SINLetter - January 2008

Happy New Year and welcome to edition 29 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.


Stock Contest #2:

When we launched the first stock contest on SINLetter, I mentioned that based on the feedback received from the first contest we would launch another contest in the future with exciting prizes. That contest is now live and you can participate by using the contest application page. The current top contestant "vinay" used a very smart strategy of going short three luxury retailers in this challenging retail environment. His picks Nordstrom (JWN), Coach (COH) and Tiffany and Co (TIF) took a dive along with the rest of the market in the first week of January, helping him reach the top. For all the gory details about this contest, check out the blog entry Two Contests, Three Months, Four Prizes.

We are also running another simultaneous "invitation only" contest as a face-off between the top financial bloggers and the response has been very encouraging. In true blogger fashion, most of them have provided detailed explanations for why they picked a particular stock or ETF. For example check out the reasons Richard Kang of The Beta Brief has provided for picking the Market Vectors Global Agribusiness ETF with its brilliant pun-intended symbol MOO, Cameco Corp (CCJ) and the ETF UltraShort FTSE/Xinhua China 25 Proshare (FXP). You can see how the bloggers are doing and read their reasons at the blogger contest rankings page.

Your feedback about these contests would be very much appreciated and you can either leave a comment on the blog or send me an email.


November and December Blog Entries:

If you do not subscribe to blog entries by email or in case you missed them, here are the blog entries for November and December.

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2008 Outlook:

With rising unemployment, declining manufacturing activity, home prices declining 6.7% in the 10 largest metropolitan areas, the inventory of unsold homes representing a 10.3 month supply and record levels of national/personal debt, my enthusiasm for common U.S stocks is the lowest it has been in years and I am even more bearish than I was at the start of 2007. I believe that cash, certain high yielding investments like Canadian energy trusts as mentioned in the blog entry Quest For a 6% yield, generic drug manufacturers like Teva Pharmaceutical (TEVA) and consumer staples companies like Unilever (UL), Church & Dwight (CHD) (the company that makes Arm & Hammer products as well as Trojan condoms) and Procter & Gamble (PG) might be the best places to be in 2008. Unilever and Procter & Gamble have the added advantage of benefiting from middle class expansion in Countries like India and China not to mention a favorable exchange rate.

If you have a contrarian bent to investing and would like to start getting into the beaten down financial sector like some subscribers have suggested to me in recent days, consider the exchange traded fund (ETF) iShares S&P U.S. Preferred Stock Index (PFF), which has a strong representation of financial stocks in its ranks and yields 20.8% (according to MarketWatch.com) instead of the ETF Financial Select Sector SPDR Fund (XLF), which yields 3.82%. Just be aware that PFF would also get you preferred shares of Ford Motor (F), Citigroup (C) and Countrywide Financial (CFC) along with Wells Fargo (WFC), ABN Amro (ABN) and JPMorgan Chase (JPM).


Portfolio Performance:

2007 proved to be a difficult year and unless you were in alternative energy, emerging markets or commodities, things were not very rosy. We saw a lot of volatility and even buy-and-hold investors saw meager returns as evidenced by the 3.53% return of the S&P 500, which even after including dividends underperformed cash parked in a CD. While the SINLetter model portfolio returns for 2007 were a far cry from the 60.80% we achieved in 2006, in this environment I am satisfied that the portfolio outperformed the major indices in 2007 with a gain of 19.67%.

Performance Metric Dow S&P 500 Nasdaq SINLetter
November 2007 -4.01% -4.4% -6.93% -0.05%
December 2007 -0.8% -0.86% -0.33% -0.8%
Fourth Quarter 2007 -4.54% -3.82% -1.82% 1.05%
2007 Annual Returns 6.43% 3.53% 9.81% 19.67%
Since Inception (Aug 2005) 24.87% 18.86% 20.81% 119.21%


SINLetter October 2007 Portfolio Performance

As you can see from the portfolio performance table above, the last two months have been challenging and the markets were hit hard in the first week of January 2008, with the Nasdaq dropping more than 6% last week and the Dow experiencing its worst three day start since 1932. Fears of a recession have increased after both home prices and home sales declined and the unemployment rate increased to 5%. The December job numbers hit the stocks of staffing agencies like Robert Half International (RHI) and Manpower (MAN) hard but took an even worse toll on Monster Worldwide (MNST), which shed more than 14% of its value since the start of the year. This helped our March 2008 $30 put options on Monster Worldwide (BSQOF.X) reverse course and post a gain of 95.12%. Monster Worldwide was one of 5 potential short opportunities listed in the Hedging Your Bets section of the September 2007 investment newsletter. We acted upon three of those opportunities and all three have been profitable.

