SINLetter - May
Welcome to edition 22
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
Once again I did not
chance to blog much in April as a new IT project took
up a lot of my time. However the few blog entries that
I did manage to write generated a lot of interest and
comments. In case you missed them, you can check them
out from one of the links below,
If you do not receive blog entries by email, you can
still subscribe to receive
blog entries by email here.
Announcing The Launch of SINLetter Forums:
The original goal of SINLetter
was a website that would not only be a source of information
and ideas but also a destination that would allow investors
to interact with each other. Since we crossed the 1,000th
sinner (er, subscriber) mark in March, I figured this
would be the ideal time to launch SINLetter forums.
You already have an account
created for you with your email address as your
login name and you can retrieve your
password by using the Request
Your Password link from the Login
page. After you login for the first time, please
update your username and other information by using
Details link in the control
panel (top right hand corner). If you do not have
the time to visit these forums regularly but would like
to get updates, you can also subscribe by email or RSS
feeds to specific forums or individual topics.
For more information about
these forums check out the Welcome To SINLetter Forums
While the SINLetter portfolio
reached a new high in April with gains of 94.8% since
inception, the monthly performance was not able to keep
up with major indices that were rebounding off a correction
that started in late February and lasted through most
of March. Despite the dismal monthly performance of
the entire portfolio, our April pick EMC Corp (EMC)
did quite well, registering a gain of almost 10% in
April. The monthly and "since inception" performance
is tabulated below.
|Since Inception (Aug 2005)
Since this newsletter
was delayed by two weeks, instead of discussing the
performance of stocks in our portfolio in this section
like I usually do, I am going to discuss my thoughts
about the market and my outlook for the next six months.
As the Dow Jones hits
new highs almost everyday and the S&P 500 approaches
its all-time high set in early 2000, it may appear that
the shift to large-cap stocks that the "experts"
have been expecting for months may finally be at hand.
However, the Russell 2000 index, which represents the
universe of small-cap stocks, is also close to its all-time
high and well above its 2000 peak. While a large-scale
shift from small-cap stocks to large-cap stocks has
not yet occurred, there are other forces at play here.
While I am not a market
pundit (it is hard enough to try and be right about
individual stocks), I believe that the market is hitting
new highs because of a variety of factors such as better
than expected first quarter earnings, low unemployment,
tame inflation that is very close to the federal
reserve's target rate of 2% and a perception that
the fallout from the sub-prime
mortgage meltdown has been contained. With most
of the major indices reaching all-time highs in the
face of a business cycle that appears to be at its peak
and projections of an economic slowdown, it is not surprising
that many market participants and financial
bloggers have a negative outlook for the next few
I am currently not bullish
on the market (I have been cautious since late last
year as you can see from Hedging
The Economy Through LEAP Puts) but remain neutral
to mildly bearish. Unlike some people, I do not expect
a market crash in the near future as I see none of the
"irrational exuberance" that marked the peak
of the dot com bubble or the recent real
estate bubble. Even though the Dow is at an all-time
high, it took the Dow almost 7 years to get past the
record high it set in January 2000. If you take
inflation and the depreciation of the U.S dollar into
account, the Dow is nowhere near its previous peak in
terms of "2000" dollars. While looking
up information about how much the dollar has depreciated
since 2000, I came across this
article that does an excellent job of explaining
in great detail what I just mentioned in the previous
With this outlook in mind,
I am currently bullish on the technology, aerospace,
consumer staples and healthcare (devices and generic
drugs but not big pharma) sectors. I am bearish on the
financial, retail, auto, trucking, housing and commodity
sectors. In short, I am mostly bullish on the
non-cyclical sectors and bearish on the cyclical sectors.
I realize that aerospace is a cyclical sector but I
believe that the parts and manufacturing segment of
the aerospace sector has outstanding long-term potential.
I would much rather leave
the portfolio untouched at this point but unfortunately
have to liquidate some positions (I do not believe in
using margin) in order to purchase this month's featured
stocks and options.
