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SINLetter – March 2010
Welcome to edition 51 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.
A New Engine Under the Hood:
I built the SINLetter website in 2005 with the dual goal of sharing information and to teach myself a new programming language. Towards this end, I wrote a blogging platform from scratch and created a model portfolio that automatically updates itself during market hours. I eventually transitioned the maintenance and enhancement of this platform to my software team so that I could spend more time on finding the best investment opportunities for you. After implementing a number of WordPress based sites for clients of my software company Eugene Software Solutions including AllAboutAlpha.com (acquired by CAIA Association) and ETF Expert, we figured it was time to migrate SINLetter to a more powerful platform like WordPress, especially since members of my team are absolute wizards at bending the popular blogging platform WordPress to their will.
Retaining most of the external mold and paint, we present SINLetter to you with an enhanced engine under the hood. Please bear with us while we work out the kinks with this migration. We have also expanded our editorial team with Jackie Judge (who is the main voice at our sister site AppStruck.com) and Ann Kumar with the goal of adding new features like “Arbitrage Mondays” and posting fresh original content more frequently. Arbitrage Mondays will provide a simple snapshot of all the pending mergers to free subscribers and an enhanced view with potential annualized returns for Special Reports subscribers. If you would like to learn more about merger arbitrage, check out the section Merger Arbitrage and the Pfizer – Wyeth Deal from the March 2009 newsletter. That deal produced returns (including dividends) of 19.64% over 6.4 months, or 36.88% annualized.
February Blog Entries:
If you do not subscribe to blog entries by email or in case you missed them, here are the blog entries for February.
- Project Natal: Revolutionary Technology for an Industry in Distress?
- Thoughts on Activision Blizzard’s Q4 Results
- Marcus Revisited: The Avatar Effect
- Is Toyota Worth Buying at Current Levels?
If you do not receive blog entries by email, you can subscribe to receive them by email here.
Portfolio Performance:
The SINLetter model portfolio posted a gain of 2.29% in February buoyed by additional gains in grocer Safeway (SWY), generic drug manufacturer Teva Pharmaceutical (TEVA) and Oregon based industrial company Precision Castparts (PCP), which is now up over 120%. However our hedge in the form of June S&P 500 puts lost additional value when the S&P 500 surged 2.85% in February. Drops in Unilever (UL) and WiMax equipment maker Alvarion (ALVR) also contributed to the model portfolio marginally underperforming the indices in February as you can see from the table below.
| Performance Metric | Dow | S&P 500 | Nasdaq | SINLetter |
| February 2010 | 2.56% | 2.85% | 4.23% | 2.29% |
| Since Inception (Aug 2005) | -2.8% | -10.59% | 1.95% | 99.99% |
Safeway (SWY) posted fourth quarter 2009 results that were inline with estimates after excluding a huge one time goodwill write-off of $1.82 billion. The company generated $1.5 billion in free cash flow in 2009, the highest annual cash flow ever achieved by the company despite an 8.1% drop in revenue in the fourth quarter. The street chose to focus on this free cash flow number and bid the stock up. We picked up Safeway last July not only because of its attractive valuation when compared to peers but also because of the company was positioning itself as an alternative to consumers who might trade down from Whole Foods. Safeway had to shift focus in recent months to cater to customers looking for the best value and the company has done a very good job of navigating this deep recession. The company is also a good play on inflation eventually making a comeback. Safeway is now up 22.82% since our July 2009 purchase and I plan to continue holding the stock.
Activision Blizzard (ATVI) reported better than expected fourth quarter non-GAAP earnings of 49 cents, beating street consensus estimates by 5 cents. The company initiated a dividend, announced a massive $1 billion stock buyback and generated a record $1.2 billion of operating cash flow. It looks like the company can do no wrong and yet the stock can do no right. The stock spiked up on earnings but has been drifting lower since then. Activision’s outlook for 2010 was lower than street expectations and this appears to be weighing the stock down. On a positive note, the much anticipated Starcraft 2 beta is out and thousands of players are participating in the beta. Given how sought after these beta keys were, some of them were selling on Ebay for as much as $450 per key. Early reviews have been positive, with one reviewer claiming that he had not eaten, slept or taken any sort of break for 12 straight hours after getting his hands on the beta version of the game.
