SINLetter - November 2007

Welcome to edition 28 of Suria Investment Newsletter (SINLetter), a free monthly investment newsletter. The objective of this newsletter is to provide you with unbiased initial research and basic facts about individual stocks and other financial instruments so that you can research them further before deciding to add them to your portfolio or not. If you are reading this and are not a subscriber, 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.


Last Newsletter of 2007:

I plan to visit India from the last week of November through mid-December and the newsletter and blog will be on temporary hiatus during this time period. This break should hopefully help me replenish my intellectual manna as there is a long list of books that I wanted to read but could not find the time for. This has been an amazing year and I would like to thank all of you for taking the time to read this newsletter and for visiting the website. Due to time constraints this newsletter is shorter than my usual newsletters. Hopefully I will get a chance to discuss a few things that are on my mind through the blog in the coming weeks.


SINLetter Stock Contest:

As mentioned in the blog entry One Stock, One Month, Three Prizes we launched a stock contest on SINLetter to give away three signed copies of Vitaliy Katsenelson's book Active Value Investing: Making Money in Range-Bound Markets. The response and the results from 39 entries have been very interesting with two Indian bank picks HDFC Bank (HDB) and ICICI Bank (IBN) holding the top spots. The contest ends on November 16th and there is still time for you to enter the contest and potentially win a copy of Vitaliy's book.


October Blog Entries:

If you do not subscribe to blog entries by email or in case you missed them, here are the blog and forum entries for October.

If you would like to post to the forums and do not have your password, you can use the Request Your Password link from the Login page. If you do not receive blog entries by email, you can subscribe to receive blog entries by email here.


Portfolio Performance:

What an amazing end to a roller coaster month that saw some of our positions post massive gains while others dropped significantly, leading to an overall gain of 1.92% for the month of October and gains of 121.08% since inception. Despite our cautious stance with short positions, put options and $26,253 (almost 12%) in cash, the model portfolio managed to beat the Dow and the S&P500 but was not able to achieve the phenomenal performance of the Nasdaq. The monthly and "since inception" performance is tabulated below.

Performance Metric Dow S&P 500 Nasdaq SINLetter
October 2007 0.25% 1.48% 5.83% 1.92%
Since Inception (Aug 2005) 31.13% 25.42% 30.23% 121.08%


SINLetter October 2007 Portfolio Performance

After spending a few weeks in the red, our short position in luxury RV maker Monaco Coach (MNC) as discussed in the section Hedging Your Bets, moved firmly into the green yesterday when Monaco reported a disappointing outlook for the fourth quarter and for 2008, despite an increase in sales and earnings in the third quarter. The stock dropped 22% in response, making it the biggest percentage decliner in the NYSE yesterday. Even if the company hits the high end of its 2 to 4 cents earnings forecast for the fourth quarter, it would translate into a 2007 P/E of roughly 36 after the price drop. For a company that does not expect to grow at all in 2008, that is still a very rich valuation and I expect further weakness in the stock. Hence I plan to hold on to the short position for now.

On the flip side, one of our long positions Ambassadors Group (EPAX) took a very hard hit earlier this month when it announced that only 26,200 travelers had signed up for its 2008 programs compared to 37,300 participants for its 2007 programs at the same date. The company expects earnings to decline in 2008 as parents cut back on spending in the face of a deflating housing bubble. Despite a 31.6% rise in third quarter earnings, the stock lost more than half its value over three trading sessions, pushing it from a gain of almost 35% in the SINLetter portfolio to a loss of 38.82%. According to this Forbes article, the stock may be a buy at these levels but unless we learn more about the expected earnings for 2008, it is difficult to make a call either way.

The news was brighter with our Chinese solar pick Suntech Power (STP), which posted an unbelievable gain of almost 50% in a single month and is now the biggest percentage gainer in our model portfolio with a gain of 127.11%. The company has indicated that it plans to increase production by 28% per year over the next three years and has signed a $1.5 billion 7 year polysilicon deal with Asia Silicon. Dropping polysilicon prices and the long-term supply contracts that Suntech has established should help the company improve its gross margins, which have taken a hit in recent quarters due to increased competition in the sector. The company opened its U.S headquarters in San Francisco right in the backyard of California based rival SunPower (SPWR).

While I still believe in the long-term prospects of Suntech Power, I think the stock and the entire sector is susceptible to a short-term pull back from these levels. There are two ways to handle this situation. Either sell part of the position and let the rest ride for the long-term or buy protective put options. With volatility at its highest level in a year, the March 2008 $55 puts on Suntech are quite expensive and hence I may sell a portion of our position in Suntech based on what we see from the third quarter 2007 results that are due out on November 15th.

Gold is now approaching the $800 level by closing the month of October at $791.70 per troy ounce, a gain of $48.60 or 6.54% in a single month. This follows a gain of more than 10% last month.

Portfolio Readjustment:

I believe it is time to end my long love affair with Tata Motors (TTM). While earnings at Tata Motors increased 19% in the recent quarter, the number of vehicles sold dropped and exports have also been slowing down in recent months. High interest rates and a euphoric market which has sent the Bombay Stock Exchange (BSE) to an all time high of almost 20,000 from under 3,000 just five years ago has dampened my appetite for Indian stocks. After holding Tata Motors for almost two years I am going to sell for a gain of 64.99%.

I am purchasing 400 shares of the PowerShares Water Resources ETF (PHO) for $22.10.