Investors in the toy maker
have had a very good time over the last eight months
as the toy maker posted better than expected results
thanks to the hype associated with the launch of their
T.M.X Elmo toy and strength in their Fisher-Price division.
The stock is up almost 50% since we picked
it up for the SINLetter portfolio in October 2006
and more than 80% over the last year. I am going to
take profits by selling half our position in Mattel
for a gain of 48.38%.
its dividend by 30% soon after I bought the stock
for the SINLetter model portfolio and my personal portfolio.
Hence my dividend yield works out to 3.25% and I plan
to continue holding the stock in my personal portfolio.
Power of Dividends:
It is a well known fact
that stocks have historically returned around 10% a
year from 1928
to 2006 (Excel
Download), a period of time that includes the Great
Monday as well as the recession following the dot
com bubble. Expanding the period of measurement to almost
two centuries from 1802 to 1991, stocks still
gained 7.7%, outperforming all other asset classes such
as real estate, bonds, cash and commodities like gold.
According to Wharton professor, WisdomTree
advisor and author of the book Stocks
For The Long Run, Dr. Jeremy Siegel,
"One dollar invested
in stocks in 1802 would have grown to $1,250,000 in
1991, in bonds to $6,920, in Treasury bills to $2,830,
and in gold to $14.20. The consumer price index has
risen by a factor of 10.4, almost all of it after World
War II. One dollar invested in 1802 would have grown,
in inflation-adjusted dollars, to $109,000 in stocks,
$605 in bonds, $248 in Treasury bills, and $1.24 in
There seems to be consensus
agreement that future returns from stocks may not be
as high as in the past. Based on whom you ask, it could
be as high as 9.27% or less than 6% as you can see from
this very interesting article from Fortune magazine
Forever?". Almost half of the historic returns of
stocks come from dividend payouts and by reinvesting
I learnt the importance
of dividends while depositing dividend checks for my
dad during my teenage years. He had mastered his cash
flow from dividends to such a point where he could pay
all household expenses from his dividend income.
In case you are wondering, he achieved this more than
a decade before he retired.
While the historical dividend
yield from 1929 to 2003 was 4.3%, the current yield
of the S&P 500 is just 1.5%. Before you jump to the
conclusion that companies are returning less to shareholders,
it is important to understand that during the first
half of the twentieth century, large special dividends
were more common while companies have now been favoring
stock buybacks over special dividends or even regular
While this trend of stock
buybacks has its advantages, I still prefer
good old dividends as it establishes fiscal discipline
by forcing the company to diligently manage its free
cash flow and I get to decide how I want to reinvest
If you consider dividend
paying stocks as boring slow growth stocks without much
potential for price appreciation consider the following
facts from the recent article titled Five
Great Yield Stocks from Fortune magazine,
28, the dividend stocks in the S&P 500 posted a
12-month total return, from price change and dividends,
of 14.8 percent - beating the 8.3 percent return of
the nondividend stocks."
"In a recent
report, senior equity researcher John Zbesko screened
Schwab's universe of 3,200 stocks and found that those
with dividend yields above 2 percent that also met a
series of additional criteria returned an impressive
18 percent per year, on average, from 1990 through 2006.
That beats the 12 percent annualized gain of the S&P
500 and the 11 percent return of the Wilshire 5000 during
the same period. In addition, Zbesko's picks were 20
percent less volatile than the typical stock Schwab
It these facts are not
exciting enough, ponder upon the fact that according
to Professor Siegel, a $1,000 investment in tobacco
maker Altria (MO)
in 1957 would have been wroth $4.6 million by 2003.
If you are like me and would prefer not to invest in
tobacco companies, a $1,000 investment in Coca
would have still netted you a cool $1.05 million by
2003 provided you reinvested all dividends.
If you are convinced of
the virtues of dividend paying stocks, what should you
look for while trying to pick the cream of the crop
(remember we don't believe in the Efficient Market Hypothesis)?
Given below are a few simple rules of thumb.
