In this Newsletter
- April Blog Entries
- Book Of The Month
- Stock Contest Update
- I Am Tweeting
- Portfolio Performance
- Portfolio Readjustment
- Preferred Stock ETF
- Printer Friendly Version
SINLetter – May 2009
Welcome to edition 45 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 the Delay: I was feeling a little under the weather during the first week of May and could not put in the concentrated effort required to publish these newsletters. My apologies for the delay in publishing this newsletter.
April Blog Entries:
If you do not subscribe to blog entries by email or in case you missed them, here are the blog entries for April.
- Can Intel (INTC) Drive The Market Lower?
- Customer Service ala Twitter Style
- Closing Portfolio Positions
- The Secret Recipe of Slumdog Millionaire
- iRobot: Perfect Recipe for a Short Squeeze
If you do not receive blog entries by email, you can subscribe to receive them by email here.
Book of the Month: Liar’s Poker by Michael Lewis
|After reading about the much publicized demise of Conde Nast’s two year old $100 million experiment called Portfolio, I stumbled across an article titled “The End” by Michael Lewis on Portfolio.com. Contrary to my initial reaction, this lengthy but brilliant article was about the end of Wall Street as we knew it and not the end of this two year old business magazine. Reading through this article reminded me of Liar’s Poker, a funny insider account of Michael’s four years at Salomon Brothers that helped put him on the map.Folks who might be wondering if a book written in 1989 about a now defunct investment firm has any relevance in the world we live in now would find of great interest the detailed explanation of how an instrument called the Collateralized Mortgage Obligation (CMO) was invented by Salomon Brothers in June 1983. When I read Liar’s Poker a few years ago, little did I realize that this one instrument, would wreak such havoc more than two decades later when the housing bubble burst in 2006.|
Unlike the book we reviewed last month, A Random Walk Down Wall Street by Burton G. Malkiel, Liar’s Poker is not dripping with data from academic studies, graphs or theories but is an easy read peppered with colorful language and anecdodes like the one below that painted a vivid picture of a culture brimming with greed and excess,
|If a new employee, dubbed a geek, could make millions of dollars for the company, he became the most revered of all species: a Big Swinging Dick. And nothing in the jungle got in the way of a Big Swinging Dick.|
As equity investors many of us have very little exposure to how bonds markets function. Liar’s Poker does a great job of providing us a fun and light hearted glimpse into the world of bond trading as it existed at a Wall Street firm during its peak and is a must read in my opinion.
Stock Contest #3 Update
The first month of our third stock contest ended with yours truly in the lead with a 13.55% gain followed by Bob75 with a 8.13% gain thanks to his high tech security pick ArcSight (ARST). With a consensus analyst estimats of 45 cents in earnings for fiscal 2009 (ending April 2009), the stock may appear richly valued with a forward P/E of 33.55 until you consider that earnings are expected to increase 275% in fiscal 2009 and the company became profitable just two quarters ago. While the business model seems scalable, earnings growth is expected to moderate in fiscal 2010 and 2011. However Bob75’s picks could not hold a candle to my Oregon based commodity play Schnitzer Steel (SCHN), which delivered a 48.47% gain in a single month or the 24.46% love that toy company Mattel (MAT) showered upon me. I did get dragged down by a 32.27% loss from my leveraged hedge in the form of the Ultrashort Russell 2000 ETF (TWM). If you have used or are considering using a leveraged short ETF, please do so with extreme caution. This Morningstar article discusses why such ETFs can be damaging to portfolios when held for a long durations. During the first week of May, contestant “Raja” has beaten me at my own game by taking over the top position using low price high volatility stocks (the ideal recipe to win short-term stock contests). If you think you have what it takes to displace Raja, click here to enter the stock contest.
Prizes: Since I won in April, I am going to roll the April prize into May so that the May winner would get two books (A Random Walk and Liar’s Poker) instead of one. Each month we plan on reviewing an investment related book and the monthly winner would 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.
I Am Tweeting
I have very much enjoyed using Twitter over the last couple of months and have been posting periodic updates through it. If you would like to “follow” me on twitter my account name is specialsin. You can also see all my updates on this page.
