This is the third part of a three part post covering the stocks that almost made the cut for the September 2007 newsletter. You can read part 1 and part 2 here and here. I am also updating the model portfolio by adding Marcus (MCS) to the portfolio.

Marcus Corp (MCS) is a company based in the heartland of America that operates a chain of hotels and resorts as well as 52 movie theatres playing movies on 628 screens. The company also manages hotels for third parties. I have written about Marcus multiple times on this blog and last wrote about it in a post titled Bring Out The Popcorn For Marcus Corp. After selling Marcus from my personal portfolio for a gain of 23% last September, I decided to revisit the company when I noticed that a slate of movies such as Spider-Man 3, Transformers, Pirates Of The Caribbean: At World's End, Bourne Ultimatum, and the surprising hit Superbad have done very well recently, making this the first summer ever to pull in more than $4 billion at the box office (pdf). I must confess that I am guilty of watching Superbad and if you like movies like Harold & Kumar Go To White Castle, you might like Superbad. Based on the performance of movies this summer and others such as Beowulf and Eastern Promises that are in the pipeline for later this year, box office receipts in 2007 are likely to surpass receipts in 2006, which in turn were 4.91% higher than 2005. According to Media By Numbers (pdf), as of September 3rd, 2007 receipts are already 7.42% higher when compared to the same time last year.

With the advent of inexpensive large wide screen TVs and home theatre systems, the decline of a movie going audience that is willing to pay almost $10 per seat (in some parts of the country) and as much as $3 for a bottle of water has been widely discussed over the last few years. In this environment Marcus is not only thriving (sales increased 37.2% and net earnings increased 81.5% in the fiscal fourth quarter ended May 31, 2007) but recently acquired another movie theatre operator and is experimenting with novel ideas such as its new Majestic theatre in Waukesha, Wisconsin. The Majestic is a theatre that enhances the movie going experience by offering 72-foot wide UltraScreens, a made-to-order pizza shop, a lounge, a coffee shop and ice cream parlor and get this, child care. Marcus figured that if customers had plans for dinner, a movie, drinks and dessert, why not give them everything they want in a single location.

Marcus has dropped more than $4 or 17% since I sold my position last September and the company is much cheaper now with a P/E of 18.45, a P/S of 1.83 and a dividend yield of 1.7%, which is in line with the average dividend yield of the S&P 500. Based on how Marcus defines its fiscal year, its first quarter extends from June through August and is likely to benefit from strong box office receipts this summer even though it does not include the Memorial Day weekend like it did last year. The company mentioned this when it said "At this point in the summer, our theatre box office at comparable theatres is about even with last year, except that last year included the Memorial Day weekend, which we don't have this year. The newly acquired theatres continue to perform as expected. Early summer films such as Ocean's 13, Knocked Up, Fantastic Four: Rise of the Silver Surfer, Live Free or Die Hard, Ratatouille and Transformers opened well and Harry Potter and the Order of the Phoenix and The Simpsons Movie had blockbuster openings in July. We are hopeful that the remaining films of the summer, including The Bourne Ultimatum and Rush Hour 3, will result in a strong ending to our first quarter of fiscal 2008".

I expect Marcus to report a stellar numbers when it reports first quarter results in late October or early November and am going to start a position in Marcus despite my slightly negative outlook for the market. I will also start a position in my personal portfolio after this blog entry is published.

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This is the second of three blog posts covering the three stocks that almost made the cut for the September 2007 newsletter.

About six months ago a subscriber suggested a micro cap biotech company called Lipid Sciences (LIPD) that he felt had a great story and was trading for less than $1.50 per share. In his words this company should have been pre IPO but they became public through a reverse merger with an Arizona public shell company called NZ Corporation. From what I could read on the Lipid Sciences website, the story indeed seemed very interesting with the company attempting to remove "select lipids-- such as cholesterol and triglycerides--from lipoproteins and lipid-coated infectious agents". In laymen's terms this translates into treating heart disease and highly infectious diseases like HIV or SARS by selectively removing fat soluble molecules called "lipids". Since my background is in technology, I could not really asses if their research had commercial potential and if the story was indeed as good as it sounded.

I convinced my friend Hatim Zariwala, who recently completed his Ph.D in Neurosciences from one of the top neuroscience institutes in this country, to take some time off from inserting electrodes into rat brains and look at Lipid Sciences. Given below are some of his thoughts about the company.

Technology:

1. They have used a rather believable concept from lipid chemical biology, developed a patented technology for delipidation, have shown promise at the preclinical level but no clinical results yet on its utility in HDL therapy as well as antiviral vaccine.
   
   
2. The preclinical results with delipidated viruses have been successful in developing cell-mediated immunity against the virus.
   
   
3. LIPD proposes encouraging preclinical results for HDL therapy.

Market Potential:

The estimated overall antiviral market in the world is roughly $16 billion (conservative projection) and that of cardiovascular care $22 billion (US only) and ever growing in the developing countries like China, India and Russia. The cardiovascular care is complementary to therapy for obesity, stroke and diabetic care.

Company fundamentals:

1. The company has not yet disclosed its potential competitors. We couldn't find anyone else advertising the development of this technology for human clinical application. We have not been able to assess any competitors so far.
   
   
2. The company R&D expenses have grown in the last two quarters and we couldn’t find any forward looking statement defining deadlines for announcing their results.
   
