SIN Picks

2006 SINLetter Model Portfolio Returns

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December 31, 2006 | SIN Picks | Author Asif

2006 proved to be a spectacular year for many investors and I hope that SINLetter subscribers benefited from the more than 60% returns of the SINLetter model portfolio. The 46% rise in the Bombay Stock Exchange (BSE) certainly contributed to these returns as we held a number of Indian ADRs such as Wipro (WIT), Infosys Technologies (INFY), Tata Motors (TTM) and Sify (SIFY). But the story was not all international stocks and triple digit returns from small-cap stocks like Medifast (MED) and VA Software (LNUX) along with respectable gains from large-caps like Seagate Technologies (STX), ATI Technologies and Safeway (SWY) also contributed to these gains.

While 2006 will be a difficult act to follow, I will continue to look for stocks and strategies that will help us achieve the kind of alpha we have seen since inception, without taking on excessive risk. The returns of the SINLetter model portfolio along with the returns of major indices are tabulated below.

Performance Metric Dow S&P 500 Nasdaq SINLetter
2006 Annual Returns 16.29% 13.38% 13.62% 60.80%
Since Inception (Aug 2005) 17.32% 14.81% 10.02% 83.18%

2006 SINLetter Model Portfolio Returns

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Highlights From Q2 2006 Results for Medifast (MED)

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August 14, 2006 | SIN Picks | Author Asif

Medifast (MED) reported quarterly results today with revenue growing 89% and income increasing 100% when compared to the same quarter last year. While the numbers are not as spectacular as last quarter, I am satisfied with another triple digit earnings increase.

Highlights from the first quarter 2006 conference call are given below,

  • Revenue came in at $20 million vs $10.6 million for the second quarter of 2005, an increase of 89% year-over-year.
  • Income for the second quarter came in at $1.475 million or 12 cents per share (11 cents per diluted share) when compared to $0.753 million or 6 cents per share last year, an increase of almost 100% year-over-year.
  • Selling, General and Administrative expenses (SGA) increased to $12.6 million from $6.8 million last year. SGA increased primarily on account of increased ad spending, which rose from $1.2 million to $4.5 million. As a percentage of sales, SGA actually fell 3% to 61% for the six month period ended June 30, 2006 when compared to 64% for the same six month period in 2005.
  • Medifast increased guidance for the fourth consecutive quarter. Full year revenue guidance was increased to a range of $70 to $72 million from the earlier guidance of $66 to $68 million. This time Medifast did not raise guidance on income and still expects to earn 38 to 40 cents per share.
  • Based on a question on the conference call, Medifast offered a breakup of revenue increase by division. The direct-to-consumer model posted a 160% increase in revenue. The “take shape for life” division posted a 70% increase in revenue and the clinics posted a 25% increase in revenue. The clinics are now profitable while they were not profitable last year.
  • Customer acquisition costs (CAC) jumped from $135 per customer in 2005 to $150 per customer in Q2 2006, representing an increase of 11.11%. This was a cause for concern and lead to many questions during the conference call as higher CAC usually translate into lower operating margins. Medifast claimed that the higher CAC was on account of some advertising testing on a wider demographic and they expect CAC to drop in the future. The lifetime value of customers still remains about $575 per customer.
  • Medifast, which is currently listed on the American Stock Exchange, soon expects to be listed on the NYSE. The date for this NYSE listing would be around August 25, 2006. This does not come as much of a surprise as Medifast was added to the Russell 3000 index on June 16, 2006 and is gaining recognition amongst institutional investors.
  • The company plans to spend about $11 million  to $12 million on advertising in 2006 and even more in 2007. The breakup of advertising spending did not change from the first quarter of 2006 and remains 55% print, 35% TV and 10% web.
  • Cash balance increased to $2.5 million when compared to $1.2 million in the second quarter of 2005. The company increased inventory in anticipation of future sales growth.

The stock however dropped almost 25% in after hours trading to $13.46. It probably fell on concerns about increase in CAC and the drop in income when compared to the first quarter of 2006. However a 25% correction seems extreme for a company that is still exhibiting very high growth and has raised guidance for the fourth consecutive quarter.

I have often seen stocks drop in after hours trading based on some news and actually open higher the next day. It will be interesting to see how the broader market interprets results tomorrow.

If you are interested, you can check out highlights from the first quarter 2006 here and the fourth quarter 2005 here. Medifast is now up more than 230% since I added it to the SINLetter model portfolio in December and you can check out the reasons why I like Medifast here.

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Airspan Networks Resolves Liquidity Issues

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July 31, 2006 | SIN Picks | Author Asif

A glimpse from the next edition of SINLetter that will be sent out to subscribers tomorrow:

It looks like Airspan Networks (AIRN) has resolved its liquidity issues by issuing 100,000 additional series B preferred shares to an existing investor, Oak Investment Partners, and raising $29 million. I speculated that something similar might happen in the previous edition of SINLetter when I stated “existing shareholders could face dilution if Airspan decides to issue more shares through a private placement (Sirius Satellite Radio has mastered this art)”. Since each series B preferred share can be converted into 100 common shares, the price Oak Investment Partners paid works out to $2.9 per share. Airspan shares closed at $1.88 on July 31st, 2006 and I expect the stock to open higher on August 1st. You can read the entire press release here.

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Hedging Your WIMAX Bet

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July 28, 2006 | SIN Picks | Author Asif

WIMAX is a technology that could theoretically offer high speed internet access over a 50 kms (31 miles) radius from a single base station. In real world scenarios the coverage radius is closer to the 3 to 5 mile range, which is still a big leap when compared to the 300 feet range of a traditional wireless access point. WIMAX is yet to see its prime but its potential is tremendous especially when you consider the significant technical hurdles Philadelphia faces while attempting to create a city-wide wireless network using traditional Wi-Fi standards. Security, interference from existing Wi-Fi networks and the use of the crowded 2.4GHz frequency are some of the problems traditional citywide Wi-Fi networks face.

