SINLetter - October 2007

Welcome to edition 27 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.

Newsletter Sponsor:

This investment newsletter is sponsored by ETF Expert. I came across Gary Gordon and ETF Expert while reading this very interesting article about an ETF alternative to the popular yen carry trade. Each day, Gary provides ideas on "everything ETF". This may involve broad market index-trackers like the Spider (SPY) and Diamond (DIA). The daily discussion also includes other investment opportunities, such as Wisdom Tree’s earnings-based mid-cap index fund (EZM) or Vanguard’s All World Index fund ex U.S. (VEU). "I don’t have an agenda when I write," Gordon stated. "I simply look to make the ETF investing world easier through explanation and entertainment."


September Blog Entries:

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

If you would like to post to the forums and do not have your password, you can use the Request Your Password link from the Login page. If you do not receive blog entries by email, you can subscribe to receive blog entries by email here.


Portfolio Performance:

September was a kind month for the markets and the SINLetter model portfolio participated in the post Fed rate cut celebration by posting a gain of 4.9% for the month and hitting yet another high of 116.93% since inception despite having some positions to protect against downside risk. The monthly, quarterly and "since inception" performance is tabulated below.

Performance Metric Dow S&P 500 Nasdaq SINLetter
September 2007 4.03% 3.58% 4.05% 4.9%
Third Quarter 2007 3.63% 1.56% 3.77% 9.86%
Since Inception (Aug 2005) 30.81% 23.59% 23.05% 116.93%


SINLetter September 2007 Portfolio Performance

As most of you are aware, I have been mildly bearish about the market and the Fed's aggressive move to cut rates by 50 basis points (half a percentage) caught me by surprise. While this rate cut has certainly helped Wall St, it may not prove to be equally beneficial for the folks on Main Street. This increase in the supply of little green pieces of paper is likely to lead to higher core inflation, higher prices for commodities like oil, higher prices for imported goods and a weak dollar that will not even get you one full Canadian dollar in exchange. Gold is now at a 28 year high and I am still kicking myself for not rolling the gains of our gold ETF (GLD) into a gold mining stock like I had planned back in February 2007. In this environment it is very odd to see the market going up and our recent short positions and options losing money. The overall SINLetter model portfolio however continued performing well as our long positions represent more than 90% of the portfolio.

WiMax equipment Alvarion (ALVR) has really found its stride in recent months and the stock is now the biggest gainer in the SINLetter model portfolio after appreciating 111.35% since the start of this year. According to this story on Unstrung, Cisco (CSCO) is now on the lookout for a WiMax equipment provider to add to its list of acquisitions and Alvarion could be a potential target. This news also jolted a little life into our other WiMax pick Airspan Networks (AIRN), which has unfortunately not executed as well as Alvarion.

I was recently looking for a solution that would allow Mac users to simultaneously run a Windows operating system without having to reboot their system. A program called Parallels created by privately held SWSoft has been the leading product in this segment and I was going to purchase a couple of copies of Parallels at the Mac store in San Francisco when the person helping me mentioned VMware's Fusion as a better alternative. He told me that Fusion, which had just been released, runs faster and consumes less memory. I held off on my purchase of Parallels and did some research on Fusion. It turns out that he was indeed right about Fusion as it performed better on benchmark tests. Quite clearly VMware has its sights on more than just server virtualization and given the recent spurt in Mac sales, this could become yet another fast growing revenue stream for VMware (VMW). Running Widows On A Mac

I picked EMC (EMC) in April 2007 based on its decision to spin-off 10% of VMware in an IPO and as mentioned in the blog entry "Adopting a Cautious Approach", I was excited about the VMware IPO right before it came out. VMware has posted gains of 190% just a few weeks after its IPO and this has in turn helped EMC post gains of over 50% in six months in our model portfolio. I believe EMC has further room for appreciation and agree with Bank of America analyst Scott Craig that it is "severely undervalued". However VMware at its current valuation is too rich for my blood and if the stock gives back some of its gains, EMC could drop as well, providing the perfect opportunity to start a new position in EMC in case you missed it back in April.

Our June pick Gymboree (GYMB) unfortunately lost even more ground in September as retailers came under additional pressure thanks to a larger than expected fall in consumer confidence and a housing market that is in free fall. A visitor left a question on the blog asking if I plan to continue holding Gymboree and if you are interested, you can read my response here. Unfortunately our short pick RV manufacturer Monaco Coach (MNC) has gained 11% over the last three weeks despite a slowing housing market and rising oil prices. I still think Monaco Coach will head lower and plan to retain this short position in the portfolio for now.