   
3. LIPD has no net income and its income per share is negative. But this is the case with majority (and an overwhelming majority) of early stage biopharmaceuticals.

Future:

1. Even at (a stock price of) $1.24 most analysts have put a "Strong Sell" rating on this stock. Though I was initially very excited about the prospect of this technology, I would definitely put a cautious rating till the results from the clinical trials are out.
   
   
2. FDA approval to increase the number of hospital and patient recruitment of LIPD is encouraging.
   
   
3. We do not know what the delivery route for their antiviral or HDL therapy would be. We believe the HDL therapy will be restricted to the in-patient population. The antiviral therapy is not a traditional viral therapy, it is a vaccine (what is the market for anti-viral vaccines).

After getting Hatim's thoughts, I also checked with another senior scientist who has years of experience advising senior management at biotech companies and is well on his way towards developing a new drug through his own pharmaceutical company. His thoughts on Lipid Sciences were that the company is targeting an area of research that is so vast and with so much potential that it is usually done by either government funded agencies or universities. He also told me that in more than five years the company has not even reached phase 1 clinical trials and that is not very encouraging.

Management has been done a great job of keeping a lid on operating expenses and based on its current rate of cash burn of approximately $11 million per year, the company has enough cash on hand to last through the middle of 2008. I was looking at Lipid Sciences as nothing more than a call option that expires in mid 2008 but based on the feedback of the two scientists I consulted, even this call option appears to be expensive. The stock had dipped to as low as $1.03 just a couple of days ago and is dangerously close to getting a deficiency notice from the Nasdaq, which is triggered if a stock trades below $1 for 30 consecutive days.

I hope that Lipid Sciences eventually goes on to become successful and I will continue watching this company like I have done for the last six months but I would prefer to do so from the sidelines rather than have my money on the line.

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This is the first of three blog posts covering the three stocks that almost made the cut for the September 2007 newsletter.

Over the last six months I have had a chance to research and purchase a few laser and inkjet printers made by Dell (DELL), HP (HP) and Canon (CAJ). As many of you are aware, manufacturers make their money on inkjet printers through the refill cartridges and sometimes use the actual printer as a "loss leader". A good example of this was Dell giving away printers for free along with the purchase of a computer. Consumers buying printers for personal or light business use prefer inkjet printers because the initial cost is low and the quality of color prints is much better. With the widespread use of digital cameras, more and more people are buying inkjet printers to print pictures at home.

I recently purchased a Canon PIXMA MP600 inkjet printer for light home office use and was very satisfied with both the quality and functionality offered at such a low price. I also happened to notice that the stock of ink cartridges for this Canon printer was low at my neighborhood Circuit City and these cartridges also happened to be one of the top ten best sellers at Amazon.com under the electronics section. The fact that this printer won PC Magazine's reader's choice award may have something to do with this. While this can be construed as nothing more than anecdotal evidence of demand for Canon's printers and ink, consider the fact that Canon recently announced plans to open a factory to manufacture printer cartridges.

Canon PIXMA MP600 Printer

Canon cameras hold 8 out of the 10 spots on Amazon.com's top 10 best sellers list under the cameras and photo category. Incidentally I happened to purchase a Canon PowerShot Pro S3 IS camera for someone at work just a few months ago. Canon has done a great job covering the low, mid and high end segments of digital cameras with its Digital Elf SD 1000 7.1 MP camera, the Canon PowerShot Pro S5 IS 8.0 MP camera and the Canon Digital Rebel 10.1 MP SLR camera.

As an investor, I started looking into Canon's stock as a potential investment and candidate for the September investment newsletter and liked what I saw. Canon currently trades at a current P/E of 16.11, a forward P/E of 14.45, a P/S ratio of 1.79, sports a 1.6% dividend yield, has a rock solid balance sheet with $10.84 billion in cash and investments and only $262 million in debt. The company not only grew both revenue and earnings by 11% and 20.8% respectively in the first half of 2007, it raised its full year operating profit forecast to $7.44 billion representing year-over-year growth of 18%.

But wait a minute, haven't the days of double digit growth in digital camera passed us by and aren't we worried about the US consumer cutting back on spending with the weakness in the housing market? While the original assumption was that sales of digital cameras would grow in the single digits, it turns out that these assumptions were revised upwards for growth of 15% following strong sales of digital cameras in the first half of the year. The fact that some people are buying a second or third digital camera to replace their earlier less powerful models was cited as one of the reasons behind this trend. A cautious US consumer who can no longer use his/her home as an ATM machine will indeed impact most consumer electronics companies and retailers but I think the market has already priced some of this risk into the stocks of these companies. Canon also does not derive a majority of its revenue from the US as you can see from the revenue breakdown table given below,

Canon Revenue Breakdown By Country   United States 31% Europe 32% Domestic 22% Other 15%

Canon is making a major push into developing markets like India. As investors in Nokia have come to realize, a second wave of product adoption from emerging markets like India, China and Africa can be extremely beneficial. I bought Nokia (NOK) exactly two years ago based on increasing market share driven by sales in emerging markets and the stock is up more than 100% at this point without taking dividends into account. 