Individual stocks within our portfolio have had some wild swings over the last two months with Suntech Power (STP) burning brighter and posting a gain of 215.62%. After doing some research on upcoming competitor Nanosolar's technology, I was almost inclined to take additional profits off the table but decided to hold off a little longer after analyzing Suntech's pipeline and expected growth rate. Irish medical research company ICON plc (ICLR) continues to execute well and is now posting a gain of 70.19% in the model portfolio. The company reaffirmed its 2007 outlook and expects to post a 26.16% increase in 2008 earnings and a 22.58% increase in revenue (taking the mid-point of their forecast).

Things were not so rosy for some of our other stocks like children's clothing retailer Gymboree (GYMB), which was dragged 36.48% lower along with the rest of the beleaguered retail sector. The company beat analyst estimates when it reported third quarter results with sales increasing 18% and net income increasing 9% to $26.9 million or 91 cents a share. Despite announcing a plan to buy back another $25 million of their stock after completing their past $50 million buyback, the stock has trended lower after the company forecast lower than expected fourth quarter earnings. With a current P/E of just 10.62, a forward P/E of 9.11 and P/S of 0.92, I am very tempted to add to our position.

Gold continues its slow and steady march upwards, closing the month of December at $834.50 per troy ounce, a gain of $51.40 or 6.56% for the month.

Portfolio Readjustment:

Beyond adding Sterlite to the watchlist and the portfolio changes I made at the end of the 2007, I am not going to make any additional changes to the model portfolio in this newsletter. As opportunities arise, I will post them on the blog.

India: Emerging Market Opportunity

My recent visit to India was quite an eye opener, as I had not visited certain parts of the country in almost a decade. I came across multiple opportunities for investors and will detail some of the broad themes in the paragraphs below. Some of these themes can be captured by institutional investors and non-resident Indians (NRIs) who can invest directly in Indian stocks (with some restrictions), while other opportunities are applicable for retail US investors who can use ADRs and closed-end funds.

Hotels: While I expected to see a lot of changes, the magnitude of change and especially the Indian stock market caught me by surprise. In fact I was surprised even before I landed in the southern city of Chennai. While looking for hotels in Chennai and Mumbai, I was shocked to see that some of the five star hotels cost upwards of $400 per night or about the same as the Waldorf Astoria in Manhattan. Even a standard room at the Courtyard by Marriott in Chennai costs more than $220 per night. Considering that US taxes pale in comparison to the taxes paid on hotel stays and airline tickets in India, the total tab works out to a whole lot more.

Hotels in India (especially in the four metropolitan cities) are currently experiencing near 100% occupancy, are charging an arm and a leg even by US standards, have access to cheap labor and are planning on increasing their rates by 25%. To top it all most of them are booked solid through March 2008 in Delhi and Mumbai. I am sure hotel and movie theatre company Marcus (MCS) would kill for an operating environment like this. In the absence of an international REIT that captures this theme, institutional investors and NRIs could consider investing directly in stocks like Royal Orchid Hotels (BSE: 532699), Taj GVK Hotels and Resorts (BSE: 532390) and Viceroy Hotel (BSE: 523796). Royal Orchid was a company that California based Sequoia Capital had invested in and brought public.

Volvo AB (VOLVY.PK) $15.10: A little over two years ago, when I featured Tata Motors (TTM) as an investment for the December 2005 of SINLetter, I mentioned Volvo as a competitor of Tata Motors. Tata Motors was a truck manufacturing company that evolved into a car company while Volvo is a multi-faceted company that manufactures trucks, buses, construction equipment, marine engines, aircraft engines as well as parts for rocket engines. The Volvo products that most of us are most familiar with, Volvo cars, is actually owned by the Ford Motor company since 1999.

So what does Volvo have to do with India? Volvo trucks have been used in India for many years now and India is considered the fourth largest market in the world for heavy trucks. With improving infrastructure, especially in terms of roads connecting the major cities, a number of transportation companies have started using Volvo buses, which sometimes cost three to four times their local counterparts. Volvo seems keen on increasing its market share in India as seen by its recent announcement to invest $350 million in a joint venture with Indian automaker Eicher Motors. Trading at a P/E of 14.66, Volvo may be a good way to capture the growth in emerging markets with less risk than investing directly in India or China. Volvo delisted its ADRs from the Nasdaq on December 13th but you can still buy the shares on the pink sheets.

