Welcome to the tenth 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.

SINLetter 2.0: The SINLetter.com redesign was completed without making any radical changes to the look and feel of the website other than increasing the size of the font and changing the font type. We did add a few additional features and you can now view archives by stock, view recent blog comments, view blog archives by month and add SINLetter.com to your favorite syndication service such as My Yahoo, Bloglines, Technorati or Google Reader.

Portfolio Performance:

VA Software (LNUX) managed to register some additional gains and remains the top performer in the SINLetter model portfolio with gains of 187.43%. Medifast (MED) is the second stock in the SINLetter model portfolio that has achieved a return of more than 100% with gains of 119.29%, helping the overall model portfolio register gains of 62.94% since its inception in August 2005. This compares with a gain of 7% for the Dow Jones Industrial Average, 5.79% for the Nasdaq and 6.09% for the S&P 500 over the same time period.

NutriSystem (NTRI), a competitor of Medifast that was mentioned in the March 2006 edition of SINLetter reported excellent earnings yet again and the stock rose $17.31 or 34.14% in a single day. This had a ripple effect causing Medifast to register gains of 12.92% on the same day as well. With expectations riding this high, there is a good chance that Medifast could see a drop in its stock price when it releases its next quarterly results on May 15th. I still like the long-term prospects of Medifast and plan to continue holding the stock both in the SINLetter model portfolio and my personal portfolio.

Royal Philips (PHG) released "exceptionally strong" first quarter 2006 results led by revenue gains in the lighting and consumer electronics divisions, leading an analyst to remark "I think in the last six or seven years covering Philips, I’ve never seen a year over year growth rate of that strength across the business." In case you do not want to listen to the entire conference call, I have posted highlights from the conference call on my blog. The stock jumped up 4.11% the day after the results were released and is now registering gains of 6.03% since it was added to the SINLetter model portfolio in March.

Nokia (NOK) had another great quarter with profits rising 21% to 1.05 billion euros as sales jumped 29% to 9.5 billion euros. Mobile phone sales rose 30% to 5.87 billion euros with Nokia selling 75.1 million mobile phones and other devices in the quarter. One of the only negative things about this quarter was a drop in operating margins to 14.4% from 15.1% a year ago. I am pleased with the 34% return from Nokia since October 2005 and expect additional price appreciation based on continued demand from China, India and Africa. Both the stocks featured last month, RCM Technologies (RCMT) and Safeway (SWY) managed to eke out tiny gains in April. The US employment numbers for the first quarter of 2006 were strong with a higher than expected 211,000 non-farm new jobs added in March. RCM Technologies reports quarterly results on May 4th and based on these employment numbers and the upbeat comments made by management in their last conference call, I expect the results to be good.

Portfolio Readjustment:

Unitedhealth Group (UNH) has seen a lot of downward pressure recently thanks to continued fallout from the stock options backdating controversy. Unitedhealth exceeded analyst expectations when it reported first quarter 2006 results. Earnings came in at 68 cents per share, 3 cents above expectations and up 24% when compared to the same quarter last year. However the earnings guidance issued by the company for 2007 came in below analyst expectations and I have decided to sell Unitedhealth Group from our model portfolio.

To finance this month's purchases I am going to take some additional profits in VA Software (LNUX) by selling another 2,000 shares, which represents 1/3 of our original purchase of 6,000 shares. Following the $580 million purchase of MySpace.com by media mogul Rupert Murdoch's News Corp, another new dot com established in 2004 by a Harvard drop out called Facebook.com received a valuation of $550 million. A recent article in Fortune magazine titled The Boom is Back heralds a new internet boom and VA Software is likely to benefit from this trend thanks to Slashdot.org. Hence I am going to hold on to the remaining 2,000 shares of VA Software in the model portfolio and also in my personal portfolios.

