SINLetter - December 2006
Welcome to edition 17
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 Exchange Traded
Funds (ETFs) 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.
Is It Real?
One of the questions
I get asked often by subscribers and SINLetter visitors
is whether the model portfolio is real or does it just
represent paper positions and profits. As I mentioned
in the FAQ
section, as of January 1st, ten out of the eleven
stocks in the model portfolio were also in my personal
portfolios. As we approach the end of the year, 11 out
of the 13 stocks (not counting the two featured in this
newsletter or the Gold ETF) in the model portfolio are
also in my personal portfolios.
I also have a self-imposed
rule to buy the stocks featured in the newsletters after
the newsletter is sent out to subscribers. Hence my
interests are very much aligned with the interests of
subscribers. Since I do not trade very often, it is
possible that I may not be able to purchase every single
stock that is featured in the newsletter right away
due to capital constraints. The stocks I own that are
also in the model portfolio are disclosed in the "Voluntary
Disclosure" section right below the model
portfolio at the end of each newsletter.
The resilience of this
market in the face of tough economic data is downright
amazing. My decision to hedge
the portfolio against a weak economy through put
options actually ended up hurting the portfolio a little
but the SINLetter
model portfolio still managed to post a gain of
2.70% in November. The monthly and "since inception"
performance is tabulated below.
|Since Inception (Aug 2005)
I was also pleased to
see that for the twelve month period ending October
31st, the SINLetter model portfolio outperformed
every single paid newsletter tracked by Mark
Hulbert of MarketWatch.com.
Every edition of SINLetter is sent to Mark Hulbert at
the same time it is sent out to subscribers but the
Financial Digest currently does not track the returns
of the SINLetter model portfolio.
the weight management company that until a few short
months ago was the top performing stock of the SINLetter
model portfolio with gains in excess of 230%, reported
quarterly results that came in above expectations and
the stock gained 40% last month. The
stock is now registering gains of 142.12% in the model
portfolio and there is a good chance it will regain
its top performer status from VA Software (LNUX).
I wanted to post a summary of the quarterly results
on the SINLetter blog like I have for the last three
quarters, but was unable to do so. So here is a short
summary of the third quarter results.
As you can see from the
of the second quarter results that I posted on my
blog and the comments following it, Medifast
was expected to earn between 14 to 16 cents per share
for the third and fourth quarter combined.
Medifast actually earned $1.49 million or 11 cents per
share in just the third quarter. This represents an
increase of over 140% when compared to the third quarter
of last year. Sales were also strong, up 79%
to $19.6 million from $11 million in the third quarter
of last year. The company once again left their full
year earnings forecast of 38 to 40 cents per share unchanged.
This means that the company only has to earn about $0.68
million in the fourth quarter to meet the high end of
its full year forecast. It is important to note that
the fourth quarter is traditionally the slowest quarter
for Medifast and if they do not meet their full year
estimates, there may be some short-term downside risk.
I expect Medifast to perform well in 2007 and plan to
continue holding it in the model portfolio and my personal
which was featured in last
month's SINLetter, lost additional ground in November
and closed the month with a loss of 7.69%. SanDisk appears
to be slashing prices on its flash cards, USB drives
and MP3 players based on aggressive rebates and price
cuts I have seen at Office Depot and Costco over the
last few days. While this might increase market share
and revenue, it could hurt earnings in the fourth quarter
just like it did in the third quarter. However I like
the long-term prospects of SanDisk and see this current
weakness as a buying opportunity. On the positive side,
while Microsoft's (MSFT)
MP3 player did not even make it to the top 50 Amazon.com
bestsellers in the electronics category, two SanDisk
Sansa MP3 players made it to the top 15. I picked
up SanDisk for my personal portfolio and plan to continue
holding it in the model portfolio.
Suntech Power (STP)
another strong quarter with earnings nearly
tripling to $28.7 million and revenue increasing an
equally bright 188% to $163 million.
Instead of reiterating some of the recent developments
at Suntech, I am going to let Himanshu Pandya of FinancialNirvana.com
it for me. Suntech was up more than 15%
in a single month and I expect this highly
volatile stock to continue doing well.
