SINLetter - March
to edition 31 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
With under a month to
go before the stock contest ends, "Raja" continues
to hold the top position but his gains have dropped
to 22.95% when compared to 74.72% at the end of last
month. RonPaulFan confidently declared "That wii
is mine" when he joined the contest and at second
position he just might get his wish. You can check out
his returns along with the rest of the contestants here.
The contest ends on March 31st and it is still not too
late to try and win one of the two prizes shown below.
For all the details about this contest, check out the
blog entry Two
Contests, Three Months, Four Prizes.
|First Prize:||Second Prize:|
February marked the fourth
consecutive month of declines for the major market indices
with the Nasdaq and Russell 2000 suffering the most.
The 4.95% drop in the Nasdaq this month may not have
been that bad unless you consider that this performance
was preceded by a 9.89% decline in January and that
the Nasdaq has returned just 3.47% since this newsletter
was started back in August 2005. The SINLetter model
portfolio dropped less than the major indices in February
with a loss of 2.33% due to further declines in Suntech
Power (STP), WisdomTree Investments (WSDT.PK) and Medifast
(MED). On the positive side ICON plc (ICLR) continued
its gains, becoming the top performing stock in the
model portfolio with a gain of 77.21%.
|Since Inception (Aug 2005)
Suntech Power like most
solar stocks has seen a rapid decline in its value in
recent weeks. It is hard to believe that at the start
of the year, our position was up 240% but has now declined
to a "mere" gain of 43.35%. While I regret
not selling our entire position earlier, I am glad I
took some profits in November. All through this decline,
I have received emails from subscribers asking if it
was a good time to initiate a new position in Suntech
and I told most people that since I still hold half
my original Suntech position in my personal portfolio,
I was staying on the sidelines. However at this point
I believe that the selling has been over done and if
you don't already have exposure to alternative energy
in your portfolio, Suntech is worth a close look. Another
"alternative" to consider is the alternative
energy ETF, PowerShares Wilder Clean Energy (PBW),
which has healthy exposure to solar stocks.
Since adding Umpqua Holdings
to our watch list (my thoughts on Umpqua were discussed
Holdings: Can the free cookies last?), the stock
has dropped nearly 14% and is getting near levels that
I find attractive. With housing showing no signs of
improvement and the inventory of unsold homes rising
even in the Pacific Northwest, I am inclined to
stay on the sidelines just a little longer with Umpqua
For quite some time now
I have been convinced that Gold bulls will attempt to
take the precious metal to $1,000 an ounce and this
may soon become a reality. Gold closed the month of
February at $974.30 per troy ounce, a gain of $51.00
or 5.52% for the month.
As discussed below, I
am going to add 1,000 shares of Lionsgate Entertainment
and 500 shares of Tata Motors to the model portfolio.
This will bring down our cash position from $49,154
or 24% of the portfolio to $30,984 or 15%.
Lionsgate Entertainment (LGF)
the movie that is described as the best western
since Unforgiven, 3:10
to Yuma reminded me of the British movie Lock,
Stock and Two Smoking Barrels despite the
vastly different genres these movies come from.
The first half of 3:10 to Yuma was slow; taking
its time to establish characters but then brilliantly
executes in the second half. Investors who follow
the stock of Lionsgate Films (LGF)
will recall that the theatrical release of 3:10
to Yuma last Fall helped Lionsgate's stock register
a nearly 15% jump in share price from $9.34 to
almost $11. The stock has since settled down lower
partly because of market conditions, partly because
their aging Saw
horror movie franchise (part 5 is due out in October
2008) has lost the punch of the first two parts
and partly because the Hollywood writer's strike
was affecting all movie studios.
into the drug pipeline of a large biotech like
can be difficult but the same cannot be said of
movie studios like Lionsgate. Looking into the
movies Lionsgate is slated
to release in the next couple of years, it
appears that The
Bank Job and Harold and Kumar 2 could ring
up high box office returns while Rambo
(or Rambo 4 as it is known in India and Singapore)
might register good DVD sales. "Harold and
Kumar 2" is a movie produced by Mandate Pictures,
which was acquired by Lionsgate in August 2007.
