SINLetter - July 2009
Welcome to edition 46 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.
Note About June: Between the birth of my daughter and the birth of a new venture related to iPhone app reviews called AppStruck, I was not able to publish the June newsletter. Hopefully I can get back to my regular monthly schedule starting this month.
Book of the Month: Reminiscences of a Stock Operator by Edwin Lefèvre
Originally published in 1923, Reminiscences of a Stock Operator is a very lively, entertaining and informative biography of the speculator Jesse Livermore who made and lost multi-million dollar fortunes many times over from the early 1900s through the 1930s. Jesse got his start in the 1890s by speculating in unregulated pseudo-brokerages called Bucket Shops, which were outlawed in the 1920s, before moving on to Wall Street and becoming one of its most famous traders. Oddly enough during my last visit to India when the Bombay Stock Exchange Sensex was peaking around 21,000 (it hit a bottom of just over 8,000 fourteen months later), I heard of people trading in bucket shops there. Even though the book recounts the actions of a speculator nearly a century ago, it is peppered with pearls of wisdom like the following,
It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I've known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine--that is, they made no real money out of it. Men who can both be right and sit tight are uncommon.
While there is a lot about the book and Jesse's trading style that rankles my investment philosophy, a self-made man who made millions by being short the market in 1907 and once again in 1929 right before the crash that kicked off the great depression, deserves respect and attention. My key take aways from the book were to act with conviction when you believe you are right and to stick with your winners as mentioned above. Hopefully the winner of the stock contest in July will both learn from and enjoy this book, which is written in a very easy to read narrative style.
Stock Contest #3 Update
When I was looking at the stock contest rankings the other day, I noticed that "d2cold" had jumped to the top of the ranking due to a gain of over 900% in paper and wood products company Domtar Corporation (UFS). Upon closer inspection, I realized that Domtar had a 1:12 reverse stock split and hence the massive increase in the price per share. Adjusting the purchase price by the same ratio as the split, moved d2cold to the fifth spot and "Raja" once again to the top. I had meant to put in a rule that said a winner cannot win again for the next three months but must have forgotten to include it under the rules and conditions of the contest. I am going to make this change effective immediately.
Prizes: Since we did not pick a book for June, Raja will also win a copy of the current Book of the Month Reminiscences of a Stock Operator by Edwin Lefèvre. If you would like to displace Raja from his throne click here to enter the stock contest. Each month we plan on reviewing an investment related book and the monthly winner will receive this book along with a free one year subscription to the SINLetter Special Reports, a $120 value. The grand winner at the end of the year will get all the books reviewed in these newsletters from April through the end of the year, a lifetime subscription to the SINLetter Special Reports and a surprise prize.
We have had a good month, good quarter and a good year thus far despite having close to 20% of the portfolio is cash over the last six weeks. The SINLetter model portfolio delivered gains of 8.84% in May followed by gains of 3.04% in June to close out the second quarter of the year with a gain of 24.52%, surpassing the indexes by a wide margin in Q2 and year-to-date. While I am happy about this gain, I am not so sure we will continue to see performance like this in the second half of this year as my outlook is bearish at this point. In keeping with this bearish outlook, I have initiated my first short position since late 2008 in the form of put options in the Special Reports Portfolio.
|Performance Metric||Dow||S&P 500||Nasdaq||SINLetter|
|Since Inception (Aug 2005)||-20.48%||-25.58%||-16.41%||64.92%|
I am selling the second half of our position (1,000 shares) in Sterlite Industries (SLT) for a profit of approximately 164%. I am also going to add 500 share of Safeway to the portfolio as discussed below. The closing price on Wednesday, July 1st will be used as the transaction price for these trades.
Safeway (SWY) $20.37
Investing is a lot of hard work. The time one has to spend staying current on existing positions, analyzing candidates for new positions and staying on top of macroeconomic events that could take a heavy toll on your portfolio despite the quality of your individual investments, can quickly add up. While we have been blessed with a number of powerful tools, we have also been cursed with access to so much information that the signal to noise ratio is rapidly diminishing. When looking for new investment opportunities, I have found it useful to look back at positions I once held but are no longer in the portfolio. If an old position is now at an attractive price, it saves me the time required to familiarize myself with the company, the sector it operates in, seasonal effects if they exist and the price history of the stock.
