SINLetter - October
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
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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."
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.
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blog entries by email here.
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.
|Third Quarter 2007
|Since Inception (Aug 2005)
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.
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
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
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).
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
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.
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
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.
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.
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
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.
Reading Beyond The Headlines (MCS)
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,
- 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.
- 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.
- Marcus did not have to expense stock options last
- 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
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
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.
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
||Number of Shares
||Number of Shares
||Number of Units
Voluntary Disclosure: I currently
own shares of Airspan Networks (AIRN),
Tata Motors (TTM),
Suntech Power (STP),
put options on Monster Worldwide (BSQOF.X)
and a short position in Monaco Coach (MNC).
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