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SINLetter – February 2010
Welcome to edition 50 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.
January Blog Entries:
If you do not subscribe to blog entries by email or in case you missed them, here are the blog entries for January.
- Satyam’s Scandal and Near Demise: One Year Later
- Verizon or AT&T?
- Activision Blizzard: Playing Diablo’s Advocate
- Festival of Stocks #177
We plan on updating the blog more often going forward and have a number of articles related to the gaming industry planned for this week. If you do not receive blog entries by email, you can subscribe to receive them by email here.
Following the heady gains of 2009, investors decided to take some profits in January despite better than expected earnings and revenue from a majority of the S&P 500 companies that reported results in January. The S&P 500 declined 3.7%, while the Nasdaq dropped an even steeper 5.37%. The SINLetter model portfolio declined less than 1% in January as you can see from the table below. Thankfully for the most part we have been able to outperform the market when it is going up and have avoided falling as much as the market when it is heading lower.
|Performance Metric||Dow||S&P 500||Nasdaq||SINLetter|
|Since Inception (Aug 2005)||-5.23%||-13.07%||-2.19%||95.52%|
In the Special Report #4 that was sent out to subscribers last week, I wrote on February 3rd:
“Whether you look at the market with a historical lens (PE10) or a forward looking view (Q4 S&P 500 estimates), the market looks overvalued. Recent international events from the debt crisis in Greece (their 2009 deficit is expected to hit 12.7% of GDP) to China threatening sanctions against U.S. defense companies over the sale of arms to Taiwan do little to inspire confidence in the markets at this juncture.”
“There are however enough positive data points out there ranging from a fourth quarter 2009 GDP report that came in at 5.7% to a drop in initial jobless claims that could lead the market higher. Hence I am going to continue looking for long opportunities while hedging for downside risk with the full understanding that our hedges will drop in value if the market continues to go up. With the market showing signs of weakness, I am going to take three specific actions that could benefit the SINLetter Special Reports portfolio in this environment.”
A couple of things have changed since I wrote those words. The positive data point on initial jobless claims that I referred to turned negative when initial jobless claims climbed unexpectedly to 480,000 in the last week of January. On the other hand it appears that Germany is working on a financial rescue plan for Greece. That only leaves us with potential issues with Spain (deficit 11.4% of GDP), Portugal and Ireland. The United States with a federal deficit of 10.64% of GDP is not far behind Greece and Spain and unless we address some of the structural problems with our budget and the economy, there is a good chance we could one day find ourselves face to face with a crisis of our own.
Vodafone is as much a play on its 5.5% attractive dividend yield as it is on buying an attractively valued company. Since the SINLetter model portfolio does not take dividends into account but the Special Reports Portfolio does, I am going to add Vodafone to the Special Reports Portfolio instead. The closing price on February 10 will be used as the purchase price.
In light of recent market weakness and the potential of a sharp correction over the next few months, I am going to double our put options on the S&P 500 index by adding four more June 2010 $105 contracts. Please note that on account of a glitch in Yahoo, we are no longer getting updated quotes for the options part of the SINLetter model portfolio and hence the quotes for options are updated once a day manually until we find an alternate solution. The rest of the portfolio automatically updates itself every 30 minutes.
Vodafone (VOD) $21.75
After writing the blog entry Verizon or AT&T? in response to a question from a friend and subscriber, I realized that best investment is neither Verizon, nor AT&T. Vodafone, with its 45% stake in Verizon Wireless and an agreement with Apple to sell the iPhone captures the best of both worlds. If you are investing in Verizon, it is primarily on account of growth in the wireless business as well as their fiber optic service FiOS. The wireline business at Verizon is shrinking just like it is at rival AT&T. An investment in Verizon is also a play on domestic growth inside the US. In contrast if you would like to capture the growth in wireless, prefer international diversification and still capture a piece of Verizon Wireless, consider England based Vodafone instead.
The Vodafone name was derived from the firm’s goal of establishing a voice and data services over cellular telecommunication networks. Hence VO represented voice and DA symbolized data — yielding the name Vodafone. Besides mobile devices and service, the company also provides broadband services to over 5.3 million customers with a year-over-year 1.1 million increase in fixed line customers. Vodafone’s ordinary shares are listed on the London Stock Exchange and it’s American Depositary Shares (ADS) are listed on the NASDAQ. Each ADS represents 10 ordinary shares.
