SINLetter - February 2009

Welcome to edition 42 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.


Portfolio Performance:

Considering the Dow had the worst January ever in its 113-year history with a loss of 8.84%, the SINLetter model portfolio got off to a good start in 2009 with a small gain of 0.56% for the month of January. Additional gains in our recent pick Precision Castparts (PCP) and a 65% gain in Towerstream since our blog post Towerstream (TWER) Trading Below Cash, helped offset losses in Intel (INTC), Textron (TXT), Barclays (BCS), Procter & Gamble (PG) and a botched strangle on ICICI Bank. The reason I use the word botched is because the trade could have been profitable had I acted quickly and taken gains. Each side of the strangle was posting a gain of 70% at different points during the life of the strangle. Procter & Gamble dropped more than 6% on Friday after issuing a cautious outlook for 2009. This is a very difficult market where even investing in consumer staples as a defensive play in a recessionary environment is not working out very well.

Performance Metric Dow S&P 500 Nasdaq SINLetter
January 2009 -8.84% -8.57% -6.38% 0.56%
Since Inception (Aug 2005) -24.68% -33.15% -32.75% 33.8%


 

A strike at Boeing (BA) that was partially responsible for the Dow component swinging from earnings of $1.03 billion in the fourth quarter of 2007 to a loss of $56 million last quarter. Since Boeing is one of Precision Castpart's largest customers, this strike translated into $129 million in lost sales for the company. Despite this set back, the company managed to post a profit of $239.10 million or $1.70 per share last quarter, a 3% decline from the same quarter last year and inline with analyst estimates. Net income included an $11.8 million one-time restructuring and asset impairment charge in fiscal Q3. Sales declined 3.2% year-over-year to $1.67 billion. However operating income increased from $371.9 million to $374.60 million. A strong backlog of orders and a 17% increase in the Industrial Gas Turbine (IGT) segment helped the company post results that put investor concerns at rest and pushed the stock up 10% since results were announced on January 20, 2009.

Towerstream hit a couple of milestones by reaching EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) profitability in the Chicago market (launched March 2004) in mid-December and in San Francisco (launched October 2005) in mid-January. The ability of this company to execute in a difficult business environment is commendable and probably the reason for the recent rise in the stock price. The $800+ billion new stimulus plan has $6 billion earmarked for broadband grants and loans with a focus on improving broadband connectivity in rural areas. This plan reminds me of the $1 billion (Australian dollars) in subsidies the Australian government was considering as part of a $2 billion broadband network rollout in rural areas utilizing WiMax. That plan was eventually gutted but if the stimulus funded plan goes through in the United States and WiMax is the selected technology, it could benefit WiMax equipment providers like Alvarion (ALVR) and the new Clearwire/Sprint initiative, helping WiMax finally come of age.

Much like the trouble General Electric (GE) has found itself in due to its financial division, our aircraft and industrial pick Textron (TXT) has gone into a free fall dropping 32% just after its fourth quarter results were announced. Beyond the problems the company is facing in its finance division, it also saw cancellations/deferrals in orders for its Cessna line of business jets. The company posted a loss of $209 million or 87 cents a share in the fourth quarter. Excluding special items such as loan loss provisions, Textron actually posted a profit of 40 cents, well ahead of the mean analyst estimate of 2 cents. Revenue in Q4 2008 increased to $3.61 billion when compared to $3.59 billion in Q4 2007.

The company expects to generate $450 in free cash flow from operations in 2009. Textron's Bell helicopter division and the Textron Systems (mostly defense) division continue to execute well with $1 billion in foreign orders expected for Textron Systems in 2009, nearly 5 times the amount of orders generated in 2008. Oddly enough the company expects $50 million to flow from its troubled finance division to the parent company based on liquidation of nearly $2.6 billion in assets. With the stock dropping from over $70 in December 2007 to its current $9 level, there have been some insider purchases in recent months. The stock dropped nearly 70% peak to trough in the last recession and this time around it has already dropped 88%. Instead of liquidating our position at these levels, I am going to hold on to it until after the first quarter of 2009 (expected to be weak) and make a decision based on the financial situation of the company at that point.

Gold increased for a third month in a row with a gain of $46.3 or 5.26% to close the month of January at $927.1 per troy ounce.

Portfolio Readjustment:

As discussed below, I am adding 150 shares of Pico Holdings (PICO) to the model portfolio.


Water As An Asset Class - PICO Holdings (PICO) $25.42

As a follow up to the October 2008 newsletter where we discussed the importance of asset allocation and the December 2008 newsletter with its focus on timber as an asset class, I figured it would be a good idea to revisit another asset class that we have briefly discussed in the past. When discussing the water ETF Powershares Water Resources (PHO) in the November 2007 edition of SINLetter, I wrote,

"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."

PHO has performed inline with the rest of the market dropping 43% since November 2007 but has done better than other commodities like oil and steel that have lost more than 65% of their value over the same time period. While PHO provides a lot of exposure to water related infrastructure companies (79% of holdings as of 1/30/2009) and utilities (nearly 9% of holdings), I noticed that companies like PICO Holdings (PICO) and J.G. Boswell (BWEL.PK) that own a lot of land with water rights are missing.

Since J.G. Boswell is a thinly traded pink sheet stock with no financial statements available, I am instead going to explore PICO as a potential investment opportunity. PICO through its subsidiary Nevada Land and Resource Company is one of the largest private landowners in the state of Nevada. The company through its subsidiary Vidler Water Company develops, stores and supplies water in Nevada, Arizona, Idaho and Colorado. As you can see from the chart below, water resources and storage operations account for nearly 39% of net book value as of June 30, 2008. As of the third quarter this mix has shifted with water resources now accounting for 41.4% of book value. The operative words here are "net book value" and not revenue or earnings. The company's earnings are quite volatile and its primary focus is improving book value per share, which it has done consistently at an annual rate of 18% since 1994.