If everything looks so good, why did I hold off on featuring Canon in this month's newsletter? Canon and other Japanese companies have been in a major downtrend in the last few days as the Yen has appreciated in value against both the US dollar (USDJPY=X) and the Euro (EURJPY=X). Every 1 yen move against the US dollar in the second half of 2007 is estimated to have a $41.74 million impact on Canon's operating profit and a similar move against the Euro is going to have a $27.83 million impact on operating profit assuming a conversion rate of 115 yen per US dollar. At the current exchange rate this amounts to a 5% reduction of expected full year operating profits. Japan is also going through a period of political turmoil with its Prime Minister Shinzo Abe quitting office amidst scandals and low voter support. In this environment it may be prudent to wait a little and I am going to add Canon to our watchlist for now and start a position when the market turmoil in Japan quietens down a little.

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As mentioned in the June investment newsletter, I strongly considered featuring a company and started writing about it but ended up rejecting the idea at the last moment and instead decided to feature Gymboree (GYMB). This company was Carter's Inc (CRI), the maker of baby clothes that is most likely to benefit from the "new baby boom", which I discussed in the July 2006 edition of SINLetter.

Carter's, which has traditionally been a wholesales company, has diversified into retail with a two-pronged strategy that could bode well for the company. Carter's increased its retail exposure by acquiring OshKosh in July 2005 and by developing sub-brands called "Just One Year" and "Child of Mine" for Target (TGT) and Walmart (WMT) respectively. Debt levels have dropped when compared to last year, the company is buying back stock and reported better than expected results in the first quarter of 2007.

I cannot say I am thrilled by Carter's decision to buy OshKosh, as the OshKosh division seems to be losing market share to competitors like Children's Place (PLCE) and Gymboree (GYMB). This was evident from first quarter 2007 results where the Carter's division had revenue growth of 10.6% while revenue actually fell 0.2% at the OshKosh division. This compares with first quarter revenue growth of 12% at Children's Place (PLCE) and 12.6% at Gymboree (GYMB). They say that one quarter does not make a trend but this is the third consecutive quarter where year-over-year sales have fallen at OshKosh. Both retail and wholesale margins at OshKosh were also negative in Q1 2007. Given this trend of declining sales, I am baffled by management's plans to open 5 new OshKosh stores in 2007.

The $344 million in debt that Carter's carries on its balance sheet combined with declining sales in the OshKosh division made me take a closer look at competitor Gymboree for all the reasons mentioned in the newsletter.

The other stock I considered for the June 2007 newsletter was fitness equipment maker Nautilus (NLS). After lowering their first quarter and full year 2007 forecast and reporting terrible first quarter results, the stock has taken a bad beating in recent weeks. The major risk the company faces is the cooling of the red hot real estate market that has in turn dampened consumer enthusiasm for big ticket items like the Bowflex home gym and StairMaster products that Nautilus sells. This was cited as one of the primary reasons for net income dropping more than 50% in the first quarter. Given my negative outlook of the housing sector since late 2005, I have held back on adding Nautilus to the SINLetter model portfolio despite writing about it in the past.

With a dividend yield of 3%, a high short ratio of  12, a forward P/E of 11.26 and a forecast of 20 to 30% earnings growth in 2007, the company remains near the top of my watch list. The company has also started supplying fitness products to commercial gyms. In an interesting development, buyout firm Sun Capital recently increased its stake in Nautilus.

The key to Nautilus going forward is its Pearl Izumi and Nautilus branded apparel lines. I would like to see how sales growth in apparel shapes up before starting a position in Nautilus but given the bearish sentiment surrounding this stock, any small piece of good news is likely to cause it to go up in a hurry.

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The focus of the April 2007 edition of SINLetter was spinoffs and I only considered companies that had either been spun off from a parent or were planning on spinning off a subsidiary. Hence I decided to feature EMC Corp (EMC) and Sally Beauty Holdings (SBH) in the April investment newsletter and very briefly looked into two other companies.

A subscriber suggested one of these companies to me and it is a REIT called American Home Mortgage Investment Corp (AHM). According to this subscriber, the subprime mortgage meltdown has adversely impacted other companies in the mortgage industry even though they have strong fundamentals and AHM happens to be one of these companies.

AHM has lost more than 25% of its value year-to-date even though it has very little exposure to the subprime market (less than 2% of its business) and insiders who already own 20% of the company have been buying shares on the open market. This company also had an annual dividend of $4.48 or a yield of over 17%. I asked a contact of mine in the mortgage industry about the company and he thought it looked like a solid company. However the reason I decided not to feature American Home Mortgage Investment  was because of my continued negative outlook on the housing and mortgage industries. As I mentioned in the April newsletter,

"the sector is not likely to recover this year and any bounce in home builder or mortgage lender stocks is likely to be a dead cat bounce"

This is the reason I still hold put options on the mortgage lender Countrywide Financial (CFC) and I would have contradicted myself by starting an investment in AHM at this time. My caution about AHM appears to have been well founded since the company reduced its first quarter and full year 2007 forecast today and cut its dividend to 70 cents a share, dropping the dividend yield to 10.84%. The company was also downgraded by Bear Sterns analyst Scott Coren yesterday. I am going to continue exploring AHM and if I feel that the mortgage industry is near a bottom (it is impossible to call the absolute top or bottom), it may make it into a future edition of SINLetter.

