SINLetter - May
to edition 33 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
The Pen Is Mightier Than The Sword
Writing these newsletters
has been rewarding in more ways than one and a recent
example was when the Director of Customer Support from
contacted me after reading my article
about NetSuite on Seeking
Alpha. NetSuite worked with us to resolve one of
the bugs that was causing my client a lot of trouble
and I hope that some of the other issues will be resolved
soon now that we have the "ear" of upper management
at NetSuite. Even though I did not act upon it, the
investment thesis of shorting NetSuite has proved to
be sound thus far with the stock dropping almost 8%
in April when compared to a gain of 5.87% for the Nasdaq.
I realize that NetSuite is listed on the NYSE but prefer
to compare it to the tech heavy Nasdaq or the Software
HOLDRs ETF (SWH),
which was up roughly 3% in April. NetSuite reports earnings
today (May 1st) and it will be interesting to see how
their first quarter as a publicly traded company turned
out. Analyst expectations are for a two cent loss in
As many of you are aware,
I have had a publishing relationship with Seeking Alpha
for over two years through which they publish a portion
of these investment newsletters one week after they
are sent out to subscribers. This relationship has been
mutually beneficial as Seeking Alpha gets content and
I get wider distribution thanks in part to their partnership
with Yahoo Finance. However there has been a lot of
debate about the benefits of contributing free content
to investment websites like Seeking Alpha and much of
this debate has been captured in the comments following
the article Blogonomics:
The Seeking Alpha Model by David Jackson, the founder
of Seeking Alpha.
Gains in portfolio stocks
were partially offset by drops in Blockbuster
leaving the SINLetter model portfolio with a small gain
of 2.03% in April. After 5 continuous months of outperforming
the S&P 500 and Nasdaq, our gains for the month
fell short of the gains the major indices posted in
April as you can see from the table below.
|Since Inception (Aug 2005)
Irish medical research
company ICON Plc (ICLR)
has now become the top performing company in the model
portfolio with a gain of 93.03% after the company reported
first quarter results with income increasing 38% to
$16.9 million and revenue increasing an equally healthy
48% to $201.3 million. The company once again boosted
its earnings and revenue outlook. If there is one hard
lesson I have learnt with stocks like Suntech Power,
Diamond Offshore Drilling and Alvarion, it is to protect
your profits either by selling part of your position
or using protective put options. I have at times followed
this process by selling partial positions in Suntech
Power, Medifast (MED)
and SourceForge (LNUX).
Just a few days ago I wanted to buy put options on Diamond
Offshore Drilling when the stock hit $140 right before
its quarterly results came out. I hesitated and the
opportunity was lost when the stock declined due to
earnings that did
not meet expectations. Since the volume and open
interest in put options of ICON is very low, I am going
to instead opt to sell part of our position in ICON
by selling 100 out of the 250 shares.
Despite higher commodity
prices that have been affecting all consumer staple
companies, Procter & Gamble (PG) reported
another stellar quarter with net income rising nearly
8% and revenue increasing 9.47% to $20.46 billion. The
company's well recognized brands like Gillette and Tide
have helped it retain pricing power and pass along increasing
costs to customers. Procter & Gamble has posted
a gain of 20.59% in the model portfolio while delivering
a dividend yield of 2.88% based on our $55.60 purchase
price in June 2006.
Just as BlockBuster's
turnaround strategy was beginning to bear fruit, the
company decided that it might be a good idea to shoot
itself in the foot by making a bid for ailing electronics
retailer Circuit City (CC).
Pulling off one turnaround is hard enough, attempting
to pull off two at the same time is insane. The only
silver lining in this story is BlockBuster's timing.
Circuit City was trading at $3.90 a share when BlockBuster
made its $6 to $8 offer public. Circuit City did not
reach such low levels even in the last recession where
it bottomed out at $4.40 per share. Those of you who
have been following Circuit City for a long time would
remember the $8 per share bid by Mexican billionaire
Carlos Slim Helu (briefly the richest
man in the world) in 2003. Circuit City declined
that offer and the stock went on to hit a high of over
$30 in May 2006. Maybe Carlos and Jim (the current CEO
of BlockBuster) know something the rest of us don't.
I have decided to let BlockBuster remain in the portfolio
for now and see how the Circuit City situation plays
Gold continued its downward
trend to close the month of April at $876.60 per troy
ounce, a drop of $39.1 or 4.66% for the month.