Portfolio Readjustment:
I am making no changes to the portfolio this month but as discussed below, I am going to add Crocs (CROX) to the watch list.
Crocs (CROX) $7.05
Editor’s Note: While discussing investment ideas with fund manager Michael Bigger of Bigger Capital last month, I read some of his research on the footwear company Crocs and found it intriguing. I invited Michael to write about Crocs for the March newsletter and given below is his thesis for why Crocs could be a great turnaround play. I am going to add Crocs to our watch list and may add it to the SINLetter model portfolio in the future.
The Story:
No introduction to this company is needed. People either like Crocs or they don’t, but either way, they talk about them. Being talked about is great when the barriers to getting brand attention are so high.
Last summer, if you typed “crocs” into Twitter’s search box, you identified the following criticisms about the company:
- Crocs are coyote ugly.
- Knockoffs are cheaper; there is no need to buy Crocs.
- Crocs are a short-term fad.
- The company is mismanaged.
- The company is doomed. The Washington Post reports that Crocs is on its way to bankruptcy (July, 2009).
Fast forward six months and a different view of the company emerges:
- Crocs’ newest styles are stylish. Check for yourself on the Crocs website.
- From Amazon.com’s “Best of 2009″ list of shoes and handbags: the Crocs Cayman Sandal.
- Crocs had up to six shoes among the top ten bestsellers in men’s shoes throughout the year on Amazon.com.
- I just came back from India and the Dominican Republic, and I can attest that Crocs are everywhere. Crocs are not a fad.
- John Duerden, short term turnaround specialist and appointed CEO of Crocs in February 2009, did an amazing job stabilizing the company.
- As of December 31, 2009, Crocs’ cash increased to $77 million, despite fully repaying outstanding debt.
- Wholesale, which had been a drag on the business, had flat comps for the fourth quarter.
- Wholesale spring and summer pre-bookings trends are +30% Europe, +60% America, +130% Total Americas, +61% Asia, and +50% globally.
- U.S. wholesale fall and winter pre-bookings trend is +70%.
- The CEO gave a presentation (slideshow) at the ICR Conference on January 13, 2010. He sounded very upbeat and forecasted a return to profitability for 2010.
Crocs reported fourth quarter earnings last week. The results beat analysts’ forecast both on the top line and the bottom line. The company issued first quarter 2010 guidance that is above analysts’ consensus.
In addition, short term turnaround specialist John Duerden, who was appointed CEO of Crocs in February 2009, will retire from the company and John McCarvel, the company chief operating officer, will become Crocs’ CEO.
The stock plunged 14% on the news. Should investors worry about this situation? Could this be a canary in the coal mine? It is time to reassess our investment thesis about Crocs.
The Numbers:
With 3,700 employees and sales of $650 million, Crocs has a market cap of $636 million, giving it a price/sales value of 1. This hardly qualifies as a bargain, especially considering the company lost about $.49 a share for 2009. During its heyday, Crocs’ net profit margin topped at an unsustainable 20%. It seems reasonable and conservative to assume an industry average net margin of about 7% for Crocs for analytical purposes. On that basis, the stock trades at a P/E of 14 (E being defined as conservative earning power). The company has about $1 to $1.50 per share of excess working capital.
| Channel Results Q3 2009 | Channel Results Q4 2009 | Channel Contribution |
| Retail sales increased 39.6% to $53.9 million | Retail sales increased 25.9% to $43.8 million | 30.4% |
| Internet sales increased 61.0% to $16.1 million | Internet sales increased 20.6% to $15.3 million | 9.1% |
| Wholesale sales decreased 14.7% to $107.1 million | Wholesale sales decreased 2.1% to $77.0 million | 60.5% |
The Thesis:
Looking at the table above, it becomes obvious that wholesale has stabilized. If you look at the wholesale pre-bookings metrics displayed in bullet #8 and #9 above, one can assume this business is coming back with a vengeance (and fourth quarter is the seasonally slow quarter). I don’t know about you, but I do get excited by sales growth rates way above 20%, as the numbers above indicate. They are all pointing positive and strong for 2010.
