered by Verizon and AT&T, it looks like Verizon’s $99.99 bundle offers more bang for the buck especially when you take into account the FiOS internet service (up to 15 Mbps downloads and 5 Mbps uploads) when compared to the $132 triple play bundle offered by AT&T with their Pro internet service (3 Mbps downloads) and U200 TV service.

iPhone or Droid?

Over the last decade, I have used mobile phone service from 5 different carriers starting with Voicestream Wireless (acquired by T-mobile) in 1999 to my current iPhone with AT&T. My worst experience was with Sprint and AT&T comes a close second in terms of connectivity issues. If I had the ability to transfer my iPhone from AT&T to another carrier like Verizon, I most likely would. When a journalist from AOL reached out to me a few weeks ago about AT&T’s service in the San Francisco bay area, I told him that my calls often drop especially while driving along highway 101 on the stretch just north of the San Francisco airport. A friend of mine who lives in the City runs into two dead zones during a short 10 minute commute to work. The question is not if AT&T will lose its iPhone exclusivity but when.

Verizon on the other hand is often mentioned as the carrier with the best network but every time I looked at the phone offerings from Verizon I used to come away unimpressed. The much anticipated release of the Motorola Droid running Google’s Android operating system sparked new interest in Verizon a few weeks ago. When having lunch with a friend earlier this week, he showed me his new Motorola Droid phone that he purchased after returning an iPhone. He told me that while there were certain things the Droid better than the iPhone, while the iPhone was like having a beautiful and charming person by your side, the Droid was the equivalent of a being in the company of a robot. I briefly tried the Droid and was not impressed. In contrast as you can see from this very detailed comparison of the iPhone vs. the Droid posted on our sister site AppStruck.com, a lot of iPhone users have found the Droid to be a worthy rival if not an iPhone killer.

Valuation:

AT&T activated 3.2 million iPhones just in the third quarter of 2009 and if you look at AT&T’s wireless ARPU for post-paid customers, the phone has been very beneficial to AT&T bottom line despite the data usage issues that the top 3% of iPhone users are creating for AT&T. Churn rates for iPhone users are also lower.

If you were to only consider the numbers in the tables below, one could easily make the case of investing in AT&T over Verizon after considering its wireless ARPU, profit margins, leveraged free cash flow and dividend yield. However when you look at churn, the balance sheet, valuation (EV/Operating Cash Flow or EV/Revenue) and management effectiveness metrics such as ROA or ROE, Verizon appears to be the better alternative. Finally throwing in the risk of AT&T losing its iPhone exclusivity and the early ramp of FiOS, I would personally pick Verizon over AT&T. Interestingly legendary hedge fund manager George Soros decided to buy both AT&T and Verizon for his portfolio but picked up a larger stake in Verizon.

Operating Metrics

Verizon (VZ) AT&T(T) Sprint (S) Comcast (CMCSA)
Churn (Q3 2009) 1.13% (post-paid) 1.22% (post-paid) 2.17% (post-paid) 2.7% (TV)
Wireless ARPU (post-paid) $52.78 $61.23 $56 NA
Gross Margins (Q3) 59.67% 58.24% 46.92% 60.67%
Operating Margins (Q3) 14.62% 17.46% (3.16%) 19.65%
Profit Margins (Q3) 4.31% 10.34% (7.88%) 7.43%
Return on Assets (ttm) 5.61% 4.88% (0.87%) 3.94%
Return on Equity (ttm) 11.77% 11.24% (15.62%) 7.5%

Financial Metrics

Verizon (VZ) AT&T(T) Sprint (S) Comcast (CMCSA)
Debt (billions) $62.82 $72.66 $21.66 $29.45
Cash (billions) $1.69 $6.17 $5.94 $0.92
Levered  Free Cash Flow (billions) $7.2 $14.66 $3.73 $3.79
Current Ratio 0.81 0.78 1.62 0.48
Dividend Yield 6% 6.2% NA 2.3%
Payout Ratio 94% 81% NA 24%