Our protective consumer staples play Procter & Gamble (PG) is finally beginning to contribute to the portfolio after gaining almost 15% in the third quarter when compared to a gain of less than 4% for the Dow Jones Industrial Average during the same time period. The company is now posting a gain 26.51% since we added it to our portfolio in July 2007 and along with our other consumer staples play Unilever (UL) should provide some stability in a volatile market.

Gold has continued its bullish run closing the month of September at $743.10 per troy ounce, a gain of $69.90 or more than 10% in a single month.

Portfolio Readjustment:

Around the middle of September I was considering selling our put options on trucking company YRC Worldwide (YRCW) as the stock had lost quite a lot of ground in the last few months and not booking our nearly 200% gains in these options just four months before the options were set to expire did not seem like a good idea. Just as I was considering acting upon this thought, rumors emerged that DHL's parent company Deutsche Post may be interested in acquiring either JB Hunt (JBHT) or YRC Worldwide. I would understand if Deutsche Post wanted to acquire JB Hunt as it is a well managed company that enjoys better margins and growth but an acquisition on YRCW did not make much sense to me. After hearing similar rumors about Countrywide Financial (CFC) when it was trading over $40, I had learned to discount such rumors if they did not make any logical sense. When a Bear Stearns analyst came out the next day and said that this acquisition "seems extremely far fetched ", the stock retreated back to its pre-rumor level and our put options were once again posting gains of almost 200%. So I am taking this opportunity to sell our Jan 2008 $30 put options on YRC Worldwide (YRCW) for a gain of exactly 200% over 11 months.

In order to reduce our exposure to stocks and increase cash reserves, I am also going to sell the stocks of our two consumer electronics companies Logitech (LOGI) and SanDisk (SNDK) for gains of 44.92% and 14.55% respectively. After these sales, we will have $26,254 in cash representing a little over 12% of the portfolio.


Marcus: Reading Beyond The Headlines (MCS) $19.20

I was originally considering featuring a couple of opportunities in the biotech sector that my friend Hatim Zariwala was helping me analyze but decided to hold off until we had completed our research and explored these investments in detail. Instead of these biotech stocks, I figured it would be a good idea to discuss the first quarter earnings conference call of movie theatre and hotel operator Marcus Corp that I featured in the blog entry Time To Revisit Marcus Corp (MCS). I started a position in Marcus for my personal portfolio a few days after posting that blog entry by buying half the position before earnings were announced and the second half after listening to the earnings conference call.

Marcus reported first quarter 2008 earnings on September 25th with revenue rising 20% to $112.1 million when compared to $93.4 million in the first quarter of 2007. However earnings dropped to $11.7 million or 38 cents per share when compared with $13.7 million or 45 cents per share in the prior year period and it was this drop in earnings that most of the headlines focused on, leading to a drop in the price of Marcus. Earnings at Marcus were lower due to the following unfavorable events that had little to do with operating results,

  1. The tax rate in the first quarter of last year was much lower than their standard tax rate of roughly 40.6% because of historical tax credits related to the renovation of one of their hotels.

  2. The prior year quarter included the important Memorial Day holiday weekend, while the theatre division of Marcus did not benefit from the holiday this year as it fell in the fourth quarter of 2007 instead of the first quarter of 2008.

  3. Marcus did not have to expense stock options last year.

  4. Marcus acquired a chain of 11 theatres last quarter and this increased the debt and interest payments for Marcus when compared to last year where the company had more cash on its balance sheet and less debt.

Marcus will face similar increases in interest expense for the next two quarters but their debt to capitalization ratio was actually 42.4%, down from 44.5% in the fourth quarter due to strong cash flows in the summer. As Douglas A. Neis, the CFO of Marcus put it in the conference call,

"Pretty good quarter for us at many levels despite what headline writers may be tempted to say given that our net earnings were down compared to last year. Operating income was up 11% for the quarter despite an unfriendly calendar and a couple of specific circumstances in our hotel division."

Hotel Division:

Revenues were up 15.7%, benefiting from two new hotels but did not include the Westin Columbus as Marcus sold a majority stake in that hotel last year. Both average daily rate and occupancy increased 4.5% and 1% respectively. However this did not translate into higher operating income and margins because of renovations and seasonal changes at two properties that will not occur in future quarters.

