SINLetter - March
Welcome to edition 20
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
Some subscribers have
asked me if I plan to do seminars to discuss ideas and
strategies I use to pick stocks. While it is very flattering
to hear that folks would want me to do a seminar, I
am as much a student of the markets (it is a life-long
learning process) as you are and I already share most
of my ideas through these newsletters or the blog. I
am also not very happy with the format of a seminar,
which is usually a one-way flow of information.
I think it would be a
great idea to do brunch on alternate Saturdays to share
ideas and discuss investments. Many of my most profitable
investments have come from talking to people who have
told me about products they love or have shared their
knowledge of the industries they work in. So if you
happen to live in the San Francisco bay area and would
like to chow down some food at a Saturday brunch, please
drop me an email. Hopefully we can do this in small
groups of 6 or 8 people. Please feel free to bring along
your friends as everyone will be picking up their own
tab. It would also be great to put faces to the names
of some subscribers who write to me regularly.
Blog Entries and Trades by Email:
In case you do not receive
blog entries by email, you can still subscribe to receive
blog entries by email here. I usually tend to write
on the blog about once or twice a week and may sometimes
post trades on the blog.
As I mentioned in the blog entry Portfolio
Updates: Diamond Offshore and NEW, I did make some
changes to the SINLetter
model portfolio by selling some of our put options.
Other blog entries posted in February that may be of
interest to you include,
The very put options that
hurt our portfolio performance in January, ended up
boosting the portfolio in February, helping us post
a gain of 2.25% for the month. Gains in ICON
and Mattel (MAT)
also helped us outperform all the major indices by over
4% in February. The monthly and "since inception"
performance is tabulated below.
|Since Inception (Aug 2005)
Our February 2007 pick
had a great month, registering a gain of 11.5% despite
the sell-off in global markets towards the end of February.
As expected, ICON reported excellent fourth
quarter results with revenue increasing 53.20% to
$184.3 million and earnings surging 62.86% to $11.4
million. A few days after sending out the last newsletter,
I discovered this outstanding
article by Hans
Wagner about ICON and since I did not write about
ICON in great detail last month, I figured you might
find this article useful.
was registering a gain of more than 50% in the model
portfolio right before the sell-off in Chinese stocks
and the ensuing carnage
of Wall Street on February 27th. The stock dropped
9.33% in a single day and is now registering a gain
of 39.8% in the model portfolio. Since nothing has fundamentally
changed in Suntech's business, I am going to continue
holding it in the model portfolio but would not suggest
starting a new position until the Chinese market stabilizes.
Some of our put
options did extremely well in February and served their
purpose as a hedge against a falling stock market.
Thanks to concerns about subprime mortgage lending,
our May 2007 put options on the mortgage REIT New Century
Financial Corp (NEWQG.X)
are now up 447.2%. Incidentally our put options at $19.7
per contract are now trading higher than the actual
price of the stock. Because of the massive 50% decline
in the price of the stock since the start of 2007, the
dividend yield for New Century Financial has jumped
to 49.90%, an absurdly high yield that will most likely
be cut by the company.
Continued weakness in
the housing market as seen by the 17%
plunge in new home sales in January also hurt the
mortgage lender Countrywide Financial (CFC)
and our July 2007 $40 put options on Countrywide Financial
are now up 66.67%. Options are highly volatile financial
instruments with the possibility of losing your entire
investment if used incorrectly. As you may have noticed,
I had to sell our March 2007 put options on the Dow
Jones Transportation Index (IYTOQ.X)
for a steep loss of 76.92% in early February because
the market kept rising and the expiration data was getting
closer leading to accelerated time
While our pure ETF play,
WisdomTree Investments (WSDT.PK)
moved into positive territory with a gain of 14.82%
gain in February, our other pick in the asset management
fell 0.73% in February because of bad
debt charges in its credit card division and general
weakness in the United Kingdom's FTSE 100 index towards
the end of the month. Beyond the bad debt charges, the
2006 results for Barclays were impressive with overall
income increasing 25%. The company also boosted its
dividend by 17% and the dividend yield is now a very
Gold rose steadily throughout February before crashing
with the rest of the market on February 27th. Gold closed
the month of February at $668 per troy ounce, a gain
of $16.10 or 2.47%.
After holding VA
in our portfolio for over a year, I am going to sell
our remaining stake in the company for a gain of 135.52%.