The other company I briefly considered was one of the surviving CLECs Covad Communications (DVW). I recently had to purchase a dedicated T1 internet line for a business and I found that Covad had an excellent rate and a very friendly and knowledgeable sales team. I was intrigued by the possibility that Covad may make a comeback like CMGI did this year. The focus of the company used to be wholesale telecommunication services provided through partners like AT&T, AOL and Verizon but over the last three years, the company has shifted its focus to the retail side. Retail now accounts of 38% of total revenue when compared to just 5% three years ago according to Chris Dunn who used to be Covad's CFO until he resigned on Tuesday.  

An excellent rate for the consumer usually means low margins for the company and I was not surprised to see that the company has been posting losses for the last three years despite posting revenue gains every year. While the balance sheet is not as debt laden as its pre-bankruptcy days, it still has $173 million in short and long-term debt when compared to $81.5 million in cash and short-term investments. The company's 2006 purchase of fixed-wireless internet service provider NextWeb is going to strengthen its retail focus and give it a foothold in the rapidly growing wireless ISP space. However the company expects to post a wider loss of $15 to $39.5 million in 2007, despite continuing to grow revenue and I decided to put Covad on the back burner for now.

Our April pick, EMC Corp (EMC) has gotten off to a good start with a gain of 4.26% in the SINLetter model portfolio and I plan to post a follow-up blog entry soon.

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As I mentioned in my previous blog entry Carnage on Wall Street and in the March investment newsletter, it was particularly difficult to find two stocks to feature in this month's newsletter. Amongst the stocks that I considered and then rejected were Lionsgate Entertainment (LGF) and several companies in the railroad sector. Lionsgate is the independent Hollywood studio and distributor behind Crash, the movie that won three Academy Awards including the Oscar for best picture last year. Crash is a very powerful movie peppered with witty dialogue (the scene with the two African-American guys discussing their presence in a White neighbourhood was very amusing) and I highly recommend watching it if you have not already seen it. Lionsgate is also the studio behind the gruesome but highly successful horror franchise Saw. For additional background about Lionsgate, check out this series of blog posts by Travis Johnson of One Guy's Investments who has extensively written about Lionsgate in the past.

Lionsgate appeared interesting to me because of its large library of movies (we will get to that in a moment), its successful model of investing in low budget movies that target niche audiences, the loyalty the company inspires in producers like Tyler Perry and the heavy demand for Crank, a fast paced action movie starring Jason Statham, which was recently released on DVD. If you really want to watch some cool Jason Statham movies, check out the British comedy movies Lock, Stock and Two Smoking Barrels (you will need a lot of patience to watch this one), Snatch (you may have to watch this one multiple times to understand what Brad Pitt and the rest of the cast are saying) and Mean Machine. But I digress.

As you can see from the article titled Fox the day after tomorrow in Fortune magazine, only 25% of a movie's revenue now comes from box office receipts, while the bulk of revenue comes from other distribution channels such as DVDs, cable and TV. Since this statistic is from early 2006, the number representing box office receipts has probably shrunk even more as additional distributions channels such as internet downloads have opened up. Lionsgate has a large library of movies and as each new channel of distribution opens up, this library becomes even more valuable. A good example of this is the recent agreement between Lionsgate and Apple to distribute Lionsgate movies through Apple's iTunes store.

With such an interesting story, why did I decide not to feature Lionsgate this month? While Crash was nominated for 6 Oscars and won three of them last year, Lionsgate only had one nomination this year with Deliver Us From Evil, which lost in the Best Documentary Feature category to An Inconvenient Truth.  Right after Crash won those Oscars, DVD sales of the movie soared, helping Lionsgate deliver stellar results in the fiscal fourth quarter last year. I am not sure the popularity of Crank or the recent iTunes deal will help Lionsgate deliver the kind of results it did last year. 

Moreover with a P/E of over 30 (before the recent decline in price), the stock appeared a little pricey. The balance sheet is also not particularly strong with $325 million in long-term debt and $365 million in "other" liabilities when compared to $49.44 million in cash and $220.72 million in long-term investments. Based on these observations and the performance of Tyler Perry's Daddy's Little Girl, which received a dismal rating of 2.1 stars out of 10 on IMDB.com, I decided to hold off on buying Lionsgate for now.

The rise in oil prices have lead some companies to use railroads in addition to trucking companies to deliver their goods. The resurgence of coal as an energy source has also been beneficial to some railway companies and this trend is likely to continue in the future. The companies I considered in the railroad sector were Canadian National Railway Company (CNI), Burlington Northern Santa Fe (BNI) and  Union Pacific Corp (UNP) but I decided to hold off on featuring them because of general weakness in the transportation sector and a slowdown in freight volumes related to the construction business.

I am glad I was able to find our March pick, Ambassadors Group (EPAX), as an alternative to Lionsgate and the railroad companies.

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Since the focus of the February 2006 edition of SINLetter was a long/short strategy as applied to closed-end funds, I looked into very few stocks as potential candidates for the investment newsletter. As mentioned in the newsletter, I came across Ireland based ICON plc (ICLR) when I noticed their strong hiring activity. I also noticed that the overall job market seemed quite strong and RCM Technologies (RCMT), a consulting and engineering company I featured in the April 2006 edition of SINLetter and blogged about in November last year had a very strong January, rising 12.85% in a single month. 