Our Indian commodity pick Sterlite Industries (SLT) continued its upward journey in April, posting a gain of 20% for the month following a gain of 54% in March. As I write this newsletter, the stock is up nearly 108% in the SINLetter model portfolio, more than doubling our original investment over a 6 month period. The company earned 17 cents per share in Q4 2009 and $1/share in the full fiscal year ended March 31 despite a record drop in commodity prices. For instance during Sterlite’s previous fiscal year (April 2008 to March 2009) high grade copper prices fell from just under $4/lb to $1.80/lb. Since April 2009, copper prices have gone up about 18% to its current price of $2.12/lb.
With a trailing P/E of 10, increased production and a power plant on schedule for completion in 2009, the stock has additional room to run. If the Asarco deal goes through and the bankruptcy judge decides to accept Sterlite’s $1.7 billion bid over Grupo Mexico’s renewed attempts to acquire Asarco for $1.3 billion in cash, it would be icing on the cake. However as we have seen over and over again with investments like Suntech Power (STP), Medifast (MED) and ICON plc (ICLR), stocks that have doubled and tripled from our purchase price have at some point come crashing down. Fortunately we took profits in those cases by selling either the complete position or part of our position. Taking some profits off the table at current levels or utilizing put options for protection may be a good idea. At the money $10 September 2009 put options for Sterlite last traded at $1.80 and appear to be an expensive hedge. Instead I am going to sell half our Sterlite position both in the model portfolio and my personal portfolio.
The SINLetter model portfolio delivered double digit returns in April with a gain of 11.03% as you can see from the performance table below. The portfolio did better than the Dow and the S&P 500 in April but underperformed the Nasdaq. Year-to-date, we outperformed all three indices with a gain of 10.52% when compared to a 6.93% drop in the Dow.
|Performance Metric||Dow||S&P 500||Nasdaq||SINLetter|
|Since Inception (Aug 2005)||-23.11%||-29.35%||-21.78%||47.05%|
Due to the delay in the delivery of this newslettter, I figured I would focus on a few stocks that reported results over the last week. Activision Blizzard (ATVI) reported results that totally blew expectations out of the water with non-GAAP revenue of $724 million, which was well ahead of the company’s previous forecast of $550 million and analyst expectation of $593 million. Non-GAAP earnings of 8 cents per share were also well ahead of the company’s forecast of 3 cents per share. GAAP earnings were 14 cents per share after taking into account deferred revenue and costs from the December quarter. Activision revised both its full year revenue and earnings estimates upwards. Should Activision deliver on their 2009 earnings expectations of 63 cents per share, at its current price of $11, the forward P/E works out to 17.46 and the company is selling at 3 times 2009 sales estimates of $4.8 billion.
|With more than 11.5 million subscribers playing World of Warcraft, a strong pipeline of games from Blizzard and its status as the top external game seller for the Nintendo Wii, Activision is in a sweet spot while key competitors like Electronic Arts (ERTS) flounder. While our initial foray into Activision in September 2008 was at a post split price of $16.41, we doubled our position in December 2008 when the stock hit $8.86 as discussed in the blog entry End of Year Portfolio Changes. Activision was my top stock pick for 2009 and also happens to be the largest position in my personal portfolio (without taking employer stock into account). Since we already have a full position (9% of the portfolio), I do not plan on adding to our position right now but may consider buying more should the stock decline from these levels.|
The promise of wireless broadband technology WiMAX helped motivate me to launch this newsletter to cover WiMax related stocks like current portfolio holding Alvarion (ALVR). Unfortunately I committed two cardinal sins of investing with this position. The first one was to invest in an emerging technology and the second one was to hold too long. While emerging technologies can appear to be intriguing opportunities and the right ones go on to enrich our lives, early investors more likely than not get burned. We are currently looking at a loss of more than half our original investment not only because Alvarion is still trying to prove itself, but also because I failed to take profits when investors had bid the stock up all the way to nearly $15 in the Fall of 2007 on speculation that Cisco might acquire Alvarion. Cisco instead picked up Navini Networks for $330 million and Alvarion currently trades below book value at $2.99 per share.
