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 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:

The SINLetter model portfolio outperformed the three major indices in December with a gain of 4.25% powered by strength in Tata Motors (TTM) and Suntech Power (STP) as well as respectable gains in one of our put options. The monthly, quarterly, annual and "since inception" performance is tabulated below.

Performance Metric Dow S&P 500 Nasdaq SINLetter
December 2006 1.97% 1.26% 0.68% 4.25%
Fourth Quarter 2006 6.71% 6.17% 6.95% 10.46%
2006 Annual Returns 16.29% 13.38% 13.62% 60.80%
Since Inception (Aug 2005) 17.43% 14.67% 10.37% 83.10%

SINLetter Model Portfolio Performance

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 alpha we have seen since inception, without taking on excessive risk.

Tata Motors (TTM) 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, 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 Power (SOLF), 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.

WisdomTree (WSDT.PK) 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 (NEWQG.X) is now posting a healthy gain of 55.56%. The March 2007 put option on the iShares Dow Jones Transportation ETF (IYTOQ.X) 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.

Portfolio Readjustment:

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 The 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).

The Dogs of the Dow theory that we used last January to pick Pfizer (PFE) 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

Company Name Symbol Price* Dividend Yield P/E P/S
Pfizer PFE $25.90 4.48% 15.03 3.6
Verizon VZ $37.24 4.35% 15.79 1.23
Altria MO $85.82 4.01% 15.90 2.58
AT&T T $35.75 3.97% 19.29 2.27
Citigroup C $55.70 3.52% 11.99 3.44
Merck MRK $43.60 3.49% 18.79 4.23
General Motors GM $30.72 3.26% N/A 0.08
DuPont DD $48.71 3.04% 18.79 1.59
General Electric GE $37.21 3.01% 22.62 2.42
JP Morgan Chase JPM $48.30 2.82% 13.67 3.01

* 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 personal portfolio.

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, which automatically updates the performance of the dogs every 30 minutes during market hours.

Dogs 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

Company Name Symbol Price* Dividend Yield P/E P/S
Windstream Corporation WIN 14.22 7% 13.23 2.26
Citizens Communications CZN 14.37 7% 13.17 2.11
Progress Energy PGN 49.08 5% 26.08 1.18
Peoples Energy Corporation PGL 44.57 4.9% N/A 0.57
Consolidated Edison ED 48.07 4.8% 17.65 0.99
Ameren Corporation AEE 53.73 4.7% 21.79 1.64
Washington Mutual WM 45.49 4.7% 13.38 3.06
KeySpan Corporation KSE 41.18 4.6% 17.14 0.93
Reynolds American RAI 65.47 4.6% 14.57 2.30
Pfizer PFE 25.90 4.48% 15.03 3.60

* Price as of market close on Dec 29th, 2006

Alvarion (ALVR) $6.87

The Story:

The only thing worse than picking a bad investment is investing in an emerging technology at the wrong time. When I first heard about WiMax, 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 below.

With service providers like Clearwire, Sprint (S) and TowerStream as well as major equipment manufacturers like Intel (INTC), Motorola (MOT) 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 including Poland, India and New 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).

The Good:

  • 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 in 2007.
  • Alvarion is a prime acquisition candidate for a larger equipment provider like Motorola, Samsung or Cisco.

The Bad:

  • 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 networks.

The Numbers:

P/S 2.06 Cash $109.44 million
P/E NA Long Term Debt -


Diamond Offshore Drilling (DO) $76.65

While reading the article 10 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 this point.

The Good:

  • 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 and beyond.
  • Diamond Offshore's forward P/E is 8.36 and the recent pullback in the stock price may present a good buying opportunity.

The Bad:

  • 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 drilling.
  • 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 months.

The Numbers:

P/S 5.37 Cash $688.18 million
P/E 18.08 Long Term Debt $965.8 million


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 3, 2007.

Model Portfolio - January 4, 2007


Stock Number of Shares Cost Current Value Difference($) Difference(%)
DO 80@76.65/share $6,132 $6,132 $0 0%
ALVR 1000@6.87/share $6,870 $6,870 $0 0%
WSDT.PK 1000@7.40/share $7,400 $7,650 $250 3.38%
BCS 200@54.06/share $10,812 $11,886 $1,074 9.93%
SNDK 200@48.10/share $9,620 $8,344 -$1,276 -13.26%
GLD 150@59.47/ETF $8,921 $9,342 $422 4.73%
MAT 600@19.70/share $11,820 $13,830 $2,010 17.01%
TEVA 300@35.05/share $10,515 $9,378 -$1,137 -10.81%
STP 400@25.93/share $10,372 $13,600 $3,228 31.12%
INTC 550@19.00/share $10,450 $11,192 $742 7.11%
PG 180@55.60/share $10,008 $11,617 $1,609 16.08%
LOGI 240@20.385/share $4,893 $6,919 $2,027 41.43%
JNJ 200@57.65/share $11,530 $13,280 $1,750 15.18%
LNUX 2000@1.83/share $3,660 $9,940 $6,280 171.58%
MED 500@5.39/share $2,695 $6,105 $3,410 126.53%
TTM 900@11.94/share $10,746 $19,521 $8,775 81.66%
AIRN 1700@5.62/share $9,554 $6,375 -$3,179 -33.27%


Option Number of Units Cost Current Value Difference($) Difference(%)
CFCSH.X 8@2.46/contract $1,968 $1,968 $0 0%
NEWQG.X 5@3.60/contract $1,800 $2,800 $1,000 55.56%
LRXMJ.X 3@7.00/contract $2,100 $1,650 -$450 -21.43%
YBQMG.X 8@2.60/contract $2,080 $1,840 -$240 -11.54%
IYTOQ.X 5@3.90/contract $1,950 $1,650 -$300 -15.38%
Cash     $1,215    
Total     $183,105 $83,105 83.10%


Voluntary Disclosure: I currently own shares of Airspan Networks (AIRN), Medifast (MED), Tata Motors (TTM), Logitech (LOGI), Intel (INTC), VA Software (LNUX), Suntech Power (STP), Sify (SIFY), Teva (TEVA), Mattel (MAT), SanDisk (SNDK) and Alvarion (ALVR).


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