Stocks That Almost Made The Cut: October 2006

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October 4, 2006 | S.T.A.M.T.C | Author Asif

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

“I originally decided to pick the chemical companies Dow Chemical (DOW) and DuPont (DD) as a play on the declining price of natural gas. Both Dow and DuPont use a lot of natural gas and even though Dow sports an extremely low P/E of 9.23 and a dividend yield of 3.80%, investors have stayed away from the stock because of high natural gas prices. So the logical conclusion would be that both these companies would benefit from falling natural gas prices. Not so fast. As mentioned above, U.S chemical shipments dropped by 6.2% in the first week of September and the outlook for the economy appears bleak. Chemical companies are cyclical and do not do well in a weak economy. The low P/E for Dow Chemical starts to make sense if you believe that it has reached or is close to the peak of its current cycle.

Having discarded the chemical companies, I decided to feature the health and fitness company Nautilus (NLS) instead. I even did a fair amount of research and wrote up my thoughts on Nautilus. While there were some positive catalysts for Nautilus, I just could not get past the fact that the company had lowered its earnings guidance twice in the last few months. Moreover Nautilus is a retail company that makes the Bowflex line of products and I just do not see people spending hundreds or even thousands of dollars on a home gym if the economy is weak.

Given my outlook and my inability to find another attractive investment, I have decided to allocate about 5% of the model portfolio to Gold given its recent retreat.”

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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Stocks That Almost Made The Cut: September 2006

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September 6, 2006 | S.T.A.M.T.C | Author Asif

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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Stocks That Almost Made the Cut: August 2006

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August 1, 2006 | S.T.A.M.T.C | Author Asif

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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Stocks That Almost Made the Cut: July 2006

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July 4, 2006 | S.T.A.M.T.C | Author Asif

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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Stocks That Almost Made the Cut: June 2006

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June 1, 2006 | S.T.A.M.T.C | Author Asif

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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