Welcome to the ninth edition of the Suria Investment Newsletter (SINLetter), a free monthly newsletter that highlights two publicly traded companies. The objective of this newsletter is to provide you with unbiased initial research and basic facts about individual stocks so that you can then research them further before deciding to add them to your portfolio or not. For those of you who are reading this and are not already subscribed, 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.

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Portfolio Performance:

VA Software (LNUX) continues to remain the top performer in the SINLetter model portfolio with strong gains of 161.75%, helping the overall model portfolio register gains of 57.59% since its inception in August 2005. This compares with a gain of 4.58% for the Dow Jones Industrial Average, 6.58% for the Nasdaq and 4.81% for the S&P 500 over the same time period. Recent gains in Medifast (MED), Nokia (NOK), Tata Motors (TTM) and ATI Technologies (ATYT) also helped achieve these spectacular results.

Medifast released stellar fourth quarter results and I have posted highlights from the conference call on my blog. The stock was up 32.04% last month and I continue to like the long-term prospects of Medifast. Nokia continued its upward trend with a 12% rise in March. The company is now experimenting with mobile TV on its Nokia 7710 Widescreen Smartphone. On the other hand, Seagate (STX) was down early in March on account of an analyst downgrade of rival hard drive maker Western Digital (WDC) based on a price war between Western Digital and Maxtor. The stock recovered nicely only to drop once again on the announcement that Samsung has come up with a 32 GB flash based hard drive that will be used in laptops. Considering Seagate's excellent current valuation and the prohibitive cost of these flash based hard drives, I still think Seagate has additional upward potential. The market must have seen these drops as buying opportunities as well and the stock closed down only -0.90% in March.

ATI Technologies (ATYT) reported better than expected second quarter results with revenue coming in at $672 million, a 11% increase when compared to the second quarter of last year and a 14% increase quarter-over-quarter. There was a small 0.5% drop in gross margin during the second quarter and a corresponding drop in profits but the company expects its gross margins to improve almost 3% pushing it up to 30% in the next quarter. The stock rose over 9% following the release of these results.

Portfolio Readjustment:

I was almost inclined to sell Unitedhealth Group (UNH), the only stock that is down in the SINLetter model portfolio, to finance this month's purchases. The stock has seen a lot of downward pressure recently thanks to a myriad of factors. Towards the end of February, the company issued $3 billion of fixed income securities (debt) to pay for its acquisition of PacifiCare. This was followed by questions about the timing of stock options that were granted to CEO William McGuire. Finally there was speculation and rumors that Unitedhealth Group may attempt to acquire yet another competitor. Unitedhealth denied these rumors and an analyst with Prudential Financial recently boosted his earnings projections for the company. Unitedhealth Group is expected to report results on April 18th and I am going to hold on to the stock in our model portfolio until I get a chance to listen to their next earnings conference call.

To finance this month's purchases I am going to take some profits in VA Software (LNUX) by selling 2,000 out of the 6,000 shares. I plan to continue holding it in my personal portfolios as I expect additional upside to the stock and for tax reasons. I am also selling our position in Ford (F) and realizing the small 3.11% gain since we added it to our portfolio three months ago. Ford shares have seen a lot of downward pressure thanks to loss of market share and concerns about a possible bankruptcy at GM.

Other Interesting Events:

I was recently asked to review a new book called The Essentials of Trading by John Forman before it goes on sale later this month at Amazon.com. I have posted a short review of this excellent book on my blog and you can check it out here.

Research In Motion (RIMM), the maker of the famous BlackBerry wireless email devices finally settled its equally famous lawsuit with NTP on March 3rd by agreeing to pay $612.5 million. This helped avert a potential shutdown of service and the stock soared 15% on the news. It currently trades at $84.88 per share. At a trailing Price/Earnings of 46.36 and Price/Sales of 8.24, the stock is richly valued. While users absolutely love their little BlackBerrys, the device is no iPod. With Microsoft's Windows Mobile operating system gaining traction and Nokia making a renewed push into this space with its E series, I feel that there will be increasing competitive pressure on RIMM. Buying put options in RIMM as a hedge against a long portfolio may be a good idea at this time. PALM (PALM) reported excellent fourth quarter earnings with revenue increasing 36% to $388.5 million and earnings almost doubling from $10.6 million to $19.8 million thanks in part to the 102% increase in Treo sales. This further validates my theory that RIMM is going to face stiff competition in the near future.

