SINLetter - April 2009

Welcome to edition 44 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.

A New Look, a New Book and a New Contest

A project that we had in the pipeline for quite some time and that we worked on inbetween client projects was the redesign of the SINLetter website to make it easier to read with a white background and more space for content. Thanks to the hard work of the behind the scenes team at SINLetter who are not only outstanding programmers and designers, but are also on standby at 4 AM in the morning to review the newsletters before they are sent out, we are unveiling a new look for the website and you can take it for a test ride here. Your feedback and comments on how we could improve the website or the service would be very much appreciated.

In conjunction with this new website, we are also rolling out our third stock contest that should hopefully appeal to both short-term traders and long-term investors. This contest is very similar to previous contests where you get to pick three stocks and your expected closing for the S&P 500 as of 12/31/2009. The value of the S&P 500 will simply be used a tiebreaker in case two or more people have the same average gain by the end of the contest. You can join anytime between now and December 30, 2009. Just like the first two contests, we decided to make things interesting by allowing participants to pick either long or short positions.

You can check out how you are doing from the stock contest rankings page given below. The contest rankings page would be automatically updated during market hours just like our model portfolio. The contest will run through the end of this year but we will also have monthly prizes for the contestant with the highest ranking at the end of each month. Don't forget to read the full list of rules and happy stock picking.

Click here to enter the subscriber stock contest.

Click here to view current rankings for subscribers. 

Prizes: Each month we plan on reviewing an investment related book and the monthly winner would receive this book along with a free one year subscription to the SINLetter Special Reports, a $120 value. I am currently in the process of researching a very interesting recession resistant small cap company with a dividend yield of over 6%, a low single digit PE, a strong balance sheet and high insider ownership for the second special report. The grand winner at the end of the year will get all the books reviewed in these newsletters from now through the end of the year, a lifetime subscription to the SINLetter Special Reports and a surprise prize. So don't hold back and submit your contest entry now for a chance to win one of 10 prizes throughout the course of this year.

Book of the Month: A Random Walk Down Wall Street by Burton G. Malkiel

While the pages of the book are packed with solid data and charts (I found the historical relationship between dividend yields and bull/bear market tops/bottoms very interesting), the prose is easy to read and often entertaining (the hemline indicator or the charting of coin tosses). Without giving too much away, I highly recommend checking out this book if you don't already have a dog-eared copy sitting on your shelf.

I Am Tweeting

After following the rise of Twitter for over a year, I finally decided to give Twitter and micro blogging a shot. So far I have been very happy with the service and like the ability to post updates from a phone. If you would like to "follow" me on twitter my account name is specialsin. You can also see all my updates on this page.

Portfolio Performance:

Our Indian commodity pick Sterlite Industries (SLT) had a blockbuster March, posting a gain of 53.7% for the month after mining company Asarco decided to sell its assets to Sterlite for a lowered amount of $1.7 billion. Investors were clearly relieved that Sterlite will not be liable for any asbestos related lawsuits from previous Asarco operations. After a dismal February, the SINLetter model portfolio not only had a great March, but also managed to preserve capital in the first quarter of 2009 as you can see from the performance table below. The portfolio did better than the Dow with a gain of 7.84% in March but underperformed the S&P 500 and the Nasdaq. For the first quarter of 2009, we outperformed all three indices with a tiny loss of 0.45% when compared to a 13.3% drop in the Dow.

Other bright spots for the portfolio included a 92% spike in our Chinese solar pick Suntech Power (STP). A green stimulus program by the Chinese government that could be as big as $30 billion lit solar stocks on fire, with Suntech gaining the most amongst the group. Despite these gains Suntech remains at just $11.69, well below our purchase price of $25.93 and significantly below the $65.17 level at which we scaled back on our Suntech position in November 2007. My, how the mighty have fallen.

I got a chance to attend wireless broadband provider Towerstream Corporation's (TWER) quarterly conference call (it took a lot of motivation to stumble out of bed at 5 AM) on March 19 and got a chance to ask management a question that has been on many Towerstream investor's minds. With six out of the nine markets the company operates in EBITA positive, I wanted to find out if the EBITA number for those markets includes just expenses related to that market (sales team, leases, equipment, etc) or if the company was also allocating part of corporate G&A expenses to those markets. It turns out that the EBITA number for each market only includes expenses related to that market. Quite clearly getting to cash flow positive may be a longer process that some investors had anticipated.