Valuation Metrics

Verizon (VZ) AT&T(T) Sprint (S) Comcast (CMCSA)
Price/Earnings 16.01 13.00 NA 15.56
Forward P/E 12.74 11.69 NA 13.89
Price/Sales 0.86 1.28 0.35 1.35
Enterprise Value/Operating Cash Flow (ttm) 5.09 6.15 5.73 7.22
Enterprise Value/Revenue (ttm) 1.44 1.82 0.83 2.16

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Satyam’s Scandal and Near Demise: One Year Later

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January 12, 2010 | Stocks | Author Asif

It has been just over a year since the near demise of the company behind India’s largest corporate fraud, Satyam Computer Service (SAY), a company that at the time provided services to more than a third of Fortune 500 companies. A subscriber asked me about Satyam last week and wanted to find out if I would consider buying the stock. Given that it has been a year since the scandal broke out and the company has started reporting results once again, I figured I would take a closer look at the company.

In case you did not follow Satyam’s saga at the time, here is a timeline of the events that transpired:

  • Dec 16, 2008: Satyam announces a plan to acquire Maytas Properties and Maytas Infrastructure, companies run by the sons of Satyam founder and chairman Ramalinga Raju that are completely unrelated to Satyam’s core software business. Angry investors react by punishing the American Depository Receipts (ADRs) on the NYSE with a 55% loss. The company scraps its acquisition plans in the face of investor backlash and announces the board is instead going to consider a stock buyback program.
  • Dec 23, 2008: The stock drops 13.55% on the Bombay Stock Exchange on rumors that its founder and chairman Ramalinga Raju has resigned from the board. On the same day the World Bank confirms that Satyam was barred from doing all business with the bank for an eight month period last February following allegations of data theft.
  • Jan 7, 2009: Satyam’s founder admits to falsifying accounts stating that the $1.04 billion in assets that the company listed on its balance sheet did not exist and that revenue was 20% lower than reported.
  • Jan 10, 2009:Founder Ramalinga Raju is arrested and sent to prison awaiting trial.
  • Jan 12, 2009: The stock plunges to $1.46 on the NYSE having closed the previous Friday at $9.35 per share. The stock is now down 95% from its 2008 high of $29.10 set less than 8 months ago on May 30, 2008.
  • Apr 2009: Tech Mahindra eventually acquires a 43% stake in Satyam. Tech Mahindra is a subsidiary of Indian automobile company Mahindra & Mahindra, one of Tata Motors (TTM) key competitors and the company that battled Tata Motors to acquire Jaguar and Land Rover from Ford Motor (F).
  • Jun 11, 2009: Satyam’s new chairman Kiran Karnik announces that the near-term revenue outlook was not great and that the company was under severe stress. The stock rises 10% for a third day in a row after results show that the company was still profitable. The NYSE listed ADRs open at $5.20 and hit an intraday high of $5.49 before closing the day at $4.30. The stock slides the rest of the month to end June at $3.11.
  • Nov 13, 2009: Indian infrastructure firm Larsen & Toubro that held a 6.9% stake in the new entity, sold a third of its position for Rs 112.5 ($2.42, based on an exchange rate of $1 = Rs 46.5)
  • Dec 3, 2009: JP Morgan (India) upgrades the stock from neutral to overweight with a price target of Rs 140 ($3.02 based on an exchange rate of $1 = Rs 46.31). JP Morgan analysts expect revenue to decline 36% in Fiscal 2010 (ended March 31, 2010), increase 18% in 2011 and 19% in 2012.
  • Dec 9, 2009: Satyam settles a more than $1 billion patent dispute lawsuit with U.K based Upaid Systems for $70 million. The settlement gives Satyam a royalty-free license of Upaid’s patents. $265 million in lawsuits from 37 companies remain unresolved.

What is the stock actually worth?