Based on this, I also looked into other consulting/staffing firms like Robert Half International (RHI) and Manpower (MAN) as potential candidates for this month's SINLetter. Robert Half has some of the best gross and operating margins in its industry and the company has been growing at a healthy pace over the last few years. The fourth quarter of 2006 was no different with the company delivering a 17% increase in profits to $75.4 million and 20% increase in revenue, which topped more than $1 billion. Full year 2006 earnings increased 19.04% while revenue increased at an equal clip of 20.06%. The company is growing organically as well as through acquisitions in this highly fragmented sector. Did I mention that the company also has a solid balance sheet?

Concerns about the economy kept Robert Half down through most of 2006 and the stock closed 2006 at pretty much the same price as 2005. I am still a little concerned about the strength of the economy but a 3.5% increase in fourth quarter 2006 GDP combined with a drop in the price of crude oil have allayed some of my fears. Robert Half did not make the cut this month because I chose to concentrate on closed-end funds but it remains high on my (ever growing) watch list.

Full Disclosure: I am still long RCM Technologies and recently interviewed with Robert Half International.

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Seventeen newsletters, 34 stocks and four options later, it is certainly difficult to find two new investments each month that are likely to be winners and help us deliver the kind of returns we enjoyed in 2006. 

In my quest to find the two stocks for the first investment newsletter of 2007, I considered using the Dogs of The Dow theory that we used last year to pick Pfizer (PFE) but decided against it because the 2007 Dogs of the Dow happen to be the exact set of 10 stocks that were also on the 2006 list and every single one of them posted gains in 2006. The top 5 dogs from 2006 were General Motors (GM), AT&T (T), Merck (MRK), Verizon (VZ) and JP Morgan Chase (JPM) with gains of 58.19%, 45.98%, 37.06%, 23.64% and 21.69% respectively without including dividends. Considering these gains, the stocks on the 2007 list can hardly be called "dogs".

If I were to pick two stocks from the 2007 Dogs of the Dow, it would be Verizon (VZ) and General Electric (GE). Based on my personal experience with various cellular carriers, I think that Verizon wireless is the best carrier out there and I like Verizon's bold plan to invest $18 billion to build out its fiber-optic infrastructure.

GE's aircraft engines division should benefit from the large number of aircraft orders that Boeing (BA) has recently received for its new 787 Dreamliner thanks to the delayed launch of the rival Airbus 380 "Superjumbo" aircraft. GE's water purification systems have a global market and recent interest in alternative energy sources should bode well for GE's windpower equipment business. These three divisions are part of GE's Infrastructure business, which accounts for 29% of revenues & 33% of operating profits.

Other than Verizon and GE, the biotech behemoth Amgen (AMGN), Yahoo (YHOO) and the fitness company that makes the Bowflex line of products, Nautilus (NLS) were also top contenders for this month's SINLetter. However I decided to pick Alvarion (ALVR) and Diamond Offshore Drilling (DO) for all the reasons mentioned in the January 2007 edition of SINLetter.

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The Bombay Stock Exchange (BSE) Sensex is approaching an all time high of 14,000 and the 3,000 point correction in May appears to have been no more than a hiccup and a good buying opportunity. However the Indian stock market has more than doubled over the last two years and has in fact more than quadrupled over the last four years. Can you imagine how nervous investors would get if the Dow (DJIA) were to rise from its present level of 12,278 to about 50,000 over the next four years? However this nervousness seems to be largely absent in India because the market has been driven higher by strong fundamentals as witnessed by the 9.2% growth in third quarter Gross Domestic Product (GDP) and burgeoning corporate profits. Infosys (INFY) reported a 44.2% jump in third quarter profits and SINLetter pick Tata Motors (TTM) posted a 43.1% increase in November 2006 sales.

India's state controlled pension plans called "providend funds" are currently not allowed to invest in the general stock market and there is some speculation that these rules might be relaxed in the future, fueling the market higher. However at these levels I am a little concerned and hence have pared back positions in IT companies like Wipro (WIT) and Infosys (INFY) from my personal portfolio and the SINLetter model portfolio while still retaining positions in Sify (SIFY) and Tata Motors (TTM).

Looking beyond India and China, I started considering a couple of companies from natural resources rich Brazil and Chile for the December 2006 edition of SINLetter. Like India, Chile has a mandatory pension program (PDF link) but allows up to 37% of funds to be invested in publicly traded companies and surprisingly up to 20% in hedging instruments. The Chilean pension program has been a role model for the rest of Latin America and the country also has the highest nominal GDP per capita in Latin America.

Apart from benefiting from the recent run-up in commodities like Copper and Zinc, the country also has a strong agricultural industry. GDP grew 6.3% in 2005 and is expected to be a more moderate 4.75 to 5.25% in 2006. The Chilean companies I was considering were the banks Banco De Chile (BCH), Banco Santander Chile (SAN) and the airline company Lan Airlines (LFL). All three are American Depository Receipts (ADRs) that trade on the NYSE.

Another option to investing in individual Chilean companies is the closed-end fund Chile Fund (CH), which is currently trading at a 1.53% premium to Net Asset Value (NAV). While the Chile Fund distributed a very large dividend last December (and hence its dividend yield of 18.9% according to Yahoo Finance), the distribution is likely to be much smaller this year. Since I am considering buying this fund in a taxable account, I may wait until after the ex-dividend date and the corresponding drop in price to pick up this fund. But I digress.

I also considered the Brazilian aircraft manufacturer Embraer (ERJ) as a potential candidate for the December edition of SINLetter. Apart from a strong Latin American market for its aircraft, Embraer's jets are used by regional U.S airlines like Skywest (SKYW) and JetBlue (JBLU). Embraer released its long-term outlook in November and the glimpse into Embraer's future looks promising.