I recently started thinking about Safeway, a company that we sold from the SINLetter model portfolio back in November 2006 at $30.81 for a gain of 22.65%. The stock has lost nearly a third of its value since last 2006 but at the same time its balance sheet has gotten stronger and its earnings have increased. The world we live in now is quite different from the one we were in 2006 and a deep recession combined with P/E contraction easily explains the drop in Safeway's stock price over the last two years.
I was originally attracted to Safeway back in early 2006 because of the potential for its "O Organics" line of products. Safeway executed very well with this private label brand by introducing products that not only had a great taste profile (their O Organics Blueberry jam is a personal favorite) but were also positioned right next to conventional products instead of being hidden away in a separate organic section. The brand has been so successful, that the company is now in the process of selling these products through other retailers both domestically and overseas. As mentioned in this Wall Street Journal article, Safeway has already signed up 240 Albertson's stores, 150 ShopRite stores in South Africa and 100 Exito supermarkets in Colombia. Essentially Safeway is at the verge of becoming a grocery store chain as well as an organic/natural food products company like Dean Foods (DF), all rolled into one.
Safeway is also positioned well for consumers who are downgrading from Whole Foods (WFMI) during this recession. I have been seeing an emphasis on local produce at my neighborhood Safeway and the company is stepping up efforts to source 30% of its produce locally. Based on the product I want to buy, I alternate between Safeway, Whole Foods and Costco (COST) but the majority of my shopping is done at Costco. Every time I enter a Safeway or Whole Foods, I am usually in a state of price shock as they sometimes tend to charge almost twice the price for the exact same products I buy at Costco (lovers of Oroweat Whole Wheat bread probably know what I am talking about). As an investor however, I see this translating into better margins for Safeway. To verify that this is indeed the case, I decided to do a comparative analysis of these three grocery chains and also threw in Kroger (KR) for good measure as you can see below.
Comparative Analysis: When I pulled the numbers for Safeway and compared it with other grocery store chains, they confirmed what I noticed in the stores. Safeway not only has better margins than the rest of the group but also sells at a cheaper valuation when compared to other grocery store chains and sports a higher dividend yield. While Safeway's overall balance sheet is more leveraged that Whole Foods or Costco, the company has a better current ratio (current assets divided by current liabilities) than Kroger and is almost on par with Costco.
Comparison of Supermarkets (June 30, 2009)
|Whole Foods (WFMI)||
|Kroger (KR)||Safeway (SWY)|
|Return on Assets||5.31%||5.37%||6.96%||6.53%|
|Return on Equity||5.98%||11.94%||24.45%||13.5%|
|Enterprise Value/Operating Cash Flow||6.36||9.63||7.59||6.68|
Risks: The key problem that Safeway faces along with most other supermarkets is declining revenue in a very difficult economic environment. Safeway has been cutting costs but that will only help to a certain point. Hopefully the roll out of the "O Organics" brand to other supermarket chains at a premium price point will help the company grow both revenues and margins through this downturn. The other risk weighing Safeway down is the potential of a worker's strike in Colorado. The 2004 strike in Southern California hurt Safeway's results and that episode is still on investor's minds as they keep an eye on the developments in Colorado.
Conclusion: Shop at Costco but invest in Safeway.
|Stock||Symbol||Number of Shares*||Cost||Current Value||Diff ($)||Diff (%)||Date Added|
|Companhia Siderurgica Nacional||SIDfirstname.lastname@example.org||$8,630||$4,470||$-4,160||-48.2%||04/30/08|
|Powershares Water Resources||PHOemail@example.com||$8,840||$5,888||$-2,952||-33.39%||10/31/07|
|Diamond Offshore Drilling||DOfirstname.lastname@example.org||$6,132||$6,644||$512||8.35%||01/03/07|
|Procter & Gamble||PGemail@example.com||$10,008||$9,198||$-810||-8.09%||06/30/06|
Voluntary Disclosure: From the stocks that are currently in the model portfolio, I own shares of Sterlite Industries (SLT), Activision Blizzard (ATVI), Towerstream (TWER), Lionsgate Entertainment (LGF), PowerShares Water Resources (PHO), Suntech Power (STP), Teva (TEVA), Alvarion (ALVR), Unilever (UL), and BlockBuster (BBI).
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