SINLetter - January 2007
Happy New Year and welcome
to edition 18 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.
model portfolio outperformed the three major indices
in December with a gain of 4.25% powered by strength
as well as respectable gains in one of our put options.
The monthly, quarterly, annual and "since inception"
performance is tabulated below.
|Fourth Quarter 2006
|2006 Annual Returns
|Since Inception (Aug 2005)
SINLetter Model Portfolio Performance
Let me be the first to
say that returns like these are very difficult to achieve
with a diversified portfolio and 2006 will be a difficult
act to follow, especially since my outlook for 2007
remains bleak. I will however continue to look for stocks
and strategies that will help us achieve the kind of
we have seen since inception, without taking on excessive
showed surprising strength in December, gaining 13.12%
in a single month despite facing
protests against the site it chose to build its
revolutionary small car. The stock benefited from very
strong November sales numbers with total vehicle
sales increasing a whopping 43.1% year-over-year.
December sales were also strong with vehicle sales up
33% year-over-year. This compares with a 13% drop in
December 2006 sales for both Ford (F)
and General Motors (GM).
The valuation of Tata Motors still looks attractive
to me and I plan to continue holding our position but
I would consider waiting for a pullback to start a new
position primarily because of the stratospheric rise
of the Bombay Stock Exchange (BSE), which has quadrupled
over the last four years.
After powering up 15%
in November, Suntech Power (STP)
lit up an additional 13.63% in December.
As usual, FinancialNirvana.com does a good job of summarizing
all the recent events related to Suntech Power.
There was a slew of public offerings by Chinese solar
energy companies recently, including the IPOs of Solarfun
Trina Solar (TSL)
and Canadian Solar (CSIQ),
but Suntech continues to remain the best of breed solar
play and I plan to keep it in the model portfolio for
now. It also happens to be one of the largest positions
in my personal portfolio.
and Barclays (BCS),
the two stocks featured in last
month's SINLetter eked out gains of 4.73% and 7.55%
respectively in December. Barclays benefited from continued
strength in the British housing market and speculation
that Bank Of America (BAC)
might acquire Barclays. Irrespective of whether Bank
of America acquires Barclays or not, I still like its
prospects and it also made my list of Ten
Stocks for 2007.
After writing seventeen
editions of SINLetter, I made my first big mistake
last month when I missed a zero in my revenue
assumptions for WisdomTree. I calculated the revenue
for WisdomTree as $50 million based on a 0.5% fee for
assets under management (AUM) of $1 billion. The actual
revenue and gross profits work out to $5 million and
not $50 million. I regret this error and have posted
an update in the December 2006 newsletter that discusses
this change. WisdomTree continues to grow at a rapid
clip and reported assets under management of approximately
$1.5 billion (PDF) on December 22nd, just 42 days
after reporting that assets under management had grown
to $1 billion. I am however not pleased with the
fact that they raised $56 million by offering their
common stock to AIG (AIG)
at $3 per share. Not only were these shares offered
at a very steep discount to prevailing market prices
but they also dilute the stake of existing shareholders.
It looks like WisdomTree borrowed a page out of Sirius
Satellite Radio's (SIRI)
playbook of raising capital by diluting existing shareholders.
Our put options did well
in December but the first day of trading in January
made a couple of them reverse course. The May 2007 put
option on the mortgage REIT New Century Financial Corp
is now posting a healthy gain of 55.56%. The March 2007
put option on the iShares Dow Jones Transportation ETF
did well in December and was up 33.33% before moving
into negative territory on January 3rd. While the stock
of the trucking company YRC Worldwide has gone down
a little since we added its Jan 2008 put LEAPS (YBQMG.X)
to our portfolio, the leaps are actually down 11.54%.
A drop in durable goods orders, contraction
of manufacturing activity and a tendency to use
cheaper railroads in combination with trucks are some
of the factors weighing in on the trucking industry.
Buying naked put options on a leveraged trucking company
like YRC Worldwide (YRCW)
may provide a good hedge to long portfolios in 2007.
Gold gave up some of its
November gains and closed the month of December at $636
per troy ounce, a loss of $10.60 or 1.64%. Gold
proved to an excellent investment in 2006, posting a
gain of 23.11% and outperforming many asset classes.
Once again I am presented
with the tough task of selling some of our positions
to fund the purchase of this month's featured stocks.
The reason I find it hard to sell some of these positions
is because I pick stocks with a 1 to 3 year horizon
in mind and having to rebalance the portfolio every
month is challenging.
The Indian internet portal
company Sify (SIFY)
has performed well with returns of 18.81% in just five
months since we added it to our model portfolio. While
I still believe that Sify would be an excellent acquisition
for Yahoo (YHOO)
or Microsoft's MSN division, it is a volatile stock
that is susceptible to a pullback in the Indian stock
market. Oddly enough, Sify is not even listed on the
Bombay Stock Exchange (BSE) but has a high correlation
with other Indian stocks. Hence I am going to sell Sify
and use the proceeds along with some of the existing
cash to purchase our featured stocks.