Growth at Vodafone is being driven by strong data revenue thanks to demand for smart phones. Growth from the Asia Pacific region and the Middle East has helped offset a slowdown in Europe and Africa. In an investor update last Thursday, Vodafone’s CEO Vittorio Colao stated “Smartphones are 25% of our new sales and we expect that to go to between 30% and 40% in the next 12-18 months”.
This is hardly surprising given that Vodafone has a deal with Apple and started distributing the iPhone from January. Vodafone now offers the iPhone in 14 markets including UK. So you not only get a piece of Verizon Wireless but also AT&T’s iPhone advantage with emerging market growth thrown in for good measure. In terms of subscribers, Vodafone is the second largest mobile phone operator in the world after China Mobile, a company I have been watching since a friend brought it to my attention a couple of years ago. Incidentally Vodafone also owns a 3.3% stake in China Mobile (CHL), turning a $3.25 billion investment in 2000 and 2002 into $6.27 billion now.
The dividend yield of Vodafone as stated by the Wall Street Journal is 3.89% and appears to be significantly below the 6.6% and 6.7% yields of Verizon and AT&T respectively that have attracted a number of income investors. In reality, Vodafone’s dividend yield is much higher. Vodafone paid a dividend of 7.77 pence per ordinary share during the last fiscal year ended March 31, 2009. Since each ADR represents 10 ordinary shares, the dividend for the ADR works out to 77.7 pence or $1.22 based on the GBP-USD conversion rate of 1.57 from Feb 9, 2010. The dividend yield hence works out to a more attractive 5.53%.
Please note that Vodafone pays out dividend twice a year as an interim payment and a final payment, which is usually twice the size of the interim payment. The interim payment was paid out last Friday and the record date for the final payment is June 4, 2010 (ex-dividend date is June 2, 2010). Also note that you may be liable for foreign taxes on the dividend.
Vodafone operating margins of 27.16% are some of the best in the industry and the stock trades a just 5 times fiscal 2010 EBITDA. This compares with operating margins of 18.07% for Verizon and 17.47% for AT&T. The company increased cash flow in each of the first three quarters of fiscal 2010 as you can see from the figure below and has paid down debt to £31.7 billion. The EV/EBITDA ratio of 7.21 is however higher than Verizon’s 3.89 and AT&T 5.23 ratio.
1. EBITDA margins at Vodafone have been declining for years. The company has been targeting operating cuts that are supposed to yield as much as £1 billion in fiscal 2010.
2. Intense price competition in the mobile phone sector in general and emerging markets in particular is not only putting pressure on margins but also churn rates. For example churn for India in the third quarter 2010 (ended December 31, 2009) was 26%. This was for customers under contract. Prepaid customer churn was a magnitude higher at 38.9%.
3. The catalyst that a number of investors are looking for is an unlocking in the value of Vodafone’s 45% stake in Verizon Wireless. This could be achieved either through Verizon acquiring Vodafone’s stake, spinning off Verizon Wireless as a separate business or Verizon paying a dividend to Vodafone, which it has not done since 2006. None of these scenarios may occur and the spin-off seems the least likely.
|Stock||Symbol||Number of Shares*||Cost||Current Value||Diff ($)||Diff (%)||Date Added|
|Chicago Bridge & Iron||CBIemail@example.com||$10,585||$10,145||$-440||-4.16%||1/05/10|
|Companhia Siderurgica Nacional||SIDfirstname.lastname@example.org||$8,630||$5,824||$-2,806||-32.51%||04/30/08|
|Powershares Water Resources||PHOemail@example.com||$8,840||$6,344||$-2,496||-28.24%||10/31/07|
|Procter & Gamble||PGfirstname.lastname@example.org||$10,008||$11,079||$1,071||10.7%||06/30/06|
|Option||Number of Units||Cost||Current Value||Diff ($)||Diff (%)||Date Added|
Voluntary Disclosure: From the stocks that are currently in the model portfolio, I own shares of Chicago Bridge & Iron (CBI), Empolyers Holdings (EIG), 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).
- Suria Investments, Inc. does not warrant the completeness or accuracy of the content or data provided in this newsletter.
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- We suggest you check with a broker or financial advisor before making any investment decisions.