I am also selling our stake in Seagate Technologies (STX) and recognizing the 83.3% gain since we added it to your portfolio six months ago. The valuation of Seagate still looks attractive with a current Price/Earnings ratio of 12.18, a forward Price/Earnings of 11.96 and a Price/Sales ratio of 1.43. Seagate's close competitor Western Digital (WDC) reported very strong quarterly earnings that were up 45%. Seagate also recently released a giant 750 GB hard drive that uses the new perpendicular recording technology to store more data in less space. While both these events combined with the current valuation are positive, I expect pressure on Seagate's earnings in the latter part of this year as Seagate integrates its acquisition of Maxtor.

Other Interesting Events:

As some of you are aware, I usually write a blog entry titled "Stocks That Almost Made the Cut" after the release of each SINLetter. The purpose of these blog entries is to discuss some of the stocks that I found interesting and considered for SINLetter but did not feature in the current edition. I am now strongly considering renaming these blog entries "Stocks That Should Have Made the Cut". Why am I proposing this change in title? Two stocks, Netscout Systems (NTCT) and Dyadic International (DIL) that I strongly considered featuring in March and April, are up a very respectable 42.01% and 33.55% respectively since they were considered. I found both these companies very interesting but before I could complete my research and feature them on SINLetter, they decided to take an energetic uphill sprint. Dyadic International (DIL) may still have additional upside left thanks to the high interest in alternative energy and ethanol, but remains a speculative investment.

Research In Motion (RIMM), the maker of the famous BlackBerry wireless email devices reported earnings on April 6th that failed to meet analyst expectations and the stock dropped $4.60 or 5.45% the following day. As mentioned in last month's SINLetter, I expected RIMM to perform badly in the short-term and anyone who bought put options in RIMM probably benefited from the 9.72% drop in April.

Suburban Propane (SPH), a stock with a very high dividend yield of 8.3% was discussed briefly in the October 2005 edition of SINLetter. I looked up the company again and it looks like one of the few red flags I discussed in October regarding the inability of the company to pass on high energy costs to customers seems to be addressed. The stock dropped almost 20% after I discussed some of the problems facing Suburban Propane but has since recovered all those losses and the stock is now trending upwards. After the release of strong quarterly results, UBS analyst Ronald Barone gave the company a 5-star rating.

Microsoft (MSFT) shares tumbled $3.10 or more than 11% to $24.15 on Friday, April 28th as the company outlined plans to increase spending in order to compete effectively against rivals like Google. I should have seen this coming as I have been hearing about increased hiring at Microsoft over the last few weeks. This represents the biggest one-day drop in more than five years and the stock established a new 52-week low. While this plan is going to put pressure on earnings over the next few quarters, it could be positive over the long-term if Microsoft can successfully execute its goals. However that is a big if and it would be wise not to start a new position in Microsoft during the next few days. Five analysts downgraded the stock on Friday and there is a good chance that institutions may continue dumping the stock in the coming weeks.

In case you have not noticed, Gold closed at $654.50 per ounce on Friday, up more than 50% over the last year. Without digressing any further, let me present this month's featured stocks.

Eaton Corp (ETN)

The Story:

The world of commercial aircraft suppliers is almost a duopoly with Boeing (BA) and Airbus competing fiercely for orders. Looking at the state of airline companies in the United States with United declaring bankruptcy and even Jet Blue declaring a quarterly loss, one has to wonder how good the demand for commercial aircraft is going to be in the coming years. While the airline industry in the US is mature and reeling under the effects of high oil prices, air travel in countries like China and India is booming. Airlines from these countries and other developing nations are placing a record number of orders for new planes and this trend is likely to continue for years to come. Boeing (BA) has been very successful in wooing large orders over the last few months thanks to the launch of the new 787 Dreamliner and you can view an updated list of 2006 Boeing orders here. The president of China on a recent visit to the United States decided to visit the Boeing factory in Everett, Washington as China plans to buy as many as 2,000 planes from Boeing over the next 15 years.