I initially bought VA Software at a point when it looked
like their enterprise software division was gaining
momentum and because I felt that their Slashdot
website was worth more than the entire market cap of
the company. I was not very happy to learn that management
has recently decided to sell off the software division
and concentrate only on their media properties. The
quarter 2007 forecast was also below expectations
leading to a sell-off in the stock over the last few
days. Instead of holding on to the stock any longer,
I am going to use the proceeds from the sale to purchase
Ambassadors Group and Medifast.
Diamond Offshore Drilling
which declared a $4 per share special dividend, went
on February 12th and the stock dropped 2.69% or $2.18
in response. The special dividend is payable to shareholders
on March 1, 2007. I do not take regular dividends or
trading costs into account in the SINLetter model portfolio
but since this is a special dividend that materially
affected the price of the stock, I will be adding this
special dividend to the portfolio on March 1st. The
portfolio at the end of this newsletter is as of February
28, 2007 and hence I will not include the special dividend
in this portfolio but it will be reflected in the online
model portfolio on March 1st as a $320 increase
While having dinner at
a friend's place in February, I mentioned to him how
difficult it was to find two good investments for the
March newsletter because many of the stocks on my watch
list were either expensive or the sectors they belonged
to were going through a period of weakness. He suggested
that maybe I should make this newsletter a special edition
That Almost Made the Cut".
I almost considered taking
up his suggestion but then decided to run a stock
screen to see if something interesting showed up.
While I do not recollect the exact criteria I used for
this screen, I was looking for small-cap dividend paying
stocks that had reasonable valuations and high profit
margins. Amongst the results of this stock screen, I
noticed a company that had also shown up when I ran
a screen more than a year ago that helped me find the
movie theatre chain Marcus (MCS)
and the propane supplier Suburban Propane (SPH).
Both Marcus and Suburban Propane did very well in 2006
and while I picked up Marcus in January 2006 for my
personal portfolio and sold it on 9/26/2006, I did not
buy Suburban Propane. Unfortunately I did not feature
either stock in the investment newsletter but did write
about Marcus on the blog.
The stock that showed
up in the screen I ran in January 2006 and once again
last week is Ambassadors Group, a Pacific Northwest
company that arranges international and domestic travel
for students, athletes and professionals. Most of the
customers of the company, who are also referred to as
"delegates", come from the People
To People Ambassadors program established by President
Dwight D. Eisenhower in 1956. The company was spun-off
from its parent company, Ambassadors International (AMIE),
in 2002 and the stock has done extremely well over the
last five years, gaining more than 400% since March
2002. This 400% increase was driven by a high rate of
growth in revenue and earnings as well as management's
commitment to return value to shareholders through a
combination of dividends and share buybacks. While the
days of hyper growth seem to be coming to an end, the
company is still attractively valued as discussed below.
Would you consider a company
- expects double digit growth in both the top line
(sales) and the bottom line (income) in 2007
- has a profit margin of 34.45% (for the full year
- recently completed a large share buyback
- pays a dividend (which was increased 35% in 2006)
- has a solid balance sheet with more than twice the
amount of assets as liabilities
- and is selling at 16 times 2007 earnings
... a good investment? If you do, then you should take
a closer look at Ambassadors Group. The company expects
to grow revenue more than 17% and earnings more than
20% in 2007. It recently completed a $33
million share buyback representing 5.77% of the
total shares outstanding and still has $5.4 million
left over from a $25
million stock repurchase plan launched in 2006.
The company sports a modest dividend yield of 1.5% but
when combined with the share buybacks the "payout
yield" is significant. To learn more about payout
yields, check out this
interesting blog post about a new twist on the Dogs
of the Dow theory.
As you can see from the website
of Ambassadors Group, the company is also actively hiring.
If you happened to read the February
2007 edition of SINLetter, you might recollect that
I found last month's pick ICON
because of their hiring activity, which is usually a
sign of growth. While researching Ambassadors Group,
I was a little concerned by the fact that they posted
a loss in the fourth quarter of 2006. I then found out
that just like theme parks, their business is cyclical
and they post losses in the first quarter and fourth
quarter of each year and make their profits in the spring
This company with a market cap of $617.34 million has
$133 million in cash and short-term investments on its
balance sheet and negligible debt. It should be noted
that $60.7 million of this cash and investments are
actually "participant deposits". With a strong
balance sheet, excellent growth prospects, reasonable
valuation and profit margins that would turn even software
companies green with envy, I believe that the prospects
of Ambassadors Group are bright in 2007.