- Look for stocks that offer a better than average
dividend yield. The average dividend yield of the
dividend paying stocks in the S&P 500 index is
about 2%. This should not to be confused with the
average yield of the entire S&P 500, which includes
both dividend paying and non-dividend paying stocks
and is currently 1.5%.
- Avoid stocks that have an unsustainably high dividend
yield. A very dividend yield is usually a sign of
trouble unless the stock is actually a REIT (Real
Estate Investment Trust).
- Look for companies that have a long track record
of paying dividends.
Look for companies that have a record of periodically
increasing their dividends.
- Avoid companies that may appear to be close to the
peak of their business cycle. This is extremely difficult
to figure out even for investors with decades of experience.
- And finally look for companies that are selling
at a discount to their peers (this goes without saying,
but I figured I would mention it anyways).
Unilever Plc (UL)
From personal care products
such as Dove, Vaseline, Ponds, Axe, Suave, Caress and
Q-tips to food products such as Ben & Jerry's, Breyers,
Popsicle, Klondike (ice cream is definitely on my mind),
Lipton, Ragu, CountryCrock, Skippy peanut butter, Knorr
soups, Bertolli pasta and Slim-Fast, we have all either
come across or used a product made by Unilever, the
third largest food company in the world.
Maybe you live in India
and have not heard of the rest of the brands beyond
Dove, Axe, Ponds, Lipton and Knorr. Unilever through
its subsidiary Hindustan Lever Limited, also makes the
popular Indian brands such as Kissan, Bru, Brooke Bond,
Hamam, Surf, Rin, Close-Up, Lux, Liril and Sunsilk just
to name a few. The corporate structure of Unilever is
not very straightforward with two parent companies Unilever
NV in Rotterdam, Netherlands and Unilever Plc in London,
United Kingdom. Our featured pick Unilever Plc (UL),
is an ADR
of the London based Unilever Plc.
If you find the corporate
structure odd, just try to figure out the actual annual
dividend of Unilever. Because various financial websites
like Reuters, MarketWatch.com and Yahoo Finance were
giving me different dividend amounts and yields, I decided
to try and track down the annual dividend myself. As
you can see from this
page on Unilever's website, the company usually
declares two dividends called the interim dividend (usually
paid around November) and a final dividend (usually
paid the following June). For fiscal 2006, the company
also paid an one-off dividend. The interim and one-off
dividend for 2006 was 63.55 cents and as you can see
article, the proposed final dividend is 32.04p or
63.54 cents. Hence the 2006 annual dividend would work
to $1.27 and based on the current share price of $32.53,
this works out to a dividend yield of 3.9%. Wasn't that
a fun exercise to arrive at a number that was so readily
and accurately provided by Yahoo Finance.
So what made me pick Unilever
at this point? I was originally interested in Nestle,
the world's largest food company, especially after its
recent announcement to acquire
Gerber from Swiss drug giant Novartis (NVS)
for $5.5 billion. The fact that Nestle (NSRGY.PK)
traded on the pink sheets did not deter me but when
I noticed that Unilever's dividend yield of 3.9% was
much higher than Nestle's 2.17% (source adr.com),
I started taking a closer look at Unilever.
If you read through the
Portfolio Performance and
The Power of Dividends sections
of this newsletter, you would realize that Unilever
as a consumer staples company that also has a high dividend
yield was exactly the kind of company I was looking
for at this point in the business cycle. Unilever
recently reported first
quarter 2007 results with underlying sales growth
of 5.7% exceeding both company targets as well as analyst
expectations. The company does have a high amount of
debt with over $11 billion in short-term and long-term
debt when compared to just under $2 billion in cash
and investments but it also generated $6.265 billion
in income in 2006.
With improving operating
margins and the company confident in its ability to
meet its 2007 targets, I believe that Unilever can be
a good long-term core holding in a portfolio. I would
however use caution while starting a position
in Unilever as the stock has already appreciated almost
40% over the last year.