Three out of the four
put options and LEAPS in our portfolio were in positive
territory in the beginning of November. That was until
the market decided to rally strongly. We now have three
options that are in negative territory, with only the
put option on the mortgage REIT New Century Financial
posting a gain of 13.89%. Based on a drop in consumer
durable goods orders, I expect the trucking sector to
remain weak and plan to let our put options ride along
Gold had another
strong month on account of a falling dollar and closed
the month of November at $646.60 per troy ounce, a gain
of $39.4 or 6.49%. The streetTRACKS Gold (GLD)
ETF that we picked up for the model portfolio in October
is now up 8.27% in just two months. While I would not
start a new position in Gold at this time, I plan to
continue holding it as a hedge against a weak dollar.
its operating margins down to 15% from the previous
forecast of 17% due to competitive pressure. Nokia's
new line of high-end phones including the N
Series and the E62
are uninspiring and face competition from the Motorola
Q and the BlackBerry
Pearl. There is also the chance that Apple (AAPL)
might introduce the widely rumored iPhone. Based on
these developments, I have decided to sell Nokia and
book a profit of 19.47%.
"O Organics" story played out as I expected
and the stock is registering a gain of 22.65% since
we added it to our portfolio 8 months ago. I am satisfied
with these returns and am going to sell Safeway (SWY)
to fund the purchase of our new featured stocks.
Third quarter Gross
Domestic Product (GDP) growth was revised higher
to 2.2% from the 1.6% reported in October. However this
revised figure is still below GDP growth of 2.6% in
the second quarter and 5.6% in the first quarter of
2006. Some of the other economic indicators also point
to weakness in the economy. While sales of existing
homes managed to post
a tiny gain of 0.5% in October, they were down 11.5%
when compared to October 2005. Inventory of
unsold homes increased to 7.4 months, the largest supply
of unsold homes since April 1993. The housing
market is considered to be in dire straits when the
supply of unsold homes reaches 9 months. The news was
not much better on the new homes front either. New home
sales dropped 3.2% in October but the median price of
a new home rose an astounding 13.89% to $248,500.
The savings rate
dipped further into negative territory to -1.4%,
the second lowest level since the great depression.
U.S retail sales fell
0.2% in October after a revised drop of 0.8% in September.
I would have been glad to see the "over extended"
consumer who has been propping up the economy for years,
scale back a little but that 0.2% drop is misleading
and was driven by falling gas prices. Excluding gasoline
sales, retail sales were actually up 0.4% in October.
The dollar declined further,
hitting a 20 month low against the Euro and a 14 year
low against the British pound. The dollar
is down 50% vs. the euro during the last five years
and is expected to continue losing ground. Check out
this bleak outlook for the dollar by Philip Bowring
in his article The
Devil and the Dollar. While such a collapse of the
dollar may not come to pass, it is always a good idea
to have some exposure to international stocks, gold
and other commodities in a portfolio.
So why is the market going
up in the face of weak economic data? The fact that
profits were up 31% in the third quarter of 2006
when compared to the third quarter of 2005 (depressed
due to hurricane Katrina) may have something to do with
it. There were also some bright spots in the economy
such as better than expected retail sales during the
all important Thanksgiving weekend, but those sales
numbers are best
taken with a pinch of salt. The unemployment rate
staying at a low 4.4% is another positive factor. However
the majority of the data points to further weakness
and sooner or later the market will align with the economic
Getting back to stocks,
raised its dividend 12.5% from 40 cents a year
to 45 cents a year and this will be effective in the
first quarter of 2007. Based on our purchase
price of $19 in July, the dividend yield works out
to a decent 2.37%. While there has been some recent
weakness in the semiconductor sector, I continue to
like Intel's prospects on account of the release of
Windows Vista and the new line of desktop, server and
mobile chips that Intel released in the latter half
radio providers Sirius Satellite Radio (SIRI)
and XM Satellite Radio (XMSR)
both did well in November rising 11.22% and 23.84% respectively.
A subscriber wrote to me in the first week of November
asking about Sirius. I had invested in Sirius a few
years ago when it was trading at about $2 per share
and I told him that if I wanted to invest in satellite
radio again, I would pick up both Sirius and XM Satellite.
Perceptions of which satellite radio company will emerge
a winner seem to change every year and instead of trying
to pick the winner the best way to invest in these speculative
stocks might be to start an equal position in both.
released quarterly results in the second week of
November and handily beat analyst expectations when
it reported an improvement in losses, an increase in
the number of subscribers and also forecast becoming
cash flow positive in the fourth quarter of 2006. This
profitability expectation is most likely on account
of the holiday season boost that satellite radio usually
gets and sustained profitability may still be a few
quarters away. Sirius also reported a larger than expected
increase in the number of subscribers and a 150%
increase in revenue. While both these satellite
radio stocks remain highly speculative, they are beginning
to pique my interest again.
Note: If you are familiar
with ETFs, feel free to skip the first two paragraphs.
Exchange Traded Funds
or ETFs are investment vehicles like mutual funds that
allow you to buy a basket of investments (stocks, bonds,
etc) that are administered by the company issuing the
fund. However there are a few key differences between
mutual funds and ETFs. The basket of stocks in a mutual
fund is picked by the mutual fund manager, who has the
ability to buy and sell stocks in the fund at any time.
