In this Newsletter
- Stock Contest Winner
- Portfolio Performance
- Portfolio Readjustment
- Three Ideas For 2010
- Printer Friendly Version
SINLetter – January 2010
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).
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|
|Full Year 2009||18.82%||23.45%||43.89%||48.30%|
|Since Inception (Aug 2005)||-1.84%||-9.73%||3.36%||97.31%|
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 $1.12 billion. The fund is currently trading at a 7.49% discount to its Net Asset Value (NAV). The average discount to NAV over the last 52 weeks has been 13.28% and the spread between the market price and NAV has narrowed in recent weeks.
With the aforementioned quote in mind, I am going to park some of the cash we have in the Special Reports portfolio in this fund as the Special Reports portfolio does take dividends into account while the SINLetter model portfolio does not.
|Stock||Symbol||Number of Shares*||Cost||Current Value||Diff ($)||Diff (%)||Date Added|
|Companhia Siderurgica Nacional||SIDemail@example.com||$8,630||$6,386||$-2,244||-26%||04/30/08|
|Powershares Water Resources||PHOfirstname.lastname@example.org||$8,840||$6,744||$-2,096||-23.71%||10/31/07|
|Procter & Gamble||PGemail@example.com||$10,008||$10,913||$905||9.05%||06/30/06|
|Option||Number of Units||Cost||Current Value||Diff ($)||Diff (%)||Date Added|
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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