SIN Picks

Two Old Picks Make A Strong Comeback

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March 27, 2007 | SIN Picks | Author Asif

Every once in a while you make the mistake of selling a stock a little earlier than you should have. As you can see from the historical trades page, I am guilty of committing this mistake with two old SINLetter picks, RCM Technologies (RCMT) and CMGI (CMGI). I sold CMGI for a loss of 16.67% in the SINLetter model portfolio and just three months later, I sold the consulting company RCM Technologies for a loss of 21.76% because of concerns about a weakening economy and because I needed the capital to invest in new stocks. While selling CMGI in July 2006 I mentioned,

“The results from the last quarter were disappointing as most of the $21.7 million profit was driven by liquidity events from the sale of WebCT and Realm Business Solutions. If I did not require the capital to finance this month’s featured stocks, I could have given CMGI some more quarters to see if the bread and butter supply chain management business could achieve profitability or not.”

My personal portfolios are to quite an extent aligned with the SINLetter model portfolio. Nineteen out of the 22 stocks I own are either currently in the model portfolio or were featured in past editions of SINLetter. Since it is highly tax inefficient and expensive to trade stocks often in a non-retirement account, I sometimes do not sell SINLetter picks from my personal portfolios even when I sell them from the SINLetter model portfolio.

I decided to take my own advice about CMGI and held on to CMGI and RCM Technologies in my personal portfolios and that decision proved to be very profitable. RCM Technologies is up 38.04% over the last six months thanks to outstanding third quarter results and equally impressive fourth quarter results. For the full year 2006, net income increased 79.75% to $6.36 million and revenue increased a more modest 11.79% to $201.92 million.

CMGI has fared even better after receiving an analyst upgrade and suddenly becoming a media darling with multiple mentions in Barron’s, Forbes and TheStreet.com. This new found attention has pushed the stock up more than 85% since the start of this year. This compares with a gain of less than 2% for the Nasdaq.

With this rapid rise, the stock has almost reached the $2.50 price target set by the W.R. Hambrecht analysts. While the improvement in margins at CMGI should be applauded, a gross margin target of 12 to 14% can hardly explain this move in the stock.  I believe that the stock is close to fully valued at these levels and decided to take some profits off the table by selling roughly 2/3 of my position yesterday and may sell the rest in the near future.

I wanted to post some updates on the blog over the last two weeks including highlights from the Medifast (MED) conference call but did not get a chance to do so because a new IT project I started two weeks ago has kept me very busy. I will hopefully get a chance to post these updates in the April 2007 newsletter instead.

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Selling our NEW Position For a Gain of 850%

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March 13, 2007 | SIN Picks | Author Asif

I am going to sell our remaining May 2007 $35 put options (NEWQG.X) on the mortagage lender New Century Financial (NEW) at $34.20 per contract and realize a gain of 850% in less than 5 months. Trading in New Century was halted yesterday and today the NYSE suspended trading in the stock altogether. This also lead to a halt in options trading yesterday but since the stock is now trading on the pink sheets, the puts are also trading again and I see over 200 contracts traded today at $34.20 according to Yahoo Finance.

I will be updating this post shortly but wanted to get something out before the market close today.

Update March 15, 2007: It took me a little longer than expected to update this post. New Century Financial, which is now trading under the ticker symbol NEWC.PK on the pink sheets, fell once again yesterday to close the day at 68 cents, providing yet another opportunity to get out of the put options with a very handsome profit. It looked like New Century was priced for bankruptcy after Morgan Stanley withdrew a $265 million credit facility that it had granted to New Century just the week before and Barclays Bank (BCS) asked the company to immediately buy back $900 million of mortgage loans. Instead of waiting for bankruptcy and exercising the put options in May, I decided to sell them on Tuesday and book our gains.

The whole subprime mortgage lender sector rebounded strongly today on news of potential buyouts and New Century Financial jumped up 68 cents or a whopping 101.49% to close the day at $1.35 per share. Other mortgage lenders liked Accredited Home Lenders Holding (LEND) and Countrywide Financial (CFC) also posted gains of 56.13% and 3.14% respectively. While there is a chance that LEND may be acquired, I do not believe New Century Financial can escape bankruptcy at this point and I doubt any of the large banks that are struggling with their own mortgage portfolios are going to buy Countrywide Financial.

To learn more about why I decided to buy put options on New Century Financial and Countrywide Financial, check out my blog entry titled The Effect of Housing Weakness on Mortgage Lenders and a section in the November 2006 edition of the investment newsletter titled Hedging The Economy Through LEAP Puts.

Full Disclosure: I currently hold put options on Countrywide Financial in both the SINLetter model portfolio and my personal portfolio.

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Medifast Slims Down

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March 8, 2007 | SIN Picks | Author Asif

Just one week after I decided to double our existing position in Medifast (MED) – the weight management company that was originally featured on SINLetter more than a year ago - the stock took a hard hit dropping 14.4% yesterday. Investors lost their appetite for Medifast after the company came out with 2007 revenue and earnings estimates that were well below Wall Street’s expectations.

Clearly I was a little early in adding to our position and the risk of something like this happening was on my mind when I wrote, “Please note that this stock is highly volatile with wild price swings as discussed above. If the forecast for 2007 or 2006 earnings are below expectations, the stock could decline further” in the March 2007 edition of SINLetter. Both my personal portfolio and the SINLetter model portfolio are hurting because of this drop.