It will also be interesting to see how Ayn Rand's
Shrugged translates to the big screen, especially
with Angelina Jolie playing the role of Dagny
Sales of the 3:10 To Yuma
DVD have been strong and more than two years after its
release, Lionsgate's brilliant Academy Award winning
remains at the top of Blockbuster Online's list of most
rented movies. In true Lionsgate fashion, the company
has decided to gain maximum mileage from Crash by teaming
up with Starz Encore to release a 13 episode TV
series based on the movie. The Crash mini-series
will join two other critically acclaimed Lionsgate series
"Weeds" and the recent Golden Globe winning
"Mad Men". However the value in Lionsgate
lies not in the next high grossing movie it might release
or the next Oscar winner like Crash but on account of
Long Tail of movies through its rather large library
of movies. Every new digital delivery service
could mean potential revenue for Lionsgate and while
Apple's entry into movie downloads may not bode well
for Netflix (NFLX)
or Blockbuster (BBI),
it will help studios like Lionsgate. In fact Lionsgate
expects revenue from digital delivery to increase from
less than 1% right now to almost 15% by 2010. The company
also expects to benefit from the decision of most movie
studios to back the high definition Blu-ray format,
after Toshiba accepted defeat in the
Blu-ray vs. HD DVD war. High definition DVD sales
are expected to triple to $1 billion in 2008 from $300
million in 2007.
I think a big concern for investors like me was how
Lionsgate will hold up next quarter when its results
are compared to the quarter ending March 2007, which
included a big jump in DVD sales after Crash won three
Oscars last year. I expressed this concern when I wrote
the blog entry Stocks
That Almost Made The Cut: March 2007 last year and
have been periodically checking in on the stock since
then. It looks like investors who were worried about
the fourth quarter results (Lionsgate's fiscal year
runs from April through March), were reassured when
Lionsgate announced that it expects to report
more than $400 million in fourth quarter revenue, well
above analyst estimates of $344.3 million. The company
also revised upwards its full year revenue estimate
to over $1.2 billion, giving the company a
Price/Sales (P/S) ratio of just 0.92. The month of January
was very kind to DVD sales of Lionsgate movies with
the company capturing 4 out of the top 8 DVD titles
in North America.
However the news was not
all positive. The company reported an 88% plunge in
third quarter profits as it increased its marketing
and film making budget. Despite the $110 million in
free cash flow Lionsgate expects to post in full fiscal
year 2008, the company will still report negative earnings
for 2008. Things are expected to get much better in
fiscal 2009 (ending March 2009) as the company expects
to report earnings before interest, taxes and amortization
(EBITA) of $64.3 million. Assuming no taxes on account
of the fiscal 2008 loss and interest plus amortization
of roughly $20 million (interest in Q3 2008 was $4.09
million), we get earnings of approximately $44.3 million
and a forward P/E of 25.06, which is a little lower
than the forward P/E of 28.53 reported on Yahoo Finance.
Please note that these are rough calculations based
on assumptions and a lot can change in terms of earnings
or the debt on Lionsgate's balance sheet.
A forward P/E of 25.06
may appear a little on the expensive side especially
in this market until you consider that the company expects
revenue growth of 25% in fiscal 2008, generates strong
cash flow from operating activities and has maintained
a 30% annual growth rate since 2000. Lionsgate also
sells for a much lower Price/Sales and Price/Free Cash
Flow ratio when compared to competitors Dreamworks Animation
and Marvel Entertainment (MVL).
Interest in Lionsgate has been building recently with
a few institutional funds acquiring shares. The stock
actually posted a 2.17% gain on Friday when almost everything
was getting butchered and the Dow dropped 315.79 points.
The company's earnings are volatile and the stock is
equally volatile but exhibits a lot of support at the
- Various business units at Lionsgate films ranging
from movies and home entertainment to stage plays
such as Dirty Dancing appear to be executing well.
Long Tail of entertainment is
clearly working in Lionsgate's favor. The company's
growing library of films and TV serials such as Weeds
and Mad Men is expected to generate $90 million in
free cash flow on $250 million in revenue in fiscal
- Movies such as 3:10 to Yuma, War, Good Luck Chuck
and Saw IV helped Lionsgate capture 4 out of the
top 8 DVDs sold spots in January.
- The Saw and Tyler Perry franchises have proved highly
successful for Lionsgate with the Saw franchise alone
bringing in over half a billion dollars in revenue
worldwide. Lionsgate expects to capitalize on the
success of Crash by launching a 13 episode mini-series
in partnership with Starz.
- The company expects to increase its cash and cash equivalents to $350 million by the end of fiscal 2008 and is attractively valued
with a forward P/S of 0.92 and Price/Free Cash Flow of 10.
- Lionsgate's earnings are volatile and the company
expects to report a net loss for fiscal 2008 ending
- The aging "Saw" franchise may not deliver
the kind of returns the first four parts delivered.