ADRs and Closed-End Funds: Apart from U.S listed ADRs of Indian companies like Wipro (WIT), Infosys (INFY) and Tata Motors (TTM), the two closed-end funds India Fund (IFN) and Morgan Stanley India Investment Fund (IIF) used to be the only (exchange traded) game in town to invest in India until iPath MSCI India Exchange Traded Note (INP) came along. However it appears that this exchange traded note or ETN may be headed for a premature demise due to changes in SEBI (the Indian equivalent of the SEC) rules. Given the 47.1% gain in the Bombay Stock Exchange Sensex in 2007, which followed a 46.7% gain in 2006, the market is extremely speculative at these levels.

As anecdotal evidence of how speculative the market has become, consider the fact that almost everyone I spoke to had either no clue what the companies they were invested in were doing or had any idea about the valuation of the companies. Most retail investors are momentum based investors and RISK is a four letter word that has long been forgotten. There is no doubt that the Indian economy is booming and that the Indian stock market may be in a secular bull market that may last many years but at its current levels I think a serious correction is not too far away. One way to play this would be to short the India Fund (IFN) or IIF and simultaneously buy selective ADRs or stocks. An ADR that I particularly like at this point is mining company Sterlite Industries India (SLT), which trades at a reasonable P/E of 13.06. Instead of adding Sterlite to the model portfolio, I am going to add it to our watchlist and may consider starting a position on a pullback from these levels.

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 (December 31, 2007 for the January 2008 newsletter).

Model Portfolio - January 4, 2008

Long Stocks

Stock Number of Shares Cost Current Value Diff ($) Diff (%) Date Added
CAJ 200@45.83/share $9,166 $8,870 $-296 -3.23% 12/31/2007
BCS 200@42.27/share $8,454 $7,638 $-816 -9.65% 11/20/2007
PHO 400@22.10/share $8,840 $8,284 $-556 -6.29% 10/31/2007
MCS 500@19.94/share $9,970 $7,070 $-2,900 -29.09% 9/14/2007
TWM 50@71.00/share $3,550 $3,914 $364 10.24% 9/7/2007
BBI 1,500@4.59/share $6,885 $5,130 $-1,755 -25.49% 7/9/2007
GYMB 200@42.02/share $8,404 $5,338 $-3,066 -36.48% 6/14/2007
UL 200@32.53/share $6,506 $7,376 $870 13.37% 5/11/2007
EMC 600@13.85/share $8,310 $10,194 $1,884 22.67% 3/31/2007
ICLR 250@37.30/share $9,325 $15,870 $6,545 70.19% 1/31/2007
DO 80@76.65/share $6,132 $10,823 $4,691 76.5% 1/3/2007
ALVR 1000@6.87/share $6,870 $8,760 $1,890 27.51% 1/3/2007
WSDT.PK 1000@7.40/share $7,400 $3,020 $-4,380 -59.19% 11/30/2006
TEVA 300@35.05/share $10,515 $14,349 $3,834 36.46% 9/1/2006
STP 250@25.93/share $6,483 $20,460 $13,978 215.62% 7/31/2006
PG 180@55.60/share $10,008 $12,964 $2,956 29.53% 6/30/2006
JNJ 200@57.65/share $11,530 $13,168 $1,638 14.21% 2/28/2006
MED 1000@6.955/share $6,955 $4,880 $-2,075 -29.83% 11/30/2005


Options

Option Number of Units Cost Current Value Diff ($) Diff (%) Date Added
BSQOF.X 10@2.05/contract $2,050 $4,000 $1,950 95.12% 9/7/2007
Cash     $45,054      
Total     $217,162 $117,162 117.16%  

 

Voluntary Disclosure: From the stocks that are currently in the model portfolio, I own shares of Barclays (BCS), Medifast (MED), Suntech Power (STP), Teva (TEVA), Alvarion (ALVR), WisdomTree (WSDT.PK), Unilever (UL), Gymboree (GYMB), BlockBuster (BBI), Marcus (MCS) and put options on Monster Worldwide (BSQOF.X).

 


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