SINLetter - September
Welcome to edition 26
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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In the face of an uncertain
market, the SINLetter model portfolio managed to notch
another record high of 106.79% since inception
but posted a modest gain of 1.54% for the month of August.
After seesawing through much of August, the major indices
got a boost at the finish line when second quarter 2007
gross domestic product (GDP) was revised upwards to
than expected 4% and helped the indices close the
month of August in positive territory as you can see
|Since Inception (Aug 2005)
Despite these gains all
is not well with the markets, the economy and parts
of our long portfolio. As I mentioned in my July
10th portfolio update, when the inventory of unsold
homes hits 9 months, housing is in serious trouble.
To put this in perspective, housing inventory hit a
peak of 9.4 months in the 1990-91 recession. Housing
inventory hit a 15
year high of 9.6 months (9.2 months if you only
include single family homes) in July 2007 and we are
not even officially in a recession. California's
inventory of unsold homes came in a little higher at
Unfortunately a weak real
estate market impacts the broader economy at multiple
levels and some of these effects can already be seen
with weekly jobless claims increasing and non-farm
payrolls dropping for the first time in four years.
While you might not see its effects at the mall, the
consumer confidence index also dipped
in August dragging down most retailers with it including
pick Gymboree (GYMB).
picks Alvarion (ALVR)
and Airspan (AIRN)
headed in different directions in August with Alvarion
gaining 14.71% and Airspan dropping 23.62%. Alvarion
second quarter 2007 results with revenue increasing
31% to $57.5 million and net loss narrowing by more
than half to 482,000 or $0.01 per share when compared
to the same quarter last year. The company generated
operating cash flow of $2.6 million in the quarter and
on a non-GAAP basis actually posted a profit of $2 million
or 3 cents a share. The company also increased its full
year revenue growth forecast from a previous range of
15-20% growth to a 25-30% growth rate. The news was
bleaker at competitor Airspan when it reported
second quarter earnings with net loss widening to
$11.7 million or 29 cents per share when compared to
$7.67 million or 19 cents per share in the same quarter
last year. The company was not only hurt by the winding
down of its contract with its largest customer Yozan
but also by a drop in sales in its non-WiMax products.
While the company appears to have enough cash to last
through the end of 2007, it is attempting to raise additional
capital through the sale of 14 million shares. Unless
it sees a lot of acceleration in its WiMax business
in the second half of 2007, it is highly unlikely that
Airpsan will achieve profitability in 2008 as I had
originally expected. I might exit our Airspan position
in the near future and unfortunately take a loss both
in the SINLetter portfolio and my personal portfolio.
options on homebuilder St Joe (JOE)
and trucking company YRC Worldwide (YRCW)
have done exceptionally well and were posting gains
of 161.42% and 103.85% respectively at the end of August.
Since YRC Worldwide had dropped a lot in recent months,
I was considering taking profits by selling our options
but then came
across the following statements by their CEO Bill
"I think the
economy is a lot softer than people are saying. The
Fed needs to move quickly and make some kind of rate
cut so that we can generate some kind of economic growth.
The demand we expected has not materialized and our
customers are telling us that economic recovery has
not shown up at this point."
While this is clearly
a distress call from the CEO of a leveraged company
much like mortgage lender Countrywide Financial's (CFC)
CEO Angelo Mozilo's calls for a rate cut earlier this
year, it was a clear signal to me that it was best to
continue holding on to our put options on YRC Worldwide.
These options have appreciated some more and are now
posting gains of 169.23%.
I got an email from a
subscriber wondering why Gold was not moving up in this
environment as it only posted a tiny gain of $6 or 0.9%
to close the month of August at $673.20 per troy ounce.
It looks like Gold is finally living up to its reputation
of being an asset class that is not correlated to the
stock market by cracking the $700 level in the first
week of September while the major stock indices were
down for the week.