With regards to John McCarvel, we just don’t know enough about him at this stage to make an assessment. We are monitoring the situation.
For us at Bigger Capital, an investment in Crocs is a very long-term bet that the company will strongly expand its market share on a global basis over the next ten to twenty years. For Crocs fans, the satisfaction of wearing these shoes is as intense as the enjoyment of Coca Cola fans drinking their favorite beverage, Tempur-Pedic fans sleeping on a very comfortable bed, or Tylenol fans relieving their muscle pain. (Try a pair of the new “Almost Barefoot” ABF Flips and let me know what you think.)
Risk Factors:
1. John Duerden’s departure could be disruptive.
2. As Crocs opens more stores on a global basis, its capital-heavy balance sheet becomes riskier.
3. The cat gets out of the bag and more competition enters the molded shoe business.
4. The stock has rallied about nine times over the last year from a base of $.79. The stock could experience another sharp pullback.
Long Stocks
| Stock | Symbol | Number of Shares* | Cost | Current Value | Diff ($) | Diff (%) | Date Added |
| Chicago Bridge & Iron | CBI | 500@21.17 | $10,585 | $10,845 | $260 | 2.46% | 1/05/10 |
| Employers Holdings | EIG | 600@14.92 | $8,952 | $7,908 | $-1,044 | -11.66% | 1/05/10 |
| Safeway | SWY | 500@20.29 | $10,145 | $12,460 | $2,315 | 22.82% | 07/01/09 |
| Precision Castparts | PCP | 200@51.13 | $10,226 | $22,550 | $12,324 | 120.52% | 12/05/08 |
| Activision | ATVI | 2200@12.64 | $26,882 | $23,386 | $-3,496 | -13% | 08/29/08 |
| Companhia Siderurgica Nacional | SID | 200@43.15 | $8,630 | $6,538 | $-2,092 | -24.24% | 04/30/08 |
| Lionsgate Entertainment | LGF | 1000@9.41 | $9,410 | $5,450 | $-3,960 | -42.08% | 02/29/08 |
| Powershares Water Resources | PHO | 400@22.1 | $8,840 | $6,552 | $-2,288 | -25.88% | 10/31/07 |
| Unilever Plc | UL | 200@32.53 | $6,506 | $5,888 | $-618 | -9.5% | 05/11/07 |
| EMC Corp | EMC | 600@13.85 | $8,310 | $10,494 | $2,184 | 26.28% | 03/31/07 |
| ICON Plc | ICLR | 300@18.65 | $5,595 | $7,065 | $1,470 | 26.27% | 01/31/07 |
| Alvarion | ALVR | 1000@6.87 | $6,870 | $3,670 | $-3,200 | -46.58% | 01/03/07 |
| Teva Pharmaceutical | TEVA | 300@35.05 | $10,515 | $18,003 | $7,488 | 71.21% | 09/01/06 |
| Suntech Power | STP | 250@25.93 | $6,483 | $3,315 | $-3,168 | -48.86% | 07/31/06 |
| Procter & Gamble | PG | 180@55.6 | $10,008 | $11,390 | $1,382 | 13.81% | 06/30/06 |
Options
| Option | Number of Units | Cost | Current Value | Diff ($) | Diff (%) | Date Added |
| SWGRA.X | 8@7.47/contract | $5,976 | $2,440 | $-3,536 | -59.17% | 11/02/2009 |
| Cash | $42,038 | |||||
| Total | $199,991 | $99,991 | 99.99% |
* 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 Chicago Bridge & Iron (CBI), Empolyers Holdings (EIG), Safeway (SWY), Activision Blizzard (ATVI), Lionsgate Entertainment (LGF), PowerShares Water Resources (PHO), Suntech Power (STP), Teva (TEVA), Alvarion (ALVR) and Unilever (UL).
DISCLAIMERS :
- Suria Investments, Inc. does not warrant the completeness or accuracy of the content or data provided in this newsletter.
- Suria Investments, Inc. does not comprise any solicitation to buy or sell securities.
- Suria Investments, Inc. will not be liable for any investment decision made or action taken based upon the information in this newsletter.
- We suggest you check with a broker or financial advisor before making any investment decisions.