Despite a tough economic environment, the company reported strong growth in the fourth quarter with revenue growing 68% year-over-year and 12% from the third quarter. With management's focus on reducing cash burn and not entering new markets until the existing markets are profitable, I was worried that growth at Towerstream may slow down in 2009. However guidance from the company for the first quarter calls for 60 to 65% growth year-over-year. It was interesting to learn that even 1% market penetration in existing markets, could translate into $60 million in revenue. Towerstream generated $10.66 million in sales in 2008, up 55% from $6.88 million in 2007.

Both customer churn and average revenue per customer (ARPU) held steady when compared to the third quarter and improved on a year-over-year basis. EBITA loss narrowed from $2.2 million in the third quarter to $1.6 million in the fourth quarter. The company reduced cash burn by 16% from the third quarter to $3.3 million in the fourth quarter and ended the quarter with $25 million in cash and cash equivalents. Despite strong results and a compelling valuation, the stock sold off after results were announced and is once again trading below book value.

Gold finally gave up some gains in the month of March, dropping $21.6 or 2.3% to $918 per troy ounce.

Portfolio Readjustment:

I am making no adjustments to the SINLetter model portfolio at this time.

Cisco (CSCO) $16.77

On a recent call with a regional manager from web conferencing company WebEx, I asked him how things were going at WebEx and he told me that business was great. It reminded me of the last recession when business travel fell off a cliff after the dot com bust and web conferencing companies were doing brisk business. That brisk business attracted networking giant Cisco, prompting the company to acquire WebEx in 2007 even as it eyed bigger fish with its more expensive high-end videoconferencing product called TelePresence.

WebEx generated $380 million in 2006 annual revenues, the year before Cisco's $3.2 billion acquisition. Even if revenue has more than doubled since then, WebEx would account for less than 2% of Cisco's $39.54 billion fiscal 2008 annual revenue.

What attracted me to Cisco had little to do with WebEx and a lot to do with Cisco's current valuation. With a product portfolio ranging from enterprise routers, switches and hardware firewalls to consumer facing products like Linksys wireless routers and WebEx, the company generated over $12 billion in operating cash flow last year. The company has a stellar balance sheet with over $31 billion in cash and investments when compared to less than $7 billion in debt, representing net cash of over $4/share. Inventory levels have been dropping over the last four quarters and Cisco is positioning itself for negative growth this year and potentially next.

Valuation: Cisco's P/E ratio hit a 10 year low on March 9, 2009 when it dipped to 10.81. Since then the stock has rebounded more than 20% and trades at a current P/E ratio of 13.38 or an EV/FCF ratio of just 6.95 The company posted a 16% drop in year-over-year non-GAAP quarterly earnings and gross margins have also been contracting. Net margins are holding steady due to cost cutting initiatives that will eliminate nearly $1 billion in annual expenses at the current run rate.

To arrive at a value for Cisco, I decided to use a discounted cash flow (DCF) analysis model and used very conservative numbers to arrive at a price of $22.17 ($18.17 from the model and $4 in net cash). In case you are interested, the inputs into the model were $1.88/share in free cash flow over the trailing twelve month period, negative earnings growth of 5% for the next two years followed by a conservative 5% growth rate for the next 3 years (current analyst estimates are 9.85% for the next five year), a conservative 2% terminal growth rate and a 12% discount rate. Obviously changing any of these inputs will yield different values. The current stock price for Cisco represents a 32% discount to this $22.17 value and I think Cisco could be a compelling stock to own at these levels.

Conclusion: After the strong market rally over the last three weeks, I am expecting the market to pull back and consolidate in the coming weeks. Hence I am going to add Cisco to the watch list for now and will post an entry on the blog (or tweet) should I decide to start a position in the company.

* 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 PICO Holdings (PICO), 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).

DISCLAIMERS :

• Suria Investments, Inc. does not warrant the completeness or accuracy of the content or data provided in this newsletter.
• Suria Investments, Inc. does not comprise any solicitation to buy or sell securities.
• Suria Investments, Inc. 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.