Regarding JP Morgan’s forecast, since the Satyam ADRs represent two shares each, the equivalent price target for the US listed ADRs is $6.04, representing a 9.6% upside from the current price of $5.51. The litigation risk that Satyam continues to face combined with a tarnished image and lack of visibility should ideally support a valuation that is at a steep discount of at least 50% to its peers. The last time Satyam reported revenue under US GAAP was back in October 2008 when they reported revenue of $652.2 million. If revenue was indeed inflated 20%, let us assume actual revenue was $543.5 that quarter. Revenue most likely declined after the scandal broke out and at the time Tech Mahindra acquired a stake in Satyam, full year revenue was expected to be $1.3 billion. If Satyam does post $1.3 billion in revenue for fiscal 2010 ending in March 2010, based on its current market cap of $1.86 billion, the stock is trading at 1.43 sales.

With competitors like Wipro (WIT) and Cognizant (CTSH) trading at 5.63 and 4.38 times sales respectively, Satyam is indeed trading at a steep discount to its peers when you look at revenue. However Satyam’s operating margins were 3% when the scandal broke out while Wipro and Cognizant sport operating margins of 17.91% and 18.99% respectively. Unless Tech Mahindra can improve Satyam’s operating margins, which it most likely will, the steep discount appears to be justified. Assuming Satyam does post revenue of $1.3 billion, manages to improve its operating margins to Cognizant’s level, and we apply a 50% discount to Cognizant’s 4.38 times sales valuation, I get a market cap of $2.85 billion for Satyam, representing 53% upside for the stock from current levels provided you are willing you live with the risks, don’t mind the lack of visibility and are hopeful that these assumptions will bear out.

With the Indian economy expected to grow by 7 to 8% for the current fiscal year that ends in March 31, 2009 and a world bank real GDP growth forecast of 8% in 2010 and 8.5% in 2011, India is certainly a favored investment theme. Despite the fundamental reasons for buying into India and the cost cutting in developed countries that has fueled the rise of Indian software companies like Infosys, Wipro and Satyam, the industry does face a number of headwinds in the form of a weak dollar, rising salaries and increased competition from companies like IBM that have developed large operations in India. So along with company specific risk, you also have currency risk and industry risk to consider.

Overall it appears that Satyam might be worth considering as a highly speculative investment that may do well should conditions at the company improve in 2010 and beyond. If JP Morgan’s revenue forecasts for 2011 and 2012 bear out, the stock is a bargain at current levels.

Model Portfolio Update: I am going to close our position in mattress fabric and furniture upholstery maker Culp Inc (CFI) and book gains of approximately 93% in the SINLetter model portfolio. The stock has performed well beyond my expectations since I wrote about it in the November 2009 investment newsletter and taking profits at this point would be prudent. The closing price tomorrow (Jan 13, 2010) will be used as the selling price.

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SINLetter – January 2010

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January 1, 2010 | Newsletters | Author Asif

Welcome to edition 49 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 #3 Winner

The contestant “d2cold” won the stock contest #3 with gains of 83.31% in less than 8 months followed by the runner up Bob75 who came in close behind with gains of 82.64%. Raja who held the top spot for many months in a row, took the third place. I found it interesting that d2cold was also the winner in the second stock contest we held in 2008. He is either a very skilled investor or a very lucky person.

Prizes: “d2cold” wins all the books reviewed on SINLetter in 2009, a lifetime subscription to the SINLetter Special Reports and a $50 Amazon.com gift certificate (the surprise gift).

Portfolio Performance:

I read an interesting article in the Wall Street Journal titled Hot Stocks For a New Decade? Wait a Minute! that started with the following lines,

Hands up if you had Southwestern Energy.
No? How about XTO Energy? Range Resources? Precision Castparts?

You should have. These were top stocks of the decade in the Standard & Poor’s 500-stock index.