Steve Marcus, the Chairman and CEO of Marcus, later in the conference call repeated that it was a "pretty good quarter". The new Hilton hotel in Oklahoma city, which has been open only 6 months, has been ramping up much faster than expected. The company added 6 new management contracts in fiscal 2007 and expect to add more properties this year. The company had $7 million in hotel pre-opening expenses in the second, third and fourth quarters of last year. Since Marcus does not expect similar expenses this year, comparisons are likely to be favorable in coming quarters.

The key negative thing I heard on the conference call was the 16 unsold units the company holds in their Las Vegas condo property. According to management the market in Las Vegas is "pretty soft right now".

Movie Theatre Division:

Box office revenue increased 23.8%, concessions revenue increased 22.4% and total attendance increased 20.2%. These numbers include the newly acquired chain of 11 theatres. Average admission prices increased 4.4% and concessions revenue per person increased 5.2% partly due to their new Majestic Theatre. Operating margins increased 26.6% from 26.4% last year. Higher concession revenue per person combined with higher operating margins is a good sign as it shows that their premium theatre strategy is indeed able to command premium prices.

The company is rapidly assimilating the newly acquired theatres "without missing a beat" and they are "performing exactly as expected". The Majestic had a great summer and the company has been able to expand upon the type of content and programming by successfully showing Green Bay football games in High Definition at the Majestic.

Marcus Majestic Theatre

According to 21st Century Equity Research analyst Robert Damron, the drop in share price and the lower-than-expected results were just a blip on an otherwise well-performing company. He went on to say "I look at the lower stock price today as a buying opportunity" and I could not agree more.

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 (September 30, 2007 for the October 2007 newsletter).

Model Portfolio - September 30, 2007

Long Stocks

Stock Number of Shares Cost Current Value Diff ($) Diff (%) Date Added
MCS 500@19.94/share $9,970 $9,600 $-370 -3.71% 9/14/2007
TWM 50@71.00/share $3,550 $3,294 $-256 -7.2% 9/7/2007
BBI 1,500@4.59/share $6,885 $8,055 $1,170 16.99% 7/9/2007
GYMB 200@42.02/share $8,404 $7,048 $-1,356 -16.14% 6/14/2007
UL 200@32.53/share $6,506 $6,334 $-172 -2.64% 5/11/2007
EMC 600@13.85/share $8,310 $12,480 $4,170 50.18% 3/31/2007
EPAX 300@29.70/share $8,910 $11,430 $2,520 28.28% 2/28/2007
ICLR 250@37.30/share $9,325 $12,758 $3,432 36.81% 1/31/2007
DO 80@76.65/share $6,132 $9,063 $2,931 47.80% 1/3/2007
ALVR 1000@6.87/share $6,870 $14,520 $7,650 111.35% 1/3/2007
WSDT.PK 1000@7.40/share $7,400 $3,930 $-3,470 -46.89% 11/30/2006
TEVA 300@35.05/share $10,515 $13,341 $2,826 26.88% 9/1/2006
STP 400@25.93/share $10,372 $15,960 $5,588 53.88% 7/31/2006
PG 180@55.60/share $10,008 $12,661 $2,653 26.51% 6/30/2006
JNJ 200@57.65/share $11,530 $13,140 $1,610 13.96% 2/28/2006
MED 1000@6.955/share $6,955 $5,580 $-1,375 -19.77% 11/30/2005
TTM 900@11.94/share $10,746 $17,226 $6,480 60.3% 11/30/2005
AIRN 1700@5.62/share $9,554 $4,250 $-5,304 -55.52% 8/1/2005


Short Stocks

Stock Number of Shares Cost Current Value Diff ($) Diff (%) Date Added
MNC 300@12.64/share $3,792 $4,209 $-417 -11% 9/7/2007


Options

Option Number of Units Cost Current Value Diff ($) Diff (%) Date Added
BSQOF.X 10@2.05/contract $2,050 $1,950 $-100 -4.88% 9/7/2007
JOEMJ.X 3@7.00/contract $2,100 $4,680 $2,580 122.86% 10/31/2006
Cash     $26,254      
Total     $216,927 $116,927 116.93%  

 

Voluntary Disclosure: I currently own shares of Airspan Networks (AIRN), Medifast (MED), Tata Motors (TTM), Logitech (LOGI), Suntech Power (STP), Teva (TEVA), Alvarion (ALVR), WisdomTree (WSDT.PK), Unilever (UL), Gymboree (GYMB), BlockBuster (BBI), Marcus (MCS), put options on Monster Worldwide (BSQOF.X) and a short position in Monaco Coach (MNC).

 


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