Just days after we added
Brazilian aircraft maker Embraer (ERJ) to our portfolio,
the company reported a sharp 49% drop in second quarter
profits. The company's backlog of orders was increasing
and so it decided to hire thousands of employees as
well as make capital investments to increase production
capacity. These moves are certainly going to help the
company in the long-term and our long-term investment
thesis on Embraer is intact. However this increased
spending is likely to impact the next few quarters as
well. Given the current environment, I am not very happy
about the prospects of holding on to a company that
is likely to have a few weak quarters in the near future
and am going to sell our position for a tiny gain of
Hedging Your Bets
It is one thing to recount
all the bad news out there and worry about it but it
is altogether something different to see the writing
on the wall early and act upon it to protect your portfolio.
Given the economic outlook, it has been extremely difficult
to find new stocks to feature in this newsletter and
I decided to concentrate on short ideas for this month's
investment newsletter. There are a couple of long ideas
I am currently exploring and I will post them on the
blog over the next few days instead of discussing them
in this newsletter. If you are not familiar with shorting
stocks and put options, please feel free to check out
the section Hedging
The Economy Through LEAP Puts from the November
Having picked the homebuilders
as potential short opportunities in 2005 and the mortgage
lenders in 2006 we protected the model portfolio
by hedging our long positions with put options. At this
point in the cycle, it may not be prudent to start new
short positions or put options on the homebuilders or
the mortgage lenders as they could be very close to
their bottom. The only homebuilder that has comparatively
not taken a very hard hit is Toll Brothers (TOL)
and it could be a potential short opportunity. Given
below are five broad themes for short opportunities,
1. RV Manufacturers:
While a lot of people are focused on Winnebago Industries
as a short opportunity, I see smaller rival Monaco Coach
as a much better short opportunity. Even over the last
three years while a record number of people were buying
homes and feeling flush with cash, Monaco has seen steadily
declining operating and net income. Winnebago's balance
sheet also happens to be much stronger than Monaco's.
Monaco is the BMW of RVs with its cheapest line of RVs
starting at almost $100,000 and higher end models crossing
the half a million mark. High gas prices make these
gas guzzler home-on-wheels highly unattractive even
to the rich folks these RVs are targeted towards. While
Monaco has been slowing working down its inventory over
the last few quarters, it still has $154.97 million
in inventory representing nearly half its current assets.
While I had no qualms
about picking homebuilders like St Joe (JOE) and mortgage
lenders like Countrywide Financial (CFC) as short opportunities,
I do feel a little unhappy about picking Monaco as I
have personally known people who have worked at Monaco
and it is located right outside Eugene,
Oregon, a place I love. However emotion has very
little room in the field of investing and I was planning
on purchasing Jan 2008 or April 2008 $12.50 put options
on Monaco but unfortunately there is very little volume
on those options and the April 2008 options have not
even traded in more than two weeks. Hence to reflect
real world trading conditions, I am going to
instead short Monaco, even though I prefer put options.
Please note that since Monaco has a dividend yield of
1.8%, you will be responsible for paying this dividend
in case you short the stock.
2. Furniture Companies:
Furniture companies are yet another group that
are directly affected by a weak housing. Beyond the
commonly known furniture companies like La-Z-Boy (LZB),
Ethan Allen Interiors (ETH)
and Pier 1 Imports (PIR),
you can also look for short opportunities in companies
like Haverty Furniture Companies (HVT),
Hooker Furniture (HOFT),
Italy's Natuzzi (NTZ),
Furniture Brands International (FBN)
and Cost Plus (CPWM).
From my brief analysis of this group of companies, it
looks like Haverty (HVT)
could fall the most. While most retailers saw same-store
sales increase in August, Haverty saw a sales decline
of 10.1% at stores that have been open more than a year.
3. Staffing Companies:
An interesting event transpired last week when an old
SINLetter pick RCM Technologies (RCMT)
made a two unsuccessful bids for larger rival Computer
Task Group (CTGX).
I sold RCMT from my personal portfolio in two transactions
at $7 and $8.25 on its sudden ascent to $10 in July.