Based on these orders, I started digging for companies that supply aircraft parts to Boeing. The ideal scenario would be to find a small public company that derives a large part of its revenue through the sale of aircraft parts. This is referred to by investors as a "pure play" company and holds the prospects for excellent returns if the company has not already been discovered. It would be even better if this company were to supply aircraft parts to both Boeing and Airbus. Finding such a company proved to be a daunting task because Boeing sources its parts from several international suppliers that are not listed on the US stock exchanges or from Boeing subsidiaries. It also appears that like Walmart, Boeing puts pressure on its small suppliers to get the best pricing and this affects their margins. After looking at dozens of public companies, I finally decided on Eaton Corp as it is a large company that supplies important aircraft parts to both Boeing and Airbus and has an attractive current valuation. Eaton in partnership with Hamilton Sundstrand won two contracts to supply electrical contactors and hydraulic pumps for the Boeing 787.

With 59,000 employees and customers in over 125 countries, Eaton is truly a diversified industrial company. The four primary business divisions of Eaton include electrical, automotive, fluid power and trucking. Ranked number 227 on the Fortune 500 list, Eaton had 2005 sales of $11.1 billion and reported profits of $805 million, up 24.2% from a year earlier. Eaton recently released first quarter 2006 results with both sales and net profits coming in at 14% above the year ago period and 7 cents per share above analyst expectations. Eaton also increased its full year 2006 forecast to a range of $5.90 to $6.20 per share.

From a valuation perspective, Eaton looks very attractive with a P/E of 14.19, a forward P/E of 12.07 and a Price/Sales of 0.99. The 1.8% dividend yield is in line with the average dividend yield of the S&P 500. The main cause for concern with Eaton is its leveraged balance sheet which carries $2.46 billion in short, current and long term debt when compared to just $336 million in cash and short-term investments. However Eaton is a profitable company generating a profit of $208 million on revenue of $3.01 billion in the first quarter of 2006. A downturn in the economy or a recession is another key risk faced by Eaton on account of the industrial nature of its business.

Eaton is just one example of this long-term theme of increased activity in the aerospace sector and there are many ways to benefit from this theme. Investors could also invest in aluminum producing companies like Alcoa (AA) or Alcan (AL), invest in airline stocks in emerging countries (if they have access to local markets or the ADRs are listed on the NYSE) or invest in other companies in the aerospace sector. Some of these companies are listed in the "competitors" section below.

Competitors:

Eaton Corp faces competition from other diversified industrial conglomerates like Danaher (DHR), United Technologies (UTX), Emerson (EMR) and Parker-Hannifin (PH). I held a position in Danaher (DHR) for a short period of time in 2001 and have often wished that I had held on to the stock longer as it has appreciated more than 100% in the last five years. If you were to consider just the aerospace division, competitors would include Moog Inc (MOG.A), Woodward Governor Company (WGOV), Astronics Corporation (ATRO) and Crane Co (CR).

The Good:

• Eaton sports an attractive valuation with a forward P/E of 12.07 and a Price/Sales of 0.99.
• Eaton recently reported results that were better than analyst estimates and also raised guidance for 2006.
• Eaton designed a hybrid electric powertrain that is currently used in some FedEx delivery trucks and could gain widespread adoption in the future.

The Bad:

• Eaton's automotive business could be impacted by eroding market share at Ford and GM. However Eaton also counts many other automotive companies amongst its customers and was recently recognized by Honda as an "outstanding" supplier.
• The balance sheet has $2.46 billion in short, current and long term debt.
• Inventory rose by 5.28% to $1.16 billion when compared to the preceding quarter.