While both Embraer and the Chilean stocks looked very interesting, WisdomTree (WSDT.PK) and the red hot ETF sector were more appealing to me and I decided to let Chile simmer and cook on the back burner a little longer.

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With the Dow Jones Industrial Average hitting an all time record high in October and the economy showing further signs of slowing down, finding the right stocks for the November edition of SINLetter proved very difficult. This is the reason I picked only one stock and four options instead. Two of those options, the March 2007 put on IYT and the May 2007 put on NEW have done very well, registering gains of 23% and 16.67% in just two days. The other two have not traded in the last two days but St Joe (JOE) has continued to fall.

Apart from SanDisk (SNDK), the nanotech venture capital company Harris & Harris Group (TINY) and financial services company State Street Corp (STT) were other strong contenders for this month's investment newsletter. I considered Harris & Harris because nanotech is one of the most important emerging technologies of the future and TINY offers more of a pure play on nanotechnology than the nanotech Exchange Traded Fund (ETF) PowerShares Lux Nanotech Portfolio (PXN), which includes General Electric (GE), Hewlett-Packard (HPQ) and Intel (INTC) amongst its holdings. However with no steady stream of earnings (this is a venture capital company after all), it is hard to arrive at an appropriate valuation for TINY and the stock price is likely to be driven by overall market conditions in the short-term. Since I believe the market has more downside risk in the near future, I decided to let TINY lounge on my watch list for a little while longer.

With the growing popularity of ETFs, assets under management have been steadily growing to reach a total of $363 billion in September 2006. Assets under management grew $10 billion in August and another $4 billion in September. In addition to its various business units that serve institutional investors, I was attracted to State Street (STT) because it is also one of the largest providers of ETFs. After launching the first ETF called the SPDR 500 (SPY) in 1993 and the DIAMONDS Trust (DIA) in 1998, State Street was not as active as Barclays (BCS) or PowerShares in coming out with new and innovative ETF products. However State Street launched a set of 9 new ETFs last year and is also the provider of the streetTracks Gold Share (GLD) ETF that was mentioned in last month's SINLetter. This shift of assets from mutual funds to ETFs will prove beneficial for State Street but with a P/E of over 20 and a dividend yield that is not even a third of what Barclays offers, I decided to let State Street join TINY on my constantly growing watch list. 

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I wrote in detail about the stocks that almost made the cut in the newsletter this month. Here is what I had to say,

Apart from these three stocks I also considered a company called Landec Corp (LNDC) that a subscriber brought to my attention in August. Instead of getting into what Landec does, I will let this excellent SmartMoney.com article titled Breathe Easy, Bananas do it for me.

Landec's Breathway products, which are primarily used to wrap fruits and vegetables, sound very interesting and the prospects of this technology being used in other areas in exiting. However Landec's profit and operating margins at 3.94% and 3.57% respectively seem to be as slim as the margins of the grocery store customers it serves. The company reported first quarter results on September 26th and while the company reported a profit aided by an insurance settlement, revenue growth was an anemic 2.82% and fell short of Wall Street estimates. So for now Landec remains on the top of my watch list but did not make the cut for the October investment newsletter.

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As most SINLetter subscribers already know, the stocks that almost made the cut were RealNetworks (RNWK), IMAX Corporation (IMAX) and Western Digital (WDC). In fact because Real Networks did not make the cut, Teva Pharmaceutical (TEVA) was the only featured stock in the September 2006 edition of the investment newsletter. I wonder how subscribers felt about that.

There was a lot I liked about RealNetworks and also wrote about it in my very first blog entry. As I mentioned in that blog entry as part of a lawsuit settlement, Microsoft (MSFT) paid Real $460 million in cash and $301 million in marketing credits. To promote its Rhapsody music service that allows you to listen to over 2 million songs for a monthly subscription fee, RealNetworks not only relies on these marketing credits but also an expensive rebate program. Consumers could almost get certain Sandisk Sansa MP3 players for free thanks to this $80 rebate.

When I recently visited Circuit City (CC) to pick another Sandisk Sansa, I noticed that Real was no longer offering those rebates. At the same time I noticed the newer versions of the Sandisk Sansa MP3 players like the 2GB e250, the 4GB e260 and the 6 GB e270. These players not only have the "cool factor" that made the Apple iPods so popular but they also cost less and work with subscription services like Rhapsody To Go and Yahoo Music Unlimited To Go. It comes as no surprise to me that these Sansa players were rated excellent by CNET.

I feel that these new Sansa players are going to do very well, helping drive up sales at both SanDisk (SNDK) and RealNetworks (RNWK). I am also a Rhapsody subscriber and absolutely love it. I did jump ship for a couple of months to give Yahoo Music Unlimited a test drive but did not like it at all and barely used it during those months. These three things convinced me revisit RealNetworks as a potential investment almost 9 months after I posted my previous blog entry about it. According to the latest quarterly results, the number of paid subscribers reached 1.625 million in the second quarter of 2006, a 41% jump from last year.  

So why did I back away from featuring RealNetworks at the last minute? While looking through the numbers for the last two quarters, it became very clear that Real was profitable primarily because of payments from the Microsoft settlement. After removing the effects of the Microsoft settlement, operating expenses increased 11.17% to $64.7 million in the second quarter. Once the payments from Microsoft stop three quarters from now, Real is likely to revert back to a loss unless they cut their operating expenses a lot or have a huge surge in sales.