PICO Business Segments

Due to current market conditions, shareholder equity fell to $501.3 million as of September 30, 2008 from $518.6 million in the previous quarter. This drop was primarily on account of a -17.2% drop in the investment portfolio of their investment operations in the first nine months of 2008. PICO's stock sold off with the rest of the market, pushing the stock from a high of $48.22 on September 2, 2008 to its current price of $25.42.

When compared to other land holding companies, PICO's Enterprise Value/Acre is one of the lowest at just $824 but you also have to keep in mind that the quality of its land in Nevada contributes to this low value. The company currently trades below book value and in recent weeks insiders have started buying. With its focus on book value, the company has a very strong balance sheet with nearly $140 million in cash and just $28 million in long term debt. Given the long-term potential of its sector, track record of their management and current valuation, I believe PICO represents an attractive investment even at this juncture. I am going to add a small position to the model portfolio by purchasing 150 shares of PICO. I plan on initiating a position in my personal portfolio as well.

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 (January 31, 2009 for the February 2009 newsletter).

Model Portfolio - January 31, 2008

Long Stocks

Stock Symbol Number of Shares* Cost Current Value Diff ($) Diff (%) Date Added
PICO Holdings PICO 150@$25.42 $3,812 $3,812 $0 0% 1/31/2009
Precision Castparts PCP 200@$51.13 $10,226 $12,990 $2,764 27.03% 12/5/2008
Sterlite Industries SLT 2000@$4.71 $9,430 $10,700 $1,280 13.59% 11/6/2008
Intel INTC 500@$15.60 $7,800 $6,450 $-1,350 -17.31% 8/29/2008
Activision ATVI 1,200@$12.635 $15,162 $10,512 $-4,650 -30.67% 8/29/2008
Towerstream TWER 13,000@$1.1361 $14,769 $14,807 $38 0.26% 6/30/2008
Textron TXT 150@62.55/share $9,382.5 $1,354 $-8,028 -85.56% 5/31/2008
Companhia Siderurgica Nacional SID 200@43.15/share $8,630 $3,020 -$5,610 -65.01% 4/30/2008
Lionsgate Entertainment LGF 1,000@9.41/share $9,410 $5,610 $-3,800 -40.38% 2/29/2008
Tata Motors TTM 500@17.52/share $8,760 $2,020 $-6,740 -76.94% 2/29/2008
Barclays PLC BCS 400@32.435/share $12,974 $2,284 $-10,690 -82.4% 11/20/2007
Powershares Water Resources PHO 400@22.10/share $8,840 $5,064 $-3,776 -42.71% 10/31/2007
Blockbuster BBI 3,000@3.925/share $11,775 $3,840 $-7,935 -67.39% 7/9/2007
Unilever Plc UL 200@32.53/share $6,506 $4,384 $-2,122 -32.62% 5/11/2007
EMC Corp EMC 600@13.85/share $8,310 $6,624 $-1,686 -20.29% 3/31/2007
ICON Plc ICLR 300@18.65/share $5,595 $6,030 $435 7.77% 1/31/2007
Diamond Offshore Drilling DO 80@76.65/share $6,132 $5,021 $-1,111 -18.12% 1/3/2007
Alvarion ALVR 1000@6.87/share $6,870 $3,290 $-3,580 -52.11% 1/3/2007
WisdomTree Investments WSDT.PK 1000@7.40/share $7,400 $720 $-6,680 -90.27% 11/30/2006
Teva Pharmaceutical TEVA 300@35.05/share $10,515 $12,435 $1,920 18.26% 9/1/2006
Suntech Power STP 250@25.93/share $6,483 $2,352 $-4,130 -63.71% 7/31/2006
Procter & Gamble PG 180@55.60/share $10,008 $9,810 $-198 -1.98% 6/30/2006
Cash       $670      
Total       $133,800 $33,800 33.8%  

 

* Price and number of shares adjusted for Activision Blizzard (ATVI) and ICON plc (ICLR) to reflect splits on September 8, 2008 and August 13, 2008 respectively.

Voluntary Disclosure: From the stocks that are currently in the model portfolio, I own shares of Sterlite Industries (SLT), Intel (INTC), Activision Blizzard (ATVI), Towerstream (TWER), Lionsgate Entertainment (LGF), Tata Motors (TTM), PowerShares Water Resources (PHO), Barclays (BCS), Suntech Power (STP), Teva (TEVA), Alvarion (ALVR), WisdomTree (WSDT.PK), Unilever (UL), and BlockBuster (BBI).


Entertain Yourself:

The very talented Coen brothers (of Fargo and O Brother, Where Art Thou? fame) decided to follow their Oscar award winning movie No Country for Old Men with lighter fare in the form of Burn After Reading. Peppered with witty dialogue such as the following exchange, I enjoyed every minute of this totally pointless but very entertaining short movie.

Osbourne Cox (a very exasperated John Malkovich): If you ever carried out your proposed threat you would experience such a shitstorm of consequences my friend your empty little head would be spinning faster than the wheels of your Schwinn bicycle back there.

Chad Feldheimer (Brad Pitt with a stupid grin on his face): Y-you think that's a Schwinn?

Across The Universe is a musical inspired by the music of The Beatles and is an interesting journey to say the least. I watched the movie more than a year ago but have only recently started exploring the soundtrack and have taken a particular fancy for the rendition of "I Am The Walrus" by U2's Bono.

 


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