PowerShares Water Resources (PHO) $22.10

Investors often look for promising future trends and investment instruments that capture these trends. Nanotechnology, robotics and commodities are likely to be some of the biggest trends of the coming decades. Commodities like oil, metals and to some extents water have already rewarded investors handsomely over the last few years. However timing your entry into these trends usually proves to be very tricky. Get in too early and you may invest in innovative companies that do not know how to turn a profit. Get in too late and you miss some of the explosive early gains. For an example of the pitfalls of attempting to capture a future trend through a single company, check out the steep 57.83% loss I incurred in Airspan Networks (AIRN) while attempting to capture the emerging WiMax trend in 2005. Thankfully I later decided to hedge by WiMax bet with an investment in competitor Alvarion (ALVR) resulting in a 83.11% return year-to-date. Given the proliferation of Exchange Traded Funds or ETFs in recent months, it may be possible to capture most current trends and future trends through ETFs, thereby allowing us to spread our bets across multiple companies.

Clean water for domestic consumption as well as industrial use is not only going to be an important trend of this decade but explosive population growth combined with higher standards of living could make it the biggest trend of this century. Most of you have probably heard about the tremendous growth and transformation occurring in Dubai, UAE. This city in the desert and many others in the Middle East including those in Jordan and Saudi Arabia depend on desalination of ocean water. UAE obtains almost 70% of its water from desalination and Dubai alone has an installed desalination capacity of 188 million gallons per day. The situation is a little different in India where water has always been a scarce commodity. With its recent growth that scarcity has become even worse, leading to a bunch of businesses that are attempting to provide inexpensive and effect water purification options.

Whether it is desalination in the middle east, water purification in India, the supply of water to your home through a local utility or the increased use of bottled water, you can capture this trend of clean water through the PowerShares Water Resources ETF (PHO). This ETF, which is based on the Palisades Water Index, is not totally passive as this index of 25 stocks is rebalanced on a quarterly basis. While its expense ratio of 0.60% is well below most mutual funds, it is higher than many ETFs. PHO has a yield 0.68% based on the distributions paid out in 2006. If you are interested in checking out the current holding of this ETF, you can find them here.

I have been following PHO since its inception in December 2005 and have mentioned it numerous times to subscribers in emails, the SINLetter blog and forums. With its slow and steady upward climb, this ETF has appreciated more than 40% since inception and has outperformed both the Dow Jones Industrial Average as well as the other water ETF iShares Dow Jones US Utilities (IDU). While it is entirely possible that this ETF may lose ground if the markets were to head south, I believe this could be a great long-term holding.


Every month we add featured stocks into a model portfolio started with a cash position of $100,000 on August 2, 2005. To keep calculations simple, trading costs and regular dividends are not included. Prices reflect the closing price as of the last trading day of the previous month (October 31, 2007 for the November 2007 newsletter).

Model Portfolio - October 31, 2007

Long Stocks

Stock Number of Shares Cost Current Value Diff ($) Diff (%) Date Added
PHO 400@22.10/share $8,840 $8,840 $0 0% 10/31/2007
MCS 500@19.94/share $9,970 $9,620 $-350 -3.51% 9/14/2007
TWM 50@71.00/share $3,550 $3,110 $-440 -12.41% 9/7/2007
BBI 1,500@4.59/share $6,885 $7,890 $1,005 14.6% 7/9/2007
GYMB 200@42.02/share $8,404 $6,806 $-1,598 -19.01% 6/14/2007
UL 200@32.53/share $6,506 $6,772 $266 4.09% 5/11/2007
EMC 600@13.85/share $8,310 $15,234 $6,924 83.32% 3/31/2007
EPAX 300@29.70/share $8,910 $5,451 $-3,459 -38.82% 2/28/2007
ICLR 250@37.30/share $9,325 $14,500 $5,175 55.5% 1/31/2007
DO 80@76.65/share $6,132 $9,058 $2,926 47.72% 1/3/2007
ALVR 1000@6.87/share $6,870 $12,580 $5,710 83.11% 1/3/2007
WSDT.PK 1000@7.40/share $7,400 $3,850 $-3,550 -47.97% 11/30/2006
TEVA 300@35.05/share $10,515 $13,203 $2,688 25.56% 9/1/2006
STP 400@25.93/share $10,372 $23,556 $13,184 127.11% 7/31/2006
PG 180@55.60/share $10,008 $12,514 $2,506 25.04% 6/30/2006
JNJ 200@57.65/share $11,530 $13,034 $1,504 13.04% 2/28/2006
MED 1000@6.955/share $6,955 $5,050 $-1,905 -27.39% 11/30/2005
AIRN 1700@5.62/share $9,554 $4,029 $-5,525 -57.83% 8/1/2005


Short Stocks

Stock Number of Shares Cost Current Value Diff ($) Diff (%) Date Added
MNC 300@12.64/share $3,792 $3,480 $312 8.23% 9/7/2007


Options

Option Number of Units Cost Current Value Diff ($) Diff (%) Date Added
BSQOF.X 10@2.05/contract $2,050 $1,250 $-800 -39.02% 9/7/2007
JOEMJ.X 3@7.00/contract $2,100 $5,490 $3,390 161.43% 10/31/2006
Cash     $35,143      
Total     $221,084 $121,084 121.08%  

 

Voluntary Disclosure: I currently own shares of Airspan Networks (AIRN), Medifast (MED), Tata Motors (TTM), Suntech Power (STP), Teva (TEVA), Alvarion (ALVR), WisdomTree (WSDT.PK), Unilever (UL), Gymboree (GYMB), BlockBuster (BBI), Marcus (MCS), put options on Monster Worldwide (BSQOF.X) and a short position in Monaco Coach (MNC).

 


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