Chipotle Mexican Grill (CMG) exploded upwards after reporting tasty results and the stock closed at $55.39 on March 31, 2006. Google will soon become a part of the S&P 500 index and the stock levitated almost $30 in after-hours trading in response to this news. The release of Google's newest beta product called Google Finance was met with a mixed response as summarized by the reaction of finance bloggers on the Internet Stock Blog. Microsoft (MSFT) decided to delay the release of its next generation operating system called Vista to early next year. This news combined with a negative report by RBC capital about pressure on Intel's (INTC) gross margins thanks to competition from AMD drove Intel's stock price to its lowest level in over two years.

The strength in the Indian stock market is quite amazing. Shares of Infosys (INFY) fell close to 15% after announcing disappointing results last quarter, but Infosys has now recouped all of those losses. SINLetter pick Wipro (WIT) was also downgraded by Goldman Sachs on valuation concerns and after a modest drop of 2.37%, the stock powered on to post even more gains. Tata Motors (TTM) faced similar pricing pressures early in March but rebounded quite well and remains one of the top performing stocks in the SINLetter model portfolio.

Without digressing any further, let me present this month's featured stocks.

RCM Technologies (RCMT)

The Story:

RCM Technologies is a micro-cap company (market capitalization below $100 million) that provides IT consulting, engineering and staffing services. It also provides specialized health care services. Some of RCM's clients include IBM, Lucent, Pfizer, Merck and NASA. I find the company interesting for a variety of reasons. The employment numbers have been very good in the recent months and most of the large-cap staffing and consulting firms such as Robert Half (RHI) and MPS Group (MPS) have seen their stock prices appreciate more than 50% over the last year. RCM Technologies is in exactly the same market sector as these bigger companies but remains relatively undiscovered.

RCM Tech recently announced full year 2005 results and while revenue came in only marginally higher than the previous year at $180.6 million, earnings rose 59% to $3.5 million from $2.2 million in the year ago period. While these earnings are not spectacular, a comment by the Chairman and CEO stating that recently awarded contracts will have a positive impact on the results for the first quarter of 2006 and in the subsequent quarters shows that the company can be expected to continue performing well in 2006. The consulting and staffing sector is highly fragmented and it is good to see that RCM Technologies is attempting to grow through acquisitions as evidenced by its fourth quarter acquisition of Soltre Technology.

RCM Technologies has a very strong balance sheet with $64.12 million in current assets and just $31.08 million in current liabilities. For a company with a market cap of $76.09 million and a current price of $6.48 per share, it would mean that an investor would essentially be picking up this cash flow positive company for about $3.67 a share. Insiders still hold 24% of the company and there have been no reported insider sales over the last few months. I feel that there is a lot of upward potential for RCM Technologies over the next 12 months. I plan to write to the company with a series of additional questions and if they respond, I will post the answers on my blog.

Competitors:

RCM Technologies faces competition from a plethora of small and large companies that provide IT consulting and staffing services. As mentioned above Robert Half (RHI), MPS Group (MPS) and Manpower Inc (MAN) are the 800-pound gorillas in this sector. Some of the smaller competitors include Volt Information Sciences (VOL) and iGATE (IGTE).

The Good:

• Profitable company sporting attractive valuation with a forward P/E of 11.57 and current Price/Sales of 0.40.
• Recently awarded contracts including an engineering contract to help restart two nuclear-generating units will be very positive for the company in 2006.
• A strong balance sheet with $64.12 million in current assets, $31.08 million in current liabilities and no long-term debt.
• Relatively undiscovered company with large insider ownership.

The Bad:

• While earnings increased 59% for 2005, revenue growth was anemic and came in at 6.67%.
• Low operating and profit margins thanks to a highly competitive environment.