In contrast ETFs are based on an index such as the S&P
500, which contains
500 of the largest companies in America. Stocks
are bought and sold in an ETF when there are changes
made to the underlying index. Another important difference
between mutual funds and ETFs is that ETFs are traded
on a stock exchange and you can buy and sell ETFs throughout
the day (not a recommended activity) just like you can
buy and sell stocks. It is even possible to short ETFs.
So why would investors
choose ETFs over mutual funds? It is a well known fact
that the majority of mutual funds (and newsletters,
I may add) underperform the S&P 500 index. You can
match the returns of the S&P 500 or the Dow Jones
Industrial Average or the Russell 2000 by picking the
that tracks these indices and not pay the expensive
management fees charged by some mutual funds. Since
ETFs are not "actively managed" like mutual
funds, their expense ratios are comparatively very low.
ETFs also have very little turnover,
are more tax efficient (barring the commodity ETFs)
and provide more visibility as an investor can easily
look up all the constituent stocks of a particular ETF.
For example, if I wanted to look up the holdings of
Value Line Timeliness (PIV)
ETF, I can do so on the PowerShares
There are currently
about 300 ETFs with total assets under management of
$363 billion (as of September 2006) in the United States.
This compares with over 8,000 mutual funds that have
over $10 trillion under management in the United States.
The assets under management by ETFs is no more than
a drop in the bucket right now and there is still a
lot of room to grow. It appears that new ETFs are being
launched almost everyday covering everything from emerging
markets to commodities like corn and copper.
So is it time for us to
own a piece of "Utopia"?
The theory of investing in companies that actually run
mutual funds instead of investing in the mutual
funds has been around for a while. With the explosive
growth in assets under management for ETFs, why not
apply this theory to the companies that are offering
these ETFs? Money has been flowing out of mutual funds
consistently for the last five months and instead of
assuming that it is going to the sidelines, I am willing
to wager that some of it is actually ending up in ETFs.
When the investment company
was created with a star
management team and launched 20 ETFs on June 16,
2006 it made quite a splash on Wall Street. However
the stock of the company, which currently trades on
the pink sheets, received little attention. Following
the concept of investing in the companies riding the
current ETF wave, I considered State Street Corp (STT)
as a potential
candidate for last month's SINLetter and also looked
at WisdomTree after reading this
blog post by the Confused Capitalist. Since WisdomTree
is not traded on one of the regular exchanges it is
very hard to find financial data for the company and
I could not even find information about assets under
management. A few weeks later, the stock popped up almost
20% when WisdomTree announced that in addition to the
30 ETFs that it already offers, it has filed to offer
another 31 ETFs. You can find a list of these 31
ETFs on ETFTrends.com. Even after this pop, I remained
uncertain about picking up the stock primarily on account
of the aforementioned lack of data.
On November 13, WisdomTree
announced that assets
under management have reached $1 billion. This number
lit another fire under the WisdomTree stock and it jumped
up another 42% since the news came out. So
is it still a good time to get into WisdomTree after
it has already run up more than 60% in a single month?
Let us use the limited
amount of public information we have available for WisdomTree
to arrive at a rough valuation for the company. With
expense ratios for their ETFs ranging from 0.28% to
0.58% and with a majority of their ETFs sporting an
expense ratio of 0.58%, I am going to assume an average
expense ratio of 0.5%. To keep calculations simple and
because WisdomTree does not provide this data, I am
also going to assume that assets under management are
equally distributed amongst the 30 ETFS that are currently
offered. Based on assets under management of $1 billion
over the first six months, revenue and gross profits
for the company would work out to about $50 million
($1,000,000,000 X 0.05). Revenue and gross profits for
small asset management companies is usually the same
as you can see from the income statements of other asset
management companies like Westwood Holdings Group (WHG),
U.S Global Investors (GROW)
and the recently
tainted GAMCO Investors (GBL).
If WisdomTree were to
grow assets under management over the next six months
to the same extent as they did in the first six months
(it is probably going to be much higher as they will
have 61 ETFs instead of the current 30), they should
see gross profits of about $100 million from $2 billion
in assets under management. Assuming a conservative
profit margin of 25%, which is about the same as the
profit margin for GAMCO Investors but a little higher
than the 18% margins of ETF gorillas like State Street
and Barclays, we get net income of $25 million a year.