Alvarion has $135.5 million in cash and cash equivalents on its balance sheet, which works out to $2.19 in cash per share. The company posted a small profit on a non-GAAP basis last quarter after excluding stock based compensation and amortization. With revenue of $281.28 million and a market cap of $185.22 million, the company is trading at a Price/Sales of 0.66. Alvarion has a strong sales pipeline with $100 million in order backlogs and deferred revenue. Overall Alvarion’s numbers do not paint as bleak a picture as its stock price does until you consider the fact that the company seems to be stuck in start-up mode and is unable to post consistent profits. Projections of a GAAP loss ranging from 3 to 9 cents a share next quarter failed to provide a glimmer of hope to long-term investors. Alvarion is most likely going to be a 2010 post-recession story that benefits from increased business and stimulus spending on broadband. At current valuation levels, the stock appears to have little downside risk and I am going to hold on to it until I need the capital for a compelling alternative investment.
Gold saw a second month of decline in April, dropping $33.1 or 3.6% to $884.90 per troy ounce.
I am selling half our position (1,000 shares) in Sterlite Industries (SLT) for a profit of approximately 108% and am not adding any positions to the SINLetter model portfolio at this time. The closing price on Wednesday, May 13 will be used as the sale price.
Advent Claymore Convertible Securities & Income Fund (AVK) $12.13
Preferred shares are a special class of investments that have a higher claim to a company’s assets than common stock but do not have the voting rights that common stock holders have. They also tend to pay a higher dividend than common stock and companies would normally cut or eliminate common stock dividends before they consider cutting preferred share dividends. Some preferred shares are convertible into common stocks. You can learn more about preferred shares here.
In light of the strong rally we have experienced over the last few weeks in the broad stock market and the financial sector in specific, which is up nearly 90% off its March 9 lows, I recently sold my preferred share ETF, iShares S&P U.S. Preferred Stock Index (PFF). While I am attracted to the 11% yield of the preferred shares ETF, over 80% of PFF’s portfolio consists of finanial stocks. In the uncertain investing environment we live in, preferred share funds have seen highly volatile swings, losing nearly half their value in a matter of weeks and rebounding just as quickly. Even before I sold my position in PFF, I started looking for alternative preferred shares funds that had less exposure to the financial sector and an attractive yield. The kicker would be to find such a fund that was actually selling at a discount to the value of the assets it held. The Advent Claymore Convertible Securities & Income Fund (AVK) is a closed-end fund that has only 20% exposure to the financial sector, sports a distribution rate of 9.29% and is currently selling at a nearly 10% discount to Net Asset Value or NAV. If you are interested in learning more about closed-end funds, you can check out the February 2007 investment newsletter where I discussed a long/short strategy as applied to closed-end funds in great detail.
There are no free lunches in investing and if you are wondering where the catch lies with AVK, the key risk to keep in mind is that AVK is a leveraged fund with about 48.24% leverage. Leverage appears to have come down over the last few weeks and the 1940 Act Asset Coverage Ratio has increased to 223%. According to the Investment Company Act of 1940, if the coverage ratio for preferred shares falls below 200%, the fund must suspend dividend payments. You can read the specifics of the 1940 Act regarding coverage ratios here. The 1.22% expense ratio of AVK is certainly much higher than the 0.48% charged by PFF but the portfolio holdings in AVK are diversified across sectors and include stocks like Mylan, Teva Pharmaceuticals, Transocean, Amgen and Intel. As some of you will realize, these are companies that have been discussed either in the newsletters or the SINLetter blog and are more transparent than financial stocks. I am going to add AVK to my personal portfolio but will not be adding it to the SINLetter model portfolio as I do not expect capital appreciation from this fund and the model portfolio does not take dividends into account.
|Stock||Symbol||Number of Shares*||Cost||Current Value||Diff ($)||Diff (%)||Date Added|
|Companhia Siderurgica Nacional||SIDemail@example.com/share||$8,630||$3,704||$-4,926||-57.08%||4/30/2008|
|Powershares Water Resources||PHOfirstname.lastname@example.org/share||$8,840||$5,608||$-3,232||-36.56%||10/31/2007|
|Diamond Offshore Drilling||DOemail@example.com/share||$6,132||$5,793||$-339||-5.53%||1/3/2007|
|Procter & Gamble||PGfirstname.lastname@example.org/share||$10,008||$8,899||$-1,109||-11.08%||6/30/2006|
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).
- 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.
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- We suggest you check with a broker or financial advisor before making any investment decisions.