- Increasing digital delivery of content and piracy will cannibalize
- Lionsgate's balance sheet may not appears very strong
on first glace with nearly $600 million in long-term
debt. However almost $269.37 million of that is film
obligations and the rest is convertible bonds at a
cost of capital of just 3.31%. The company expects
interest from its cash position to cover the interest
payments on the debt and with closer inspection, the
debt does not seem so bad.
I currently hold a small position in Lionsgate and will
add to my position after this newsletter goes out to
Tata Motors (TTM) $17.52
lot has changed at Tata Motors since I wrote about
it more than two years ago in the December
2005 edition of SINLetter. The company unveiled
its much anticipated small car called the Tata
Nano, introduced a new
line of armoured vehicles, struck a deal
with Boeing to make parts for the 787 aircraft
and is said to be very close to acquiring Jaguar
and Land Rover from Ford Motor (F).
Despite getting almost 50 miles per gallon, the
Tata Nano has irked environmentalists both in
India and outside the country. Maybe one day we
will see an "air powered" Nano or a
hybrid Nano thanks to Tata's $30
million investment in Air Car developer MDI
and its joint effort with Chrysler to develop
an electric version of its Ace mini truck.
On the financial front,
the company increased both revenue and earnings as well
as increased its dividend (current yield is 2.1%). Unfortunately
the company has also taken on a lot of debt to fuel
its growth and operating margins have declined. Exports
have also slowed and the company faces tough competition
at home from Mahindra and Mahindra. Hopefully the launch
of the Nano in fall and the acquisition of Jaguar and
Land Rover will help Tata Motors address competition
in the domestic market while improving its international
presence and brand name.
As you can see from the
trades section, I sold Tata Motors from the SINLetter
model portfolio when it was trading at $19.7 on
10/31/2007 for a gain of 64.99%. The stock has declined
11% since then and with a P/E of 12.43, a P/S of 0.77
and PEG of just 0.76, the company looks cheap. The Indian
market has been highly volatile lately and as I write
this the BSE Sensex has dropped another 908 points or
5.17% but Tata Motors appears to be holding its own
with just a 1.6% drop. This may have to do with the
released Union budget that did not please the capital
markets but is perceived to be beneficial to automobile
companies that make small cars like Tata Motors.
The release of the new
WisdomTree India ETF (EPI)
provides investors the ability to hedge their risk by
shorting the ETF and going long a select group of Indian
ADRs like Tata Motors (TTM),
and Sterlite Industries (SLT),
which was featured in the India:
Emerging Market Opportunity section of the January
2008 investment newsletter. When I wrote the January
newsletter, I felt that the Indian market was overvalued
and highly speculative but after a more than 4,000 point
or 20% drop since early January, I am no longer comfortable
shorting the Indian market and am ready to initiate
long positions in high quality companies like Tata Motors.
I continue to hold the position I initiated
in Tata Motors in December 2005.
Model Portfolio - February 29, 2008
||Number of Shares
Voluntary Disclosure: From the stocks
that are currently in the model portfolio, I own shares
of Lionsgate Entertainment (LGF), Tata Motors (TTM),
PowerShares Water Resources (PHO),
Suntech Power (STP),
and Marcus (MCS).
Music That Helped:
It takes me anywhere
from 8 to 12 hours to write these newsletters
and they are usually binge writing sessions where
I sometimes write all night long. Something that
helps me burn the midnight oil is familiar music
playing in the background. Since I have not written
a music blog entry like
this one in a long time, I figured I would
just list out some of the songs and albums I am
currently listening to.
- Dive Deep by Morcheeba. Check out the songs "Gained
The World" and "The Ledge Beyond The Edge".
- The Insider - Movie Soundtrack. Michael Mann's finest
movie has a brilliant soundtrack.
- Kill To Get Crimson - Mark Knopfler. Includes the single "Punish the Monkey".
For all you Mark Knopfler and Dire Straits fans,
Mark is touring once again to promote "Kill
To Get Crimson" and he will be playing
at the Greek Theatre in Berkeley on June 28,
2008. I watched him at the Greek Theatre in 2005
during the Shangri-La tour and highly recommend
this concert. You can find North American tour
I was pleasantly surprised to learn that for each
pair of tickets, you get a CD of "Kill To
Get Crimson" free.
To unsubscribe, please click here.
- Suria Investment Newsletter (SINLetter) does not warrant
the completeness or accuracy of the content or data provided in this newsletter.
- Suria Investment Newsletter (SINLetter) does not comprise
any solicitation to buy or sell securities.
- Suria Investment Newsletter (SINLetter) will not be liable
for any investment decision made or action taken based upon the information
in this newsletter.
- We suggest you check with a broker or financial advisor before
making any investment decisions.