SINLetter - February
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
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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),
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
|Since Inception (Aug 2005)
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.
As discussed below, I am adding 150 shares of Pico
to the model portfolio.
As An Asset Class - PICO Holdings (PICO) $25.42
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,
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.
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
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
||Number of Shares*
* Price and number of
shares adjusted for Activision Blizzard (ATVI)
and ICON plc (ICLR)
to reflect splits on September 8, 2008 and August 13,
From the stocks that are currently in the model portfolio,
I own shares of Sterlite Industries (SLT),
Activision Blizzard (ATVI),
Lionsgate Entertainment (LGF),
Tata Motors (TTM),
PowerShares Water Resources (PHO),
Suntech Power (STP),
and BlockBuster (BBI).
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
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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