The stock slid 8.52% in the last two days based on an analyst downgrade and I am glad I chose not to feature RealNetworks for the reasons discussed above.

I chose not to feature Western Digital (WDC) even though I like its valuation because I felt that there might be a better point of entry in the future. It looks like my wish may be granted sooner than expected as the stock fell 7.47% on Wednesday after Komag (KOMG), a company that makes hard disk platters used by almost all the major hard disk makers, cut its sales forecast due to slowing demand. Komag fell $4.93 or 13.6%, while Seagate Technology (STX) fell 8.14% in sympathy. Revisiting this sector in about three months before the release of Microsoft's next operating system called Windows Vista in early 2007 may be a good idea. However I feel that more than Vista, it is the massive server farms that are being erected by companies like Google (GOOG), Yahoo (YHOO) and Microsoft (MSFT) that will continue to drive demand for hard drives in addition to their use in consumer devices like cell phones and iPods. 

Sometimes the best thing to do is nothing at all.

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Picking Suntech Power Holdings (STP) and Sify Ltd (SIFY) for this month's SINLetter was relatively easy as I have been following both these stocks for months and the recent pullback in both these stocks provided a good point of entry. After the August newsletter was sent out to subscribers this morning, I picked up both these stocks for my personal portfolio as well.

Other stocks I considered for this month's investment newsletter included Fedders (FJC) and Genentech (DNA). Given the extreme heat wave the United States has experienced over the last few weeks, I started looking at companies that make air conditioners for consumers. Fedders (FJC) is one such company and a quick check at stores like Home Depot indicated that almost all Fedders units were sold out. A local TV station also reported that most retailers were out of air conditioning units. However a closer look at the company's financials indicated that it had very little cash on hand, a large debt load and was not profitable to boot. So while the cyclical summer story was great, the numbers were terrible. 

I had considered featuring Genentech (DNA) back in February but decided to hold off. The stock has fallen another 6% since then and I reconsidered it this month when it reported strong second quarter results that beat analyst estimates. Genentech's drug Lucentis has also been granted regulatory approval for the treatment of wet age-related macular degeneration, a leading cause of blindness in the elderly. However with its extremely high valuation, even a small slip causes a sell off in the stock. A good example of this was the sell off when sales of one of Genentech's drugs Avastin came in $16 million less than analyst estimates. Hence I decided to feature Suntech Power (STP) instead thanks to its amazing growth rate and all the other reasons mentioned in the one-year anniversary edition of SINLetter.

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As I mentioned in the May investment newsletter, I should have renamed this section "Stocks That Should Have Made the Cut". A company I considered last month called OraSure Technologies (OSUR) and then mentioned in Stocks That Almost Made the Cut: June 2006 gained 8.8% in June while Logitech (LOGI) lost 4.83%. However I am very satisfied with the 8.23% gain in Infosys (INFY) in June followed by additional gains on Monday and also like the long-term prospects of Logitech.

Stocks I considered for this month's SINLetter and then decided against were Suntech Power Holdings (STP) and Syneron Medical (ELOS). Suntech Power is a profitable Chinese solar energy company whose revenue is expected to grow 126% this year and who has been awarded an exclusive contract to supply a 130 KW solar energy system for the 2008 Olympic Games that will be held in Beijing. However with the extreme volatility in alternative energy stocks in recent weeks, a shortage in silicon that is required to make solar panels and Suntech's high valuation (P/E of 96.17 and P/S of 15.02), I decided to keep Suntech on my watch list for now.

Syneron Medical (ELOS) is a company that makes aesthetic medical products and has been covered extensively by fellow blogger Subbu in this post and this follow up post. While I really like the current valuation of Syneron, I like the valuation and future prospects of Intel (INTC) much better and hence Syneron Medical remains on the watch list for now.

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The drop in the domestic and international markets in May made some stocks I had been following attractive on a valuation basis. Infosys (INFY) was one of these stocks and while building the table that compared the large Indian IT firms, I found Satyam Computer Services (SAY) intriguing thanks to its annual earnings growth rate of 62.20%. Digging a little deeper, I found out that this earnings growth was inflated on account of Satyam's sale of its 31.61% stake in Sify (SIFY) to a silicon valley based investment partnership called Infinity Capital Ventures. Satyam also mulled a stock split and then did not make an announcement confirming a split when it released its quarterly and full year results. Since the focus of this month's SINLetter was stock splits, I decided against Satyam and picked Infosys instead.

I also considered Network Engines (NENG), Intel (INTC) and Orasure Technologies (OSUR) for this month's SINLetter. OraSure Technologies is a company that makes easy to use oral HIV diagnostic test kits and it was featured in a recent article in Fortune magazine. OraSure received a large order from the Centers for Disease Control and Prevention (CDC) in May and the company is attempting to get FDA approval that will allow consumers to use its test kits at home. I figured it was best to follow OraSure for now and see if it indeed receives the FDA approval. I decided to feature Logitech (LOGI) instead for all the reasons discussed in the June SINLetter and because it fit in well with our theme of stock splits and international investing.

