SINLetter - November
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
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month. I have provided relevant links throughout this
newsletter, but if you have any questions or comments,
feel free to write
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.
As mentioned in the blog
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
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
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you can subscribe to receive
blog entries by email here.
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.
|Since Inception (Aug 2005)
After spending a few weeks
in the red, our short position in luxury RV maker Monaco
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
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.
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
I am purchasing 400 shares
of the PowerShares Water Resources ETF (PHO)
PowerShares Water Resources
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
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
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
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
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
||Number of Shares
||Number of Shares
||Number of Units
Voluntary Disclosure: I currently
own shares of Airspan Networks (AIRN),
Tata Motors (TTM),
Suntech Power (STP),
put options on Monster Worldwide (BSQOF.X)
and a short position in Monaco Coach (MNC).
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