The Numbers:

Safeway (SWY)

The Story:

Supermarket stocks are hot again with Whole Foods (WFMI) posting gains of over 30% and even Wild Oats (OATS) showing a meteoric 100% rise in its stock price over the last year. Supermarket investor Ron Burkle increased his stake of Wild Oats to 15% through his hedge fund Yucaipa. I understand that by this point you are thinking, "Wait a minute, is he not talking about good old Safeway? How does that compare with Whole Foods or Wild Oats and the massive growth associated with the organic food industry". While Albertsons has been busy selling itself to a consortium led by Supervalu Inc and CVS Corp, Safeway quietly embarked upon a strategy to introduce organic food products in its stores under the brand name "O Organics". The most interesting part about this strategy is that these organic products are not placed in a separate aisle nor are they priced higher than conventional items. The "O Organics" version of the famous Oreo cookies taste very similar to the original Oreos and in fact costs a little less. Safeway has rolled out 150 organic products under this new brand and the feedback has been positive from consumers. I got a chance to sample a few of their organic products and liked most of them.

Safeway is not alone in recognizing that organic products are gaining widespread adoption and even Walmart has recently introduced organic products in some of its stores. All of this brings to mind the question, what about margins? Organic products usually command a higher margin and hence could prove to be more profitable. However with Safeway pricing the products at or below the price of conventional items, they could loose the potential gains in gross margins. It is entirely possible that Safeway is using this pricing strategy primarily to introduce its organic line of products and may increase prices in the future. I have seen the upstart Progresso (a division of General Mills) line of soups effectively steal market share from Campbell Soup (CPB) with a similar introductory pricing strategy. Another concern with Safeway aggressively rolling out their organic line of products is supply. There are only so many certified organic farmers out there and some organic lines such as dairy have been known to have periodic shortages. It was not long ago that I found it hard to lay my hands on a gallon of Horizon organic milk. Horizon Organic was acquired by Dean Foods (DF) and a supply problem could be very negative to a highly leveraged company like Dean Foods. Dean Foods currently carries $3.3 billion dollars in long-term debt, $108 million in short-term debt and just $25 million in cash on its balance sheet.

My current interest in Safeway does not just stem from its introduction of this new "O Organics" product line. Large supermarkets and grocery stores usually operate on razor thin margins and generate much of their income from high volume and revenue. Safeway has been focusing on operating margins and it increased its operating margin to 3.3% in 2005 from 1.6% in 2004. This was done without sacrificing sales and revenue for 2005 was up 7.2%. While Safeway carries an intimidating $5.60 billion in debt, it also lists $9.1 billion in property and equipment on its balance sheet. Given that many of these properties are in prime locations, their actual value is probably a whole lot more than what is stated on the balance sheet. The company is also profitable and generated over half a billion dollars in earnings last year. With a forward looking P/E of 14.27 and a P/S of just 0.29, Safeway could be a good stock to hold for the long-term.

Competitors:

The Good:

• The new "O Organics" line of products has received positive feedback and could spur revenue growth.
• Operating margins improved in 2005 and the company generated $561.1 million in net income.
• Attractive valuation with a forward P/E of 14.27 and current Price/Sales of 0.29.

The Bad:

• Margins may be impacted in the short-term due to the cost of rolling out this new product line.
• The United Kingdom's largest grocer Tesco plans to spend $400 million to start rolling out stores on the West Coast in 2007.
• A heavy debt load of $5.6 billion.

The Numbers:

Every month we will add the two featured stocks into a model portfolio started with a cash position of $100,000 on August 2, 2005. To keep calculations simple, trading costs are not included. Prices reflect the closing price as of the last trading day of the previous month (March 31, 2006 for the April 2006 newsletter).

Voluntary Disclosure: I currently own shares of Airspan Networks (AIRN), ATI Technologies (ATYT), Wipro (WIT), Nokia (NOK), Medifast (MED), Tata Motors (TTM), Ford (F), Seagate Technologies (STX), RCM Technologies (RCMT) and VA Software (LNUX).