The Hits: While we missed out on the massive gains posted by Southwestern Energy and XTO Energy, we did end 2010 with Oregon based Precision Castparts (PCP) posting a gain of 115.82% since we picked it up in December 2008. Our pick from the previous newsletter, mattress fabric maker Culp Inc (CFI), is also up a handsome 65.78% in less than two months after the company reported strong results for the second quarter of fiscal 2010. These gains along with gains from closed positions like Indian commodities giant Sterlite (132%) and wireless communications company Towerstream (58.44%) helped us close 2009 with gains of 48.30% for the overall model portfolio.

This compares with gains of 18.82% for the Dow, 23.45% for the S&P 500 and 43.89% for the Nasdaq as you can see below. With the exception of 2008, where our loss was on par with the loss of the S&P 500, the SINLetter model portfolio has outperformed the indices every year since its inception in 2005. The model portfolio has nearly doubled to $197,313 since its inception in August 2005. We would have easily crossed the $200,000 mark had we included our gains from apartment REIT AvalonBay (AVB) and the profits from the Pfizer-Wyeth merger arbitrage trade, which were instead included in the Special Reports Portfolio. AvalonBay has not only doubled since Special Report #1 was published back in February 2009, it has also helped us lock in a dividend yield of 8.1%.

The Misses: Despite these gains, 2009 was also a year of missed opportunities for me. Not only did I sell Tata Motors (TTM), Sterlite (SLT) and apartment REIT AIMCO (AIV) much too early, I botched an options trade in the Special Reports portfolio and missed out on quality companies that were probably trading at a generational low back in March 2009. While I was buying aggressively in October 2008 when the S&P 500 had dropped below the 850 level, I did not add to my positions with the same enthusiasm when the S&P 500 hit its low of 677 on March 9, 2009.

To add to my disappointment, a couple of companies I really like including Lionsgate Entertainment (LGF) and Activision Blizzard (ATVI) did not do as well as I had expected. Lionsgate was up 5.6% for the year and Activision was up 28.59%. Unfortunately both stocks are still in the red in the model portfolio. Activision has executed very well from a business perspective and I continue to like its prospects. Lionsgate has stumbled along in 2009 both from a business perspective and the market’s perception of its stock. The purchase of TV Guide was a terrible move but they redeemed themselves by selling nearly half their stake in TV Guide shortly thereafter. Hopefully 2010 will be redeeming year for both these stocks.

2010 Outlook: The outlook for 2010 appears to be murky with an equal number of optimists and pessimists on both sides of the fence. Many leading economists are talking about a double dip recession and the two downward revisions in third quarter GDP all the way from 3.5% to 2.2% combined with a small drop in builder confidence to 16 would give credence to their argument. On the other hand, you can find positive data points in both unemployment and home prices. Stocks and commodities have been trending higher (unless you had the misfortune of buying wheat futures) and are expected to continue doing so for some more time. The market looks expensive on a trailing earnings basis with an estimated P/E of 18.59 for the S&P 500 but cheap on a forward earnings basis when you consider an expected 2010 P/E of 13.94 for the S&P 500 (excel data here). I believe that we are at a cross-roads and it is best to continue investing with caution by purchasing undervalued stocks that were overlooked during the big 2009 rally, employing hedging strategies such as buying out of the money index puts and writing covered calls against positions that have appreciated a lot.

Performance Metric Dow S&P 500 Nasdaq SINLetter
December 2009 0.8% 1.78% 5.81% 3.63%
Full Year 2009 18.82% 23.45% 43.89% 48.30%
Since Inception (Aug 2005) -1.84% -9.73% 3.36% 97.31%

Portfolio Readjustment:

I am going to add 500 shares of Chicago Bridge & Iron (CBI) and 600 shares of Employers Holdings (EIG) to the model portfolio. I am also going to add 400 shares of the closed-end fund Eaton Vance Dividend Income fund to the Special Reports portfolio as discussed below. The closing price on January 5 will be used as the purchase price.

Three Investment Ideas for 2010

Instead of writing in detail about one company in this newsletter, I figured I would briefly highlight my top three investment ideas for 2010. There is one more stock I really like but I am going to hold that for the next Special Report due out in mid-January. I have to wrap my research, reach out to company management about a few questions and then put my analysis on paper.