So let us deconstruct what happened to the stock yesterday after the company issued its 2007 forecast. A few weeks ago, Medifast increased its 2006 revenue guidance to $73.5 million, up 83% from 2005 but did not change its earnings guidance. Medifast is expected to report earnings of 38 to 40 cents per share when it releases its 2006 results on March 16, 2007. Assuming earnings of 39 cents a share, this will represent earnings growth of over 90% in 2006.

According to the 2007 forecast, revenue is expected to come in between $85 million and $88 million and the company expects to earn between 45 to 46 cents per share. This represents an increase of 17.68% in revenue and a 16.67% increase in earnings if you use the mid-point of their revenue and earnings forecast. While Medifast did not forecast a drop in earnings or even flat earnings for that matter, the rate of growth has slowed down significantly when compared to previous years and hence the drop in the price yesterday.

The forward P/E now works out to 15.41 and given the fact that Medifast usually tends to issue a conservative forecast and then increase its guidance throughout the year, the downside on this stock may be limited. This is just my opinion and there is no way to predict with any degree of certainty how the stock will behave in coming months. I will listen to the conference call announcing fourth quarter and full year 2006 results and will post highlights along with some thoughts on this blog.

While some of our long positions like Diamond Offshore (DO), Intel (INTC) and Tata Motors (TTM) have declined in this market correction, the overall model portfolio continues to hold up well due to astounding gains of 711.11% and 95.12% in our put options on the mortgage lenders New Century Financial (NEW) and Countrywide Financial (CFC).

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WisdomTree AUM Climbs to $2.4 billion

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February 21, 2007 | SIN Picks | Author Asif

SINLetter pick WisdomTree Investments (WSDT.PK) announced the launch of six new earnings based ETFs (PDF) that will begin trading on the American stock exchange on Friday, February 23. These six ETFs are part of the 31 ETFs that WisdomTree had filed with the SEC in late 2006.

It is hard to come across information about this pink sheet listed company that counts a former Chairman of the SEC as its senior advisor. However their press releases usually contain information about assets under management (AUM) and according to today’s announcement, they now have $2.4 billion in assets under management. Given below is a timeline of growth in assets under management since their first 20 ETFs started trading on June 16, 2006.

Date Assets Under Management
June 16, 2006 20 ETFs begin trading
October 13, 2006 $700 million
November 10, 2006 $1 billion
December 22, 2006 $1.5 billion
Late January, 2007 $1.9 billion
February 2007 $2.4 billion

Growth in AUM has been driven as much by the stellar performance of many of their ETFs as addition of new assets. Their top performing fund, WisdomTree Europe SmallCap Dividend Fund (DFE), has returned 32.38% since inception on June 16, 2006.

The stock has appreciated 21.62% since I picked it for the SINLetter model portfolio less than three months ago and while I would be cautious about starting a new position in this highly volatile stock at this point, I plan to continue holding it for now.

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Portfolio Updates: Diamond Offshore and NEW

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February 8, 2007 | SIN Picks | Author Asif

After announcing a $4 per share special dividend in January, SINLetter pick Diamond Offshore Drilling (DO) announced fourth quarter 2006 results today that totally blew away analyst estimates. The company reported earnings of $1.60 per share, well above analyst estimates of $1.37 per share and more than double what it earned in the same quarter last year. Fourth quarter revenue jumped 57% to $578.2 million from $368.32 million last year. Full year 2006 results were even more impressive with earnings rising 171.5% to $706.8 million and revenue increasing 68% to $2.05 billion.

As mentioned in the February 2007 edition of SINLetter, deep water drilling remains profitable if the price of crude oil stays above $30 per barrel. With the price of crude oil close to $60 a barrel, increasing utilization rates for its rigs and a huge deep water oil discovery last year, I see additional upside potential for this company that trades at a forward P/E of 9.86. The stock appreciated more than 3.6% in response to fourth quarter earnings and is now registering a gain of about 14% in the SINLetter model portfolio.

It is amazing what a difference a week can make. The very put options that hurt our portfolio in January have now helped propel it to new heights. As I write this blog entry, the portfolio is registering gains of over 92% (the portfolio automatically updates itself periodically during market hours) thanks to an astounding gain of 305.56% in our May 2007 $35 put options on the sub-prime mortgage lender New Century Financial (NEW). The stock of New Century lost almost a third of its value today after announcing that it expects 2007 loan production to be 20% below 2006 levels. Since the weakness in the housing market is expected to continue at least until mid-2007, I am not surprised to see the mortgage lenders head lower and that was the reason I picked up put options on New Century Financial (NEW), Countrywide Financial (CFC) and the homebuilder St Joe (JOE). St Joe is no longer in the home building business and has become more of a play on the vast tracts of land it holds in Florida.

It is quite clear that the housing boom is over and both homebuilders as well as mortgage lenders have seen a drop in the share prices but for some reason the stock of Countrywide Financial remains untouched in spite of its large portfolio of ARM loans and heavy insider selling. To illustrate my point, check out this one year chart of NEW, LEND and CFC. There have been many buyout rumors surrounding Countrywide (especially right before their last earnings announcement) but they have been denied over and over again.

Portfolio Adjustment: I am going to take some profits off the table by selling 3 out of the 5 put option contracts on NEW (NEWQG.X) using the last trade of the day as the selling price and will also be selling our March 2007 put options on the Dow Jones Transportation Index (IYTOQ.X) and taking a loss.

Note: As mentioned in the newsletters, naked options are highly risky financial instruments with the possibility of losing your entire investment. I could also be spectacularly wrong about these options. Hence the initial position sizes of options in the SINLetter model portfolio are relatively small ($2,000) when compared to the initial position sizes of stocks ($6,000 to $10,000) in the portfolio. Put options are primarily used as a hedge against our long portfolio.

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