It is hard to identify direct public competitors of
this company due to the unique nature of its business
but you could consider travel companies like Expedia
and the travel arm of American Express (AXP)
as competitors of Ambassadors Group.
- Ambassadors Group grew its revenues and income by
17% and 19% respectively in 2006 and expects a similar
rate of growth in 2007.
- The profit margin for 2006 was 34.45%.
- Since the beginning of 2007, the company has already
deployed $35.5 million to purchase 6.3% of the shares
- The company returned 50% of operating cash flow
to shareholders in 2006.
- Ambassadors Group increased its dividend by 35%
in November 2006.
- As of Feb 1, 2007 the company had 60,600 "delegates"
(read customers) enrolled when compared to 47,800
in 2006, representing a 26.78% increase year-over
- Cash balance increased by $24 million and total
assets grew 23% in 2006.
- Gross margins were negatively impacted in 2006 due
to higher airfare on account of rising oil prices.
Even though oil prices have backed away from their
highs, the company does not expect airfares to drop.
- Operating expenses grew 21% in 2006 but a large
part of that was because of marketing initiatives
aimed at increasing sales in 2007.
- The tax rate for 2007 will increase when compared
to 2006 because the company used tax exempt investments
- Capital expenditures are likely to increase in 2007
because of a new building project that the company
has undertaken. Total cost of this project is projected
to be about $20 million, of which $7.5 million was
expended in 2006.
- The company is currently seeing a 30% withdrawal
rate amongst its enrolled delegates. Such a high rate
of attrition would be a sign of trouble at companies
that provide satellite radio, phone or cable services
but according to Ambassadors Group this rate of withdrawal
is to be expected since delegates often make plans
more than a year in advance.
||Cash and Investments
||Long Term Debt
Instead of featuring another
new stock this month, I figured I would write about
a stock that is already in the model portfolio and that
I have wanted to revisit for quite some time now. Medifast
is a weight management company that I first came across
in 2003 when someone I knew asked me about the stock
after it had run up from 50 cents all the way to $15
per share, a 2,900% gain. She told me that she used
their products and they seemed to be very effective.
I checked out the stock and decided to stay away not
only because of the tremendous run-up but also because
of large insider sales.
However I continued to
follow the stock closely as it started a downward slide
that lasted for more than a year and I finally started
a position in Medifast in April 2005 when the stock
was trading at $3.25 per share. After I launched SINLetter
in August 2005, I decided to feature Medifast in the
2005 edition of SINLetter. After some initial weakness,
the stock took off like a rocket over the next seven
months posting gains of 244% by August 2006 as you can
see from this
blog post. The company was exhibiting tremendous
sales and income growth. I continued to monitor the
stock closely and posted highlights from the Q4
2006 and Q2
2006 conference calls on the SINLetter blog.
There was a lot of euphoria
surrounding the stock and while I believed in the long-term
prospects of the company, I took some profits off the
table in June
2006 and once again in July
2006 on valuation concerns and high insider selling.
These sales generated gains of 233.95% and 231.54% respectively
and were instrumental in helping the SINLetter model
the indices by a wide margin in 2006. Since hitting
a high of over $21 in June 2006, the stock lost more
than half of its value after concerns about its valuation
surfaced amid a couple of negative articles by Stocklemon.com
Medifast actually went on to write
a response to the Barron's article but that did
not help arrest the slide in the stock price.
The company continued
to execute well and after the release of third quarter
2006 earnings in November, the stock started moving
back up only to be hit once again by another
article in Barron's that eventually lead to a management
shake up at Medifast.
Based on a recent
upward revision in their 2006 guidance, the company
is expected to post an 83% increase in revenue and based
on my calculations between 80 to 100% growth in earnings.
The company has a current P/E of 21.09, a forward P/E
of 15.78 and PEG of 0.75. I believe that the stock is
undervalued at this point and well positioned to move
up in the coming weeks. Please note that this stock
is highly volatile with wild price swings as discussed
above. If the forecast for 2007 or 2006 earnings are
below expectations, the stock could decline further.
I am going to
double our position in Medifast in the model portfolio
by adding another 500 shares at $8.52. Instead of displaying
this as a separate line item in the portfolio, I am
going to combine it with our existing position and move
our cost basis up to $6.955 per share (($5.39 + $8.52)/2).
This will unfortunately make it appear like our position
in Medifast is up only 22.50% instead of 58.07%.
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 (February 28, 2007 for the March
Model Portfolio - February 28, 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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