As mentioned in the Portfolio
Performance section above, I am going to sell 100 shares
of ICON Plc (ICLR).
Getting back to the international focus of this newsletter,
I am also going to purchase 200 shares of Companhia
Siderurgica Nacional (SID)
as discussed below.
Companhia Siderurgica Nacional
Matt, a SINLetter subscriber and the
recent winner of CNBC's
Fast Money Contest, has contributed the following
section of the newsletter. Matt is a consultant within
the biotech industry and also a full time trader. I
occasionally seek out his opinion on the pharma/biotech
The price for steel, as
well as iron ore, has seen extraordinary price appreciation
in recent months.
Fueled by a seemingly
insatiable demand for basic materials, developing nations
are falling victim to the increase in pricing power
by global steel makers who have been consolidating over
the last few years. Even raw iron ore commodity prices
as high as 65%, in which South Korean steel maker
POSCO (PKX) and Japanese steel maker JFE Steel Corp
have recently complied with Brazil's largest iron ore
producer, Companhia Vale Do Rio Doce (RIO).
One of the few steel companies
in prime position to benefit from this current environment
trades on the NYSE as an ADR by the name of Companhia
Siderurgica Nacional (SID).
Founded in 1941, SID is
a fully integrated Brazilian steel company that as the
name implies used to be a state-owned company until
1993. Full integration means SID can not only
produce steel products that are in high demand, but
also owns iron ore mines, railroads, and sea ports.
This makes SID supremely positioned to support
the increasing steel demand in Asia, the Middle East,
and even its own governmental demands for increased
infrastructure and urbanization.
The primary benefit of
this integration will undoubtedly be its ability to
tolerate, if not ignore, the cost of goods impact from
the increase in iron ore prices.
This could give
SID a dramatic advantage on the international steel
market by undercutting other steel manufacturers thanks
to lower than industry averages in basic raw materials
(i.e. iron ore). Ostensibly, this sort of lowball
price war is highly unlikely in the short term thanks
to strong global demand, but provides SID with a several
advantages rarely seen thanks to a higher than normal
profit margin potential compared to it’s competitors.
Numbers and Valuation:
The chart below certainly
proves that SID has richly rewarded investors during
the last 12 months with a 184% return. However despite
these returns, the company trades at a trailing P/E
of 19.36, a P/S of 4.94 and a very attractive forward
P/E of just 10.15 (according to Yahoo Finance). Net
income increased an astounding 150% to $1.64 billion
in 2007 and revenue increased 27% to $ 6.44 billion.
The forward P/E of 10.15
is indicative of a strong growth stock and would not
(at least to this investor) suggest price appreciation
is over. Growth rates for 2008 are expected to be in
the 35% to 50% range, which differ among analysts covering
the stock, but this could be due in large part to the
frequent changes in short term steel prices.
While the company had
$2.71 billion in debt on its balance sheet at the end
of 2007, net debt fell by 28% when compared to 2006.
Declining interest rates in Brazil (they fell from 19.75%
in mid-2005 to 11.25% before a recent 50 basis point
increase) combined with declining debt should help SID’s
bottom line in 2008. If you are interested you can find
the 2007 annual report here (PDF) (Note: All numbers
calculated using the Real/Dollar exchange rate of 1.771
from December 31, 2007)
Additional positives for
SID include the increasing popularity of Latin American
stocks (particularly Brazil) in the ETF market, and
finally Brazil likely reaching investment grade status
(shortly before publishing this newsletter we came to
find out that S&P has raised Brazil's credit rating
to investment grade). While the US is at the brink of
a recession or already in one based on whom you ask,
Brazil posted GDP growth of over 5% in 2007 and is expected
to growth 5% in 2008. Therefore, SID is definitely worth
serious consideration as a global growth story for 2008.
Voluntary Disclosure: Matt has a long
position in SID.
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 (April 30,
2008 for the May 2008 newsletter).
Model Portfolio - April 30, 2008
||Number of Shares
|Companhia Siderurgica Nacional
Voluntary Disclosure: From the stocks
that are currently in the model portfolio, I own shares
of Lionsgate Entertainment (LGF),
Tata Motors (TTM),
PowerShares Water Resources (PHO),
Suntech Power (STP),
and Marcus (MCS).
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