I am also adding the July
2007 $40 put option on Countrywide Financial (CFCSH.X)
to the model portfolio. You can read more about why
I am picking up this option in my blog entry titled
Effect of Housing Weakness on Mortgage Lenders.
Dogs Of The Dow
According to the Dogs
of the Dow theory if you were to pick 10 stocks with
the highest dividend yields from the Dow Jones Industrial
Average (DJI) at the beginning of the year and hold
them until the end of the year, your average returns
over a period of time should be higher than the returns
of the entire Dow Jones Industrial Average (DJI).
of the Dow theory that we used last January to pick
has sparked renewed interest amongst investors this
year after the 2006 Dogs posted a stellar gain of 24.8%.
Once you include dividends, the returns of the
2006 dogs exceed 30%. Given below is the list
of 2007 Dogs of the Dow, sorted by dividend yield. Interestingly
all the ten dogs from last year make an appearance once
again on this year's list.
2007 Dogs of the Dow
|JP Morgan Chase
* Price as of market close on Dec 29th, 2006
I considered using the
Dogs of the Dow theory once again to pick this month's
featured stocks but after a gain of 58.19% in General
Motors (GM), a gain of 45.98% in AT&T (T) and a
gain of 37.06% in Merck (MRK), most of the stocks on
this list can hardly be called "dogs". Given the high
level of interest in the Dogs of the Dow theory, there
is a possibility that some of these stocks may register
additional gains in the first quarter of 2007 but I
plan to abstain from the dogs this year with the single
exception of Pfizer, which I already hold in my
Pfizer's recent 21%
dividend increase to 29 cents from 25
cents per quarter helped put it on the top of the Dogs of the Dow
with a yield of 4.48%. This dividend increase comes
after a similar 26%
increase declared in December 2005 and marks the
40th consecutive year of dividend increases.
Based on my purchase
of Pfizer in December 2005, my dividend yield works
out to 5.5% and hence I plan to hold Pfizer in my portfolio.
However I would not consider starting a new position
in Pfizer at this time since sales are expected to stay
flat at Pfizer over the next two years and the company
sold its profitable consumer products division to Johnson
& Johnson. On the positive side Pfizer plans to buy
back as much as $10 billion of its stock in 2007 and
George at Fat Pitch Financials believes that Pfizer's
intrinsic value is more
than its current market price.
Note: You can check to see how the dogs of the
dow are doing from the Dogs
Of The Dow page on SINLetter.com, which automatically
updates the performance of the dogs every 30 minutes
during market hours.
Of The S&P 500
Applying the definition of
the Dogs of the Dow to the S&P 500 and selecting the 10
stocks with the highest dividend yields, we arrive at the
Dogs of the S&P 500. The list of 2007 Dogs of the S&P
500 is given below and it will be interesting to see if they
outperform the S&P 500 in 2007. Pfizer is the only stock
that makes an appearance on both lists.
2007 Dogs of the S&P 500
|Peoples Energy Corporation
* Price as of market close on Dec 29th, 2006
The only thing worse than
picking a bad investment is investing in an emerging
technology at the wrong time. When I first heard about
a technology that could theoretically offer high speed
internet access over a 50 kms (31 miles) radius from
a single base station, I was so excited by its prospects
that I wanted to share my thoughts about WiMax and specifically
Airspan Networks (AIRN)
with my family and friends and this was one of the factors
that lead to the creation of SINLetter.
In real world scenarios
the coverage radius for WiMax is closer to the 3 to
5 mile range, which is still a big leap when compared
to the 300 feet range of a traditional wireless access
point. The large-scale commercial deployment of WiMax
did not occur as expected in 2006 and Airspan Networks
also got into trouble with its largest customer Yozan,
causing the stock to drop precipitously and making it
the biggest loser of the SINLetter
model portfolio with a loss of 33.27%. Investors
had two opportunities to recover their losses in Airspan,
either by adding to their Airspan position when it resolved
its liquidity issues on July 31st, 2006 or by Hedging
Their WiMax Bet through an investment in Israel
based Alvarion, Airspan's key competitor. The former
action would have netted investors a gain of more than
70% while the latter action would have netted a moderate
21% gain. While I did start a position in Alvarion for
my personal portfolio soon after writing the "Hedging
Your WiMax Bet" blog entry, I wanted to observe
Alvarion a little longer before adding it to our model
portfolio. I believe that the time has come to add Alvarion
to our model portfolio and have discussed some of the
catalysts that make Alvarion an interesting investment
With service providers
like Clearwire, Sprint (S)
and TowerStream as well as major equipment manufacturers
like Intel (INTC),
and Alcatel-Lucent (ALU)
on board with WiMax, the question is not whether WiMax
will be commercially deployed but when. Sprint has selected
WiMax to implement its next generation 4G technology
platform and is expected
to spend $1 billion on this technology in 2007.
Alvarion's WiMax equipment has been selected recently
by telecommunication providers in various countries
Zealand. TowerStream, a WIMAX service provider in
the United States that provides high-speed service at
a competitive price to businesses in major cities uses
equipment by Alvarion. According to Barron's, Alvarion
may also benefit from the recent auctioning of the
3.5 GHz spectrum in Germany.
Excluding special items,
the company broke even with earnings of 2 cents per
share in the third
quarter of 2006. On a GAAP basis, the company reported
a loss of $0.2 million on $54 million in revenue. Year-over-year
revenue growth was 20% and the company is expected to
post a profit of 14 cents a share in 2007. According
to the third quarter 2006 condensed
balance sheet (excel), the company had $109.44 million
in cash and investments and no debt.