With a market cap of $600 million, I arrive at a rough
forward P/E of 24. Please note that it is possible that
WisdomTree may not even be profitable, as many new companies
tend to utilize every dollar available to grow the business
at the expense of earnings. Astute investors will also
realize that since WisdomTree did not start the year
with $2 billion in assets under management, the actual
gross profits during the first year of operations may
be much lower. It should also be noted that ETFs charge
their expenses on a daily basis. Based on some of the
information provided here, investors should be able
to build a more sophisticated model to arrive at a valuation
for WisdomTree. If you do, please shoot me an email
and I would happy to post it on SINLetter.
Given that WisdomTree
currently trades on the pink sheets and has appreciated
more than 60% in less than a month, it could be considered
a highly speculative investment by some. But it is also
highly unusual to find a former
SEC Chairperson in the management team of a company
that is trading on the pink sheets. WisdomTree may eventually
end up listing its shares on one of the main exchanges
or get acquired by a company like Fidelity that has
oddly enough failed to launch its own ETFs. While my
guesstimated P/E of 24 is not exactly inexpensive, the
prospects for high double-digit growth combined with
the fact that my calculations are probably conservative,
lead me to believe that WisdomTree may prove to be a
good investment even after this amazing run-up.
I plan to start a position
in WisdomTree for my personal portfolio after this newsletter
is sent to subscribers.
WisdomTree faces competition not only from 800 pound gorillas
like State Street (STT),
and Amvescap (AVZ)
that offer ETFs but also from mutual funds powerhouses
like Fidelity and Vanguard that have certain funds with expense ratios so low that they would put some ETFs to shame.
- ETFs currently have about $363 billion in assets
under management and a lot of room to grow.
- WisdomTree is a young company with an excellent
management team and a defined focus on dividend based
- WisdomTree already has $1 billion in assets under
management and has filed to launch an additional 31
- Based on my rough valuation model, WisdomTree could
see further price appreciation as assets under management
- Former SEC Chairman Arthur Levitt recently joined
WisdomTree as a senior advisor.
- WisdomTree currently trades on the pink sheets and
there is little financial data available for the company.
- The stock has seen an astonishing 60% run-up in
less than a month and is susceptible to a dramatic
- If the economy continues to weaken and the markets
drop, investors may lose their appetite for newly
Barclays Bank (BCS)
Barclays is a London based
bank with a global footprint and multiple business units
including investment banking, retail banking, credit
card, mortgage lending and wealth management. It is
the wealth management division that attracted me to
Barclays as it fits in well with our ETF growth theory
discussed in WisdomTree (WSDT.PK).
The iShares family of ETFs offered by Barclays, has
over $244 billion in assets under management and Barclays
Global Investors manages 65 of the world’s top
100 largest pension plans. Barclays is growing its assets
under management both by launching new ETFs as well
as acquiring competitors such as Indexchange Investment,
which it agreed
to acquire for 240 million euros in November.
Barclays also provides
international diversification and a hedge against the
falling dollar, which is now at a 14 year low against
the pound sterling. Barclays has business operations
in 37 countries outside the United Kingdom and a strong
presence in Africa through acquisitions. There is speculation
itself might get acquired by Bank of America (BAC).
Bank of America currently holds 9.2% of U.S deposits
and has been attempting to expand without breaching
the 10% regulatory ceiling.
So why would I want to
invest in Barclays instead of Bank of America or Citigroup
Apart from international diversification, the dollar
hedge and the ETF growth theory, Barclays also sports
better revenue and earnings growth than either Bank
of America or Citigroup. It is astounding to see a company
with a market cap of almost $88 billion exhibit quarterly
revenue growth of 35% and earnings growth of 45.1%.
Barclays does not face the mortgage default and weak
housing risks that Bank of America is facing as the
British housing and mortgage industries are very strong
right now. But that could
The stock has a decent
dividend yield of 3.8% and an attractive valuation with
a current P/E of 12.57 and a forward P/E of 9.94. Barclays
may prove to be a better and possibly safer alternative
to either State Street or WisdomTree as a play on the
burgeoning growth in ETFs.
- Barclays is a globally diversified bank with strong
revenue and earnings growth.
- Barclays through its iShares family of ETFs is the
800 pound gorilla amongst ETF providers.
- Barclays sports an attractive valuation with a forward
P/E of just 9.94 and P/S of 2.28.
- Barclays profit margin of 18.34% is well below the
margins of either Citigroup or Bank of America.
- Barclays could be hit by a slowdown in the British
- The dollar may rebound from its low, leading to
a drop in the price of Barclays ADR shares.
Every month we add the two 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 (November 30, 2006 for the December
Model Portfolio - December 1, 2006
||Number of Shares
||Number of Units
Voluntary Disclosure: I currently
own shares of Airspan Networks (AIRN),
Royal Philips (PHG),
Tata Motors (TTM),
VA Software (LNUX),
Suntech Power (STP),
and SanDisk (SNDK).
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