On a side note: Towards
the end of his review of Jeremy Siegel's book Stocks
For The Long Run in a Forbes article titled Stocks
For The Long-Ago Run, Robert Lenzner laments,
Siegel doesn't give us the names of the Chinese and
Indian El Dorados so that we can supplement the meager
Social Security payments and have sufficient savings
to live a dignified life in old age."
With a number of popular
brands in India, both Nestle and Unilever along with
the Tata group of companies could be considered the
El Dorado's of India that are easily accessible to US
investors without using global index funds.
||Cash and Investments
||Short and Long Term Debt
Jun 2007 $40 Put Options (CRMRH.X) $1.08
has been an amazing growth story over the last few years
thanks to their web-based customer relationship (CRM)
software that helped the company acquire 560,000 subscribers
serving 26,000 companies (as of Feb 2007) over the last
eight years. The company posted 75% revenue growth in
fiscal 2006 and more than 60% top-line growth in fiscal
2007. So why would I consider buying put options on
a company that appears to be doing so well? The problem
with Salesforce.com becomes evident once you consider
the growing competition and the actual income.
Ever since SEC rules required
the expensing of stock options, the company has been
posting disappointing earnings due to the number of
options exercised by management and employees. This
hurt results last quarter even though the company reported
that Cisco had acquired 15,000 licenses and it branched
into financial services software. The company reported
earnings of less than a million ($0.516 million to be
precise) on revenue of $144 million last quarter.
After looking at the number
of options insiders had exercised last quarter and the
earnings report from the quarter before that, I was
convinced that Salesforce.com would report very low
earnings while still growing top line revenue. Right
before earnings were released last quarter, I bought
March 2007 $45 put options. I sold those options less
than two weeks later for a gain of 149%. I do not trade
very often and this was an uncharacteristic trade for
me. Moreover the position was highly speculative as
I bought options expiring in a month and had I been
wrong, I would have lost most of my "investment". This
was the primary reason I did not mention this trade
in the newsletter or blog.
However as I look at the
selling at Salesforce.com this quarter, I see the
same pattern emerging and I think buying June 2007 put
options would be a good play on disappointing earnings
from Salesforce.com and as a hedge against a general
One could argue that Salesforce.com
is sacrificing the bottom line in order to continue
growing revenue at this point and that investors would
be rewarded a couple of years down the line. Such a
line of thinking would not only be ignoring the fact
that management is willing to significantly hurt earnings
through its options exercising practices and that competitors
such as NetSuite
could capture more market share. Even Microsoft through
its Sharepoint software and Oracle through its Fusion
product (when it is released) could put a dent into
Salesforce.com's growth. In case you are interested,
to go public sometime this year.
I had a chance to review
offerings from both Salesforce.com and NetSuite for
a client of mine. While I like Salesforce.com's AppeXchange
platform and the options they provide for custom development,
NetSuite offers a more integrated and broader platform.
If only NetSuite provided development support in languages
These put options
are highly risky and there is a very good chance that
we could just as easily lose our entire "investment"
as make money on it. Hence I am allocating just 0.5%
of the portfolio to this position.
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. However as this newsletter was delayed by two
weeks, it represents the closing price as of May 11,
Model Portfolio - May 11, 2007
||Number of Shares
||Number of Units
Voluntary Disclosure: I currently
own shares of Airspan Networks (AIRN),
Tata Motors (TTM),
Suntech Power (STP),
and Alvarion (ALVR)
as well as put options on Countrywide Financial (CFC)
and YRC Worldwide (YRCW).
To unsubscribe, please click here.
- Suria Investment Newsletter (SINLetter) does not warrant
the completeness or accuracy of the content or data provided in this newsletter.
- Suria Investment Newsletter (SINLetter) does not comprise
any solicitation to buy or sell securities.
- Suria Investment Newsletter (SINLetter) will not be liable
for any investment decision made or action taken based upon the information
in this newsletter.
- We suggest you check with a broker or financial advisor before
making any investment decisions.