Based on this aggressive acquisition attempt that does
not fall under the category of "diworsification" and
a P/E of just 12.44, I am tempted to start a position
in RCMT once again but am held back by the dismal job
numbers and an economic slowdown, both of which bode
badly for a consulting and engineering company.
If you think this subprime
mess is hurting home builders and mortgage lenders,
check out the action on staffing company Manpower Inc
which has dropped from $92.24 to $63.93 or 30.69% since
the end of June. Competitor Robert Half (RHI)
has fared a little better with a drop of 17.81%. In
the aftermath of the dot com bust, Robert Half lost
more than half its value while Manpower weathered that
downturn much better. I think there is little doubt
that both these companies are likely to fall even more
and could be potential short opportunities. Please note
that while Robert Half has a rock solid balance sheet
with $434.79 million in cash and very little debt ($4.02
million), Manpower is slightly leveraged with $710.8
million in cash and $847.7 million in debt. Manpower
also has an astounding billion dollars in goodwill on
its balance sheet.
However if there is one
stock I would want to short in this area, it would be
Monster Worldwide (MNST), the company behind the job
website Monster.com. The stock has fallen hard in recent
weeks from a high of over $50 to its current price of
$33.50. Beyond a weak job market Monster also faces
tough competition not only from traditional job websites
like Dice.com and Yahoo's HotJobs but also from Craigslist.com
and increasingly from social networking websites like
LinkedIn. LinkedIn is favored by professionals and I
am beginning to see several "LinkedIn exclusive" jobs.
A friend of mine who is looking for equity research
positions also landed an interview through LinkedIn.
I tried using Monster a few months ago and my experience
was terrible. Not only was I inundated by ads every
step of the way, I also received a lot of spam from
people exploiting monster by posing to be employers.
Please note that Monster is as much an internet play
as a staffing play and the company has tons of cash
and investments with very little debt. Since
Monster Worldwide is a highly liquid stock and the options
are available, I am going to purchase Mar 2008 $30 put
options for $2.05 per contract instead of shorting the
Consumers inability to use their homes as an
ATM machine combined with falling consumer confidence,
high energy costs and a drop in non-farm payrolls certainly
spells trouble for retailers. Even retailers like Costco
(COST) and Gymboree (GYMB) have seen their stocks drop
in recent weeks. One potential play would be to short
stocks of companies like Bebe Stores (BEBE) and AnnTaylor
Stores (ANN) while simultaneously buying discount retailers
like Ross Stores (ROST) and TJX Companies (TJX), which
operates the stores T.J. Maxx, Marshalls, and A.J. Wright
in the United States. Beyond a few retailers, I do not
follow the retail sector very closely and hence do not
plan on initiating short positions in this sector.
5. The Russell
2000 Index: With the exception of the last
few months, small cap stocks as represented by the Russell
2000 index have handily outperformed large cap stocks
over the last four years. The recent downward trend
of the Russell 2000 is likely to continue as small companies
are hurt the most in an economic downturn. Office Depot
(ODP) blamed small business spending while announcing
that third quarter earnings will decline by double digits.
The stock has lost almost half its value since early
June. I am going to use the UltraShort Russell
2000 ETF (TWM) by ProShares to short the Russell 2000.
Since this is an ETF, it will not show up under "short
positions" in the portfolio. If you are not familiar
with how the UltraShort ETFs work, check out this article.
stocks or purchasing put options is a highly risky strategy
with the potential of losing your entire investment
and then some. I only utilize it to hedge a portfolio
consisting of long stocks and use very small positions. A half point fed rate cut may also make the markets go up in response
and this short-term event should also be kept in mind.
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 a week, it represents the
closing price as of September 7, 2007.
Model Portfolio - September 7, 2007
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Voluntary Disclosure: I currently
own shares of Airspan Networks (AIRN),
Tata Motors (TTM),
Suntech Power (STP),
and BlockBuster (BBI).
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