Intel (INTC) has been pushing hard for the adoption of the 802.16 WIMAX standard and recently invested $600 million in Clearwire, a company that provides wireless high-speed service to consumers. TowerStream is another WIMAX service provider that provides high-speed service at a competitive price to businesses in major cities. Intel plans to roll out the next-generation “Rosedale 2″ WiMAX chip by the end of 2006 and we can expect to see WIMAX enabled laptops sometime in 2007.

If you believed and invested in WIMAX over the last year through pure play WIMAX stocks like Florida based Airspan Networks (AIRN) or Israel based Alvarion (ALVR), you probably took a big hit as this six month chart illustrates. Bigger players like Intel (INTC), Motorola (MOT) and Alcatel (ALA) that have a stake in WIMAX have not fared much better either. The risk of investing early in a new technology was exacerbated in this case by a volatile stock market and revenue recognition problems faced by Airspan with regard to a contract with Yozan Inc, its biggest customer.

Investing in individual stocks does involve considerable risk. Creating a diversified portfolio of stocks across various industries, market caps and geographic locations should help mitigate some of this risk. This knowledge is probably of no comfort to investors in Airspan Networks who are trying to figure out how to recoup some of their losses. Averaging down your cost basis by buying even more shares of Airspan at this “low” price has probably crossed some investor’s minds. The CEO and CFO of Airspan purchased a small amount of stock recently and a director bought some in May. This may be an encouraging sign but there is no telling where the chips may fall until the Yozan contract problems are resolved.

As a rule of thumb it is best to avoid averaging down and it makes a lot of sense as you do not want to put good money behind bad money. There is an opportunity cost associated with averaging down as this newly committed capital could be invested in another stock that may do better. The bigger problem with averaging down is that you will have more at stake now in a stock that is trending down and are likely to spend more time tracking it, researching every piece of information you can find about it and quite possibly losing sleep over it. Since I believe in WIMAX and its future potential, I plan to hold on to my Airspan stock until the problems associated with the Yozan contract are resolved one way or the other. Apart from holding on to Airspan and waiting, there is another course of action that I plan to take to hedge my WIMAX investment. But before I explain this course of action, let me tell you a story.

In 2001, I decided to invest in a telecom company called Allegiance Telecom (ALGX) that along with its competitors McLeod USA (MCLD) and Time Warner Telecom (TWTC) were known as CLECs (Competitive Local Exchange Carriers). Most of these debt laden CLECs lost a lot of money and eventually went bankrupt. However from 2001 to 2003 I believed that ALGX would survive the extreme bear  market and provide an excellent return. The risks were very high but the company had an excellent management team that claimed that ALGX would not go bankrupt unless they were hit by a meteor. The company also had a $500 million credit facility that it decided to draw down and put in the bank.

As the price of ALGX kept dropping, I had a choice between averaging down on ALGX or investing that money in competitor Time Warner Telecom (TWTC). Both stocks were trading at about $1 at that time and I made the mistake of averaging down on ALGX, which eventually went bankrupt. Lets assume I had $1,000 invested in ALGX and I decided to average down with another $1,000. When Allegiance Telecom went bankrupt, I lost close to 100% of my investment. Had I invested the second $1,000 in Time Warner Telecom instead, I would have roughly $16,000 now as TWTC now trades for about $16 per share (without reverse splits). My total return on the $2,000 invested would have been a whopping 700% in spite of ALGX declaring bankruptcy. It was a costly mistake but it did teach me a valuable lesson. Thankfully I did not commit another fatal mistake of staying away from the market after this setback. I went on to double and quadruple some of my investments in companies like Sirius Satellite Radio (SIRI), Priceline.com (PCLN), TD Ameritrade (AMTD), VA Software (LNUX) and Medifast (MED).

Thanks to the expensive lesson learnt from ALGX, I now plan to invest in WIMAX equipment provider Alvarion (ALVR) instead of averaging down on Airspan Networks. Like Airspan, Alvarion is also currently unprofitable and since it is based in Israel, faces risks from the current crisis in the Middle East. However Alvarion has fallen almost 50% over the last six months even though it does not face the challenges that Airspan currently faces and the Middle East crisis is probably already priced into the stock. Alvarion also derives a large portion of its revenue from international contracts and supplies equipment to service provider TowerStream mentioned above.  If the Middle East crisis escalates or there are further delays in the adoption of WIMAX, all bets are off.

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ATI Technologies is Back in the “Game”

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July 23, 2006 | SIN Picks | Author Asif

The graphic chip making company ATI Technologies (ATYT) will be acquired by Intel’s archrival Advanced Micro Devices (AMD) very soon according to this reuters report for a price tag of $5.4 billion. This works out to a premium of 28.57% on Friday’s closing price of $16.56 and market cap of $4.2 billion and would translate into a bid of around $21.29 per share. The stock jumped up another 9.12% to $18.07 in after hours trading on Friday.

ATI Technologies was featured in the first edition of SINLetter back in August 2005 when it was trading at $13 a share. Rumors about this acquisition were also mentioned in the June 2006 edition of SINLetter based on comments made by an analyst with RBC Capital Markets. This acquisition would represent a return of over 60% for SINLetter subscribers in a little less than a year, which is not bad given that the Nasdaq is actually down over the same time period. Now if only Airspan Networks (AIRN) could gets its Yozan contract issues resolved.

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