1. Chicago Bridge & Iron Company (CBI) $20.66

Chicago Bridge & Iron is a company that contrary to its name is based in the Netherlands and has little to do with bridges and Chicago. The company has more to do with building infrastructure projects primarily for the oil and gas industry. To its credit it does have a couple of offices in Illinois to house some of its 19,000 employees located around the world from Africa to Southeast Asia. Amongst its various lines of businesses, the company builds storage tanks to hold liquefied natural gas (LNG), oil and gas plants, offshore drilling structures and also licenses refining technology from its vast portfolio that includes more than 1,500 patents or patent applications. As you can see this company is a play on energy and would be a good replacement for Diamond Offshore Drilling (DO), which we sold from the model portfolio back in September 2009.

While the stock has more than quadrupled from its March 2009 low of under $5, at its current price of $20.66, it is still off significantly from its January 2008 high of over $60. The stock trades at a forward (2009) P/E of 11.67, a Price/Sales ratio of 0.41 and EV/EBITDA of 5. The company reported record revenues of $5.94 billion in 2008 and ended the year with an order backlog of $5.7 billion. However the company posted a loss of $21 million for the full year 2008 due to cost overruns at two LNG terminal projects in the United Kingdom. After the loss incurred in the second quarter of 2008, the company did return to profitability and has been profitable for the last five quarters. CBI also beat analyst earnings estimates in each of those five quarters.

Unfortunately revenue has been declining throughout 2009 and Q4 2009 earnings are estimated to come in at 39 cents per share when compared to actual earnings of 72 cents in Q4 2008. Low operating margins of 6.4% (full year 2008) and a balance sheet that is not very strong (current ratio 0.699) are additional causes for concern.

Despite some of these concerns, the catalyst driving the stock higher in the near term is an increase in order backlog in the second quarter of 2009 after the company was awarded $1.6 billion in new contracts. Operating margins improved in the third quarter of 2009 to 9.24%. More recently the company was awarded a $1 billion contract in a joint venture with Australian firm Clough by a subsidiary of Exxon Mobile (XOM). Following the announcement of this contract Goldman Sachs raised its 2011 earnings estimate to $2.30 a share and has a price target of $30 for the shares, representing a 45% potential upside from current levels. The company is also on Goldman’s conviction buy list. As mentioned above, I am going to buy 500 shares of CBI for the model portfolio and also plan on buying shares for my personal portfolio after this newsletter is published.

2. Employers Holdings (EIG) $15.60

Value stocks have done well during the lost decade that ended last week but value stocks are usually a bargain for a good reason. While running some stock screens a few months ago, insurance company Employers Holdings kept showing up on my screen. Employers Holdings provides workers compensation insurance to small businesses in low to medium hazard industries. The company services clients in 30 states and derives a lot of its business from California and Florida. The stock was cheap for a reason. With unemployment rising, it stands to reason that the company’s revenue stream would decline and this is exactly what occurred from 2006 through 2008. The company however managed to remain profitable and posted operating margins of over 20% in 2008. I wanted to keep this company on the back burner until the first signs that the rate of job losses is declining. With initial jobless claims declining for a number of weeks in a row, I figured this is a good time to revisit Employers.

The company reported 2008 revenues of $397 million and is on track to hit 2009 revenues of over $500 million primarily due to its November 2008 acquisition of AmCOMP for approximately $223.5 million in cash and debt. Employers Holdings is expected to report $1.53 in full year 2009 earnings, giving it a forward P/E of 10.2, below the P/E of its industry and the S&P 500. The stock has a Price/Book value of 1.32. The company yields a small 1.6% dividend but management has also returned value to shareholders through share buybacks. The company bought back $54.43 million worth of its own stock through the end of September 2009 and has put another $50 million program in place to buyback shares in 2010. Insiders probably think the stock is a good buy as they have also been purchasing shares directly for their portfolios. The balance sheet appears to be strong and stockholder equity has increased in each of the last three years as well as the last four quarters.