WiMax would really gain
momentum after the mobile
WiMax standard also known as 802.16e is commercially
deployed in conjunction with the integration of Intel's
mobile WiMax chip named Rosedale
II into the Centrino platform in late 2007. Alvarion
currently owns more than 50% of the WiMax equipment
market and according
to some estimates, their market share is as high
as 80%. With units deployed in over 150 countries and
dominant market share in the WiMax equipment space,
Alvarion is well positioned to benefit from the commercial
rollout of fixed WiMax and the adoption
of the Mobile WiMax standard in 2007.
Alvarion faces competition from pure play wireless
equipment companies like Airspan Networks (AIRN),
Aperto Networks and Redline Communications as well as
larger companies like Motorola (MOT),
Samsung, Nortel and Alcatel-Lucent (ALU).
- Alvarion currently has a dominant market share with
over 50% of the emerging WiMax equipment market.
- According to a recent research report by Canaccord
Adams, the combined market for fixed and mobile broadband
is expected to grow from $1 billion in 2007 to $4
billion in 2010 and Alvarion is well positioned to
benefit from this growth.
- Excluding special items, the company posted a profit
of $2 million or 2 cents per share in the third quarter
of 2006 and is expected to report earnings of 14 cents
- Alvarion is a prime acquisition candidate for a
larger equipment provider like Motorola, Samsung or
- Mobile WiMax deployment is likely to occur in late
2007 or early 2008 and until then growth will be primarily
driven by rural markets and emerging countries that
do not have established broadband infrastructure.
- Mobile WiMax faces competition from newer 3G wireless
data technologies like EV-DO and HSDPA that offer
faster transfer speeds on already established cellular
||Long Term Debt
Diamond Offshore Drilling
While reading the article
Stock to Buy Now in the recent edition of Fortune
magazine, I was intrigued by Diamond Offshore, one of
the companies mentioned in the article. As a subscriber
pointed out last month, traditional energy companies
are conspicuously missing from the SINLetter
model portfolio and when I came across Diamond Offshore,
I decided to explore the company further to see if it
would be a good fit. Without reiterating what was written
in the article, let me discuss a couple of additional
thoughts about the company.
Apart from the triple
digit earnings growth mentioned in the article, Diamond
Offshore also has excellent operating and profit margins
of 43.1% and 32.15%. However the price of the stock
seems to be highly sensitive to oil prices, as seen
by the more than 4% drop on January 3rd in reaction
to a 4.5% drop in the price of crude oil. Given that
Diamond has already booked out rigs at high prices for
2007, 2008 and beyond, the stock should respond to higher
earnings in the longer term and I see drops in the stock
price in response to drops in oil prices as a buying
opportunity. Over the last few months oil and gas prices
have been very volatile and so it may be prudent to
start a small position in Diamond and then add to this
position over a period of time.
Diamond Offshore does
have close to a billion dollars in debt on its balance
sheet but it also has $788.5 million in cash and short-term
investments. As you can see from the balance sheet,
the company appears to be devoting capital towards the
purchase of property and equipment each quarter. Given
the shortage of drilling rigs and the high profit margins
the company enjoys, it makes a lot of sense to invest
in additional equipment instead of paying down debt
during this period of high growth.
Apart from volatility
in oil prices, the other key risks to watch out for
with Diamond Offshore is the possibility of intense
tropical storms due to global warming that could affect
offshore drilling operations. Environmentalists and
many members of congress are also not supportive of
offshore drilling because of the potential for oil spills
and other discharges into the ocean that can affect
marine life. In light of the fact that Congress
recently gave its go ahead on offshore drilling
in an area of the Gulf of Mexico that is estimated to
hold 1.26 billion barrels of crude oil, the political
risk of a ban on offshore drilling appears remote at
- Diamond Offshore's earnings are expected to rise
178% in 2006 and this highly profitable company could
offer a special dividend like it did last year.
- Offshore drilling rigs are in short supply and Diamond
has already contracted its rigs out for 2007, 2008
- Diamond Offshore's forward P/E is 8.36 and the recent
pullback in the stock price may present a good buying
- Offshore drilling is heavily opposed by environmentalists
as it carries the risk of oil spills and tainted beaches
if done too close to shore.
- Global climate changes could bring about severe
storms like hurricane Katrina and impact safe offshore
- Diamond's stock price is highly correlated with
the price of crude oil in the short-term and crude
oil has been trending downwards over the last few
||Long Term Debt
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. However as this newsletter was
delayed, it represents the closing price as of January
Model Portfolio - January 4, 2007
||Number of Shares
||Number of Units
Voluntary Disclosure: I currently
own shares of Airspan Networks (AIRN),
Tata Motors (TTM),
VA Software (LNUX),
Suntech Power (STP),
and Alvarion (ALVR).
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