The Numbers:

CMGI Inc (CMGI)

The Story:

Alternative energy stocks are all the rage on Wall Street these days thanks to the rising price of crude oil. Recent solar IPOs like California's SunPower (SPWR) and China's Suntech Power Holdings (STP) have seen their stocks soar up more than 50% and 70% respectively since December 2005. As automobile manufacturers unveil plans to produce vehicles that can run on E85, a mix of 85% ethanol and just 15% gas, ethanol producing companies like Pacific Ethanol (PEIX) and much larger rival Archer Daniels Midland (ADM) have seen a big boost in their stock prices. Investors have also shown renewed interest in hydrogen fuel cell stocks like Hoku Scientific (HOKU), Ballard Power Systems (BLDP) and the aptly named FuelCell Energy (FCEL). While looking for alternative energy stocks that have not already been chased to the moon, I came across a company called CMGI Inc that could be an alternative play on alternative energy. I came across CMGI while reading this article by Mark Hulbert on MarketWatch.com discussing how George Putnam, the editor of the investment newsletter Turnaround Letter, finds CMGI interesting.

CMGI is a company that offers global supply chain management solutions and marketing distribution services through its subsidiaries ModusLink and SalesLink. CMGI also holds a stake in various early-stage and mid-stage start-ups through its venture capital arm @Ventures. Notable past investments of @Ventures include GeoCities (acquired by Yahoo), eGroups (acquired by Yahoo) and Half.com (acquired by eBay). Apart from the sizable cash position of $159.70 million that CMGI holds and the $1.07 billion in revenue that CMGI brought in last year, it was not very clear why the Turnaround Letter would be excited about this company. There were quite a few things about this company that did not appeal to me at first glance and are probably keeping most investors away. Inventory has risen consistently over the last few quarters, gross margins are very low and the company posted a loss of $6.3 million last quarter. The corporate structure is complex and visibility is reduced as CMGI operates through various subsidiaries.

I decided to dig deeper into CMGI to figure out if it was indeed a worthy investment or not. Looking at the current portfolio of companies that @Ventures has invested in brought up something interesting. Advent Solar is a @Ventures company that manufactures solar cell and modules. The technology and patents that Advent Solar holds allow it to manufacture solar cells using ultra-thin silicon wafers. As most followers of the alternative energy sector are well aware, silicon is in very high demand these days and manufacturing processes that utilize less silicon are becoming increasingly important in the solar energy industry. Another interesting company in the @Ventures portfolio is H2Gen Innovations, a company that designs and manufactures on-site hydrogen generators. Most companies in the hydrogen fuel cell space actually derive a large part of their current revenue from hydrogen generators as the prospect of strong revenue growth from fuel cells that power automobiles is still a few years away. Hence CMGI through its stakes in Advent Solar and H2Gen could be an alternative play on alternative energy.

The most interesting part about CMGI is however its stake in an e-learning company called WebCT that was acquired by Blackboard (BBBB) very recently for approximately $180 million. @Ventures owned a 13.5% stake in WebCT and hence it received approximately $21.2 million when this acquisition closed in February. Most of this $21.2 million is likely to drop straight down to the bottom line and could end up boosting results when CMGI reports the next quarterly results. The exciting investments of @Ventures combined with the steady revenue stream from subsidiaries ModusLink and SalesLink have convinced me that CMGI looks like an interesting short to intermediate term investment.

Competitors:

The Good:

• CMGI carries $190.93 million in cash, short-term and long-term investments on its balance sheet when compared to just $36.53 million in long-term debt.
• The company is likely to report good results next quarter on account of Blackboard's acquisition of WebCT.
• CMGI is also expanding its footprint in China and currently has seven solution centers there.
• The venture capital arm of CMGI called @Ventures has made some interesting investments in alternative energy companies.

The Bad:

• At a price of $1.44 per share, CMGI may be considered by some as a "penny stock".
• If the price of the stock were to drop below $1 for 30 continuous days, CMGI will be issued a delisting notice by Nasdaq.
• CMGI has a complex corporate structure with a stake in various companies through its venture capital arm.

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 (April 30, 2006 for the May 2006 newsletter).

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