Overall Employers Holdings has executed well in the current environment and is positioned well to benefit once unemployment stabilizes. As mentioned above, I am going to start a position in Employers Holdings both for the SINLetter model portfolio and plan on adding it to my personal portfolio as well.

3. Eaton Vance Tax-Advantaged Dividend Income Fund (EVT) $16.06

“In investing money, the amount of interest you want should depend on whether you want to eat well or sleep well” – J. Kenfield Morley, Some Things I Believe

I came across this quote in the book A Random Walk Down Wall Street by Burton Malkiel just as I was about to look into the closed-end fund EVT based on a request from my brother-in-law. A few months ago I introduced him to the 8% yields that some closed-end funds like iShares S&P U.S. Preferred Stock Index (PFF) and Advent Claymore Convertible Securities and Income Fund (AVK) offer, and since then he has been very interested in closed-end funds. Based on his request, I checked out EVT and it is an interesting closed-end fund that employs a small amount of leverage (20 to 30%), yields 8.2% (paid out on a monthly basis), has a portion of its portfolio in preferred shares (32.4% from the last semi-annual report) and has more than 40% of its portfolio in international investments, primarily in Europe. The domestic investments are mostly large cap stocks distributed across various sectors, with financial stocks accounting for 25.7% of the portfolio and 16.8% in the energy sector. Please note that these allocations are from the semi-annual report and allocations have probably changed since August 2009.

The fund was hit very hard from August 2008 to August 2009 but has rebounded since then. Net assets during that period fell from $1.77 billion to $1.12 billion. The fund is currently trading at a 7.49% discount to its Net Asset Value (NAV). The average discount to NAV over the last 52 weeks has been 13.28% and the spread between the market price and NAV has narrowed in recent weeks.

With the aforementioned quote in mind, I am going to park some of the cash we have in the Special Reports portfolio in this fund as the Special Reports portfolio does take dividends into account while the SINLetter model portfolio does not.

Model Portfolio – December 31, 2009

Long Stocks

Stock Symbol Number of Shares* Cost Current Value Diff ($) Diff (%) Date Added
Culp CFI 1500@6.02 $9,030 $14,970 $5,940 65.78% 11/02/09
Safeway SWY 500@20.29 $10,145 $10,645 $500 4.93% 07/01/09
Precision Castparts PCP 200@51.13 $10,226 $22,070 $11,844 115.82% 12/05/08
Activision ATVI 1200@12.64 $15,162 $24,442 $-2,440 -9.08% 08/29/08
Companhia Siderurgica Nacional SID 200@43.15 $8,630 $6,386 $-2,244 -26% 04/30/08
Lionsgate Entertainment LGF 1000@9.41 $9,410 $5,810 $-3,600 -38.26% 02/29/08
Powershares Water Resources PHO 400@22.1 $8,840 $6,744 $-2,096 -23.71% 10/31/07
Unilever Plc UL 200@32.53 $6,506 $6,380 $-126 -1.94% 05/11/07
EMC Corp EMC 600@13.85 $8,310 $10,482 $2,172 26.14% 03/31/07
ICON Plc ICLR 300@18.65 $5,595 $6,519 $924 16.51% 01/31/07
Alvarion ALVR 1000@6.87 $6,870 $3,740 $-3,130 -45.56% 01/03/07
Teva Pharmaceutical TEVA 300@35.05 $10,515 $16,854 $6,339 60.29% 09/01/06
Suntech Power STP 250@25.93 $6,483 $4,158 $-2,325 -35.87% 07/31/06
Procter & Gamble PG 180@55.6 $10,008 $10,913 $905 9.05% 06/30/06

Options

Option Number of Units Cost Current Value Diff ($) Diff (%) Date Added
SWGRA.X 4@9.5/contract $3,800 $1,780 $-2,020 -53.16% 11/02/2009
Cash $45,421
Total $197,313 $97,313 97.31%

* 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 Safeway (SWY), 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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