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I strongly considered featuring the aluminum producer Alcoa (AA) in this month’s SINLetter. Alcoa would have fitted in well with the theme of the May SINLetter as a large amount of aluminum is used in airplanes. It would have also been a play on the current bull market in commodities. However I found Eaton (ETN) more intriguing for reasons already discussed in the latest edition of SINLetter.

A friend recently started a position in Pacific Ethanol (PEIX) and suggested that I take a look at it. I looked into Pacific Ethanol briefly but decided against it on account of heavy insider selling as chronicled in this blog entry by Himanshu Pandya. When the CEO and CFO start dumping their company stock in unison, it is best to stay away from the stock. Investing in Pacific Ethanol at this point just feels like subscribing to the greater fool theory. Instead I picked CMGI (CMGI) as an alternative play on alternative energy.

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Given the high level of interest in alternative energy and specifically ethanol, I started looking into companies that produce ethanol or help in the process of producing ethanol. When you buy gasoline there is a good chance that you are buying a mixture that contains at least 10% ethanol. Another version, which uses 85% ethanol with just 15% gas is called E85 and is widely used in Brazil. As part of its "Go Yellow" campaign, General Motors (GM) also has a line of cars, trucks and SUVs that run on E85. Ethanol is most commonly produced using corn but could be produced using other waste biomass such as grass. Converting grass to ethanol is currently a long and challenging process. A micro-cap company called Dyadic International (DIL) engineers enzymes that help convert biomass into ethanol. SmartMoney featured this company in a story titled Children Of the Corn and the stock shot up more than 50% in a period of less than 2 weeks. Given the underlying fundamentals of the stock, its rapid ascent and lack of additional information, I decided to put the stock on my watch list instead of featuring it in this month's SINLetter.

Another stock I considered was Dean Foods (DF), the company that is well known for its regular and organic products such as Horizon Organic milk, Silk soymilk, Mountain High yogurt and Berkeley Farms dairy products. The reasons I decided not to pick Dean Foods are covered in the April 2006 edition of SINLetter.

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Intel (INTC) has seen quite a drop in its share price over the last three months, loosing almost a fourth of its value. Intel was a strong contender for this month's SINLetter based on its current valuation but I was not entirely convinced that Intel has hit bottom as yet. Apart from the fierce competition that Intel is facing from AMD, I think the bigger threat on the horizon is the revolutionary nine core Cell processor developed jointly by IBM and Sony for the Playstation 3. While Intel and AMD are dabbling with dual core processors, IBM has already made plans to introduce the Cell processor in a line of blade servers. Intel's margins may also face pressure in the future thanks to its decision to enter the highly competitive and (often) low margin business of consumer electronics.

Another stock that I strongly considered for this month's investment newsletter was NetScout Systems (NTCT). NetScout makes a line of network monitoring products called nGenius. I am not sure why anyone would choose this product over the network monitoring software that comes bundled with routers and switches or available for download from open source websites. Revenue growth has been good in the recent quarters but profit margins are very low. This does look like a promising company and I am going to follow up on it to see if I can get some of my questions resolved. Interestingly, a Kaufman Bros analyst initiated coverage on the stock today with a buy rating and the stock was up 4.72% in after hours trading.

Full Disclosure: I currently do not own any positions in INTC or NTCT.

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While VA Software (LNUX) was an easy pick for this month's SINLetter, I had a rather difficult time deciding on my second pick. After featuring Pfizer (PFE) last month, I wanted to pick one more stock from the healthcare sector. Genentech (DNA) was a very strong contender especially after its recent pull back to the $86 level from almost $100 per share just a few weeks ago. The company has been growing at an annual rate of around 30% over the last five years and expects to grow earnings between 35% to 45% in 2006. Genentech also garnered the number 1 spot in Fortune magazine's list of 100 Best Companies To Work For In 2006. According to Fortune, job applicants may have to face up to 20 interviews before they get a job at Genentech and this was correlated by what I heard from a friend a few months ago about Genentech. So why did I pick UnitedHealth Group (UNH) instead? At 13.66 times current sales and 72.81 times current earnings, I felt that Genentech is still richly valued and there may be additional downside to this stock. The market was a little spooked after Genentech released sales numbers which fell short of market expectations for Avastin, one of its key drugs. Richly valued stocks can fall precipitously even at the hint of bad news and I plan to continue watching Genentech closely over the next few months.

Timberland (TBL) makes some of the best light hiking shoes I have ever tried and I also like their apparel. After recently noticing their sweaters selling for $100 (read high profit margins) at a store, I checked into the stock as a possibilty for this month's SINLetter. Growing inventory and anemic earnings growth put Timberland out of the running. I finally decided on UnitedHealth Group on account of its projected earnings growth, reasonable valuation and excellent product.

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This month's SINLetter was based on the "Dogs of the Dow theory" and my pick for the dog with the most potential was Pfizer (PFE). I strongly considered featuring the generic drug manufacturer Teva Pharmaceutical (TEVA) or the biotech Amgen (AMGN) as my second pick to balance the ying of Pfizer and create a ying-yang effect.

The $1.73 billion in long-term debt that Teva carries on its balance sheet combined with its 48% run-up in 2005, made me seriously reconsider Teva. I liked Amgen a lot but its 8.07 P/S seemed a little inflated and took it out of the running. I finally decided on Ford as it is another dog (not of the Dow), that seems well positioned for a rebound and also fit in well with the Dogs of the Dow theme of the January issue.

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