Asif Suria's SINL Newsletter: Looking Back At Our Third Year

by: Asif Suria

The first two years of writing this newsletter were a very exciting time with interesting experiences and a lot of interaction with fellow investors, bloggers and subscribers. As discussed in the blog entry Looking Back At Two Years, returns of 106.6% over that two-year period certainly added to the excitement. In contrast our third year was muted and delivered a loss but as you can see below, the loss was much lower than the rest of the market. I would be happy if I can continue to deliver returns like these where our profits are higher than the market on its way up and our losses are smaller on the way down.

Performance Metric Dow S&P 500 Nasdaq SINLetter
Year 1 4.83% 2.67% -6.28% 59.51%
Year 2 20.21% 15.25% 23.92% 29.54%
Year 3 -15.87% -14.39% -10.29% -4.18%
Since Inception (Aug 2, 2005) 6.62% 2.02% 5.26% 98%
Click to enlarge

The Wins:

Every trade done over the last three years can be found in the historical trades section and as you can see we greatly benefited from all the put options we had picked up in 2006 and 2007. Our LEAP puts on trucking company YRC Worldwide (NASDAQ:YRCW) delivered returns of 200% after we held them for almost 11 months. Put options on homebuilder St Joe (NYSE:JOE) delivered returns of 107.14% while put options on Monster Worldwide (NASDAQ:MNST) returned 100% in less than 4 months. Even though I held my LEAP puts on St Joe for 14 months and sold very close to expiration, it felt like in every case I sold a little too soon.

The best example of this was our short position in Oregon based luxury RV manufacturer Monaco Coach (MNC), which we sold short (put options on this company were scarce) in September last year at $12.64. We covered the position in less than four months when the stock dropped to $8.88 and picked up a gain of 29.75%. Our hypothesis on Monaco was spot on as the demand for RVs that cost half a million dollars dried up in the face of declining home prices and $4/gallon gas. With Monaco closing plants recently due to low demand and posting a loss in the second quarter, the stock closed at $2.26 last Friday and we obviously covered too soon.

Other notable wins were closing out part of our position in Suntech Power (NYSE:STP) and Irish medical research company ICON plc (NASDAQ:ICON) for gains of 151.33% and 93.03% respectively. I still regret not selling our entire position in Suntech but then again as you can see from ICON's recent performance (the stock is now up 118.82% in the model portfolio), it is sometimes prudent to let your winners run.

I am also glad I took profits in children's clothing retailer Gymboree (NASDAQ:GYMB) due to weakness in the retail sector and Brazilian aircraft company Embraer (NYSE:ERJ) due to its plans to spend on capital intensive infrastructure projects. Both these stocks are at much lower levels now but ERJ is rebounding on strong demand for its jets and might be worth a second look. However my timing on selling SanDisk (SNDK) at $55.1 for a gain of 14.55% was either divine providence or just dumb luck. The stock how rests with the fishes at $14.36.

The Losses:

Weakness in financial stocks prompted me to close out our position in British banking giant Barclays (NYSE:BCS) at $55.8 for a tiny gain of 3.22% over an 8 month holding period. I also closed our position in Indian automobile company Tata Motors (NYSE:TTM) at $19.7 for a nice gain of 64.99%. The reason I list these trades under the losses section is because I picked both stocks up again when Barclays declined to $42.27 and Tata Motors dropped to $17.52. The SINLetter model portfolio now shows paper losses of 35.46% in Barclays and 45.66% in Tata Motors. I was bottom fishing in the financial sector a little too soon with Barclays and made the fatal mistake of not paying enough attention to the debt Tata Motors was taking on to finance its purchase of Jaguar and Land Rover from Ford (NYSE:F).

Do I dare say that Tata Motors looks very attractive at these levels with most of the capital spending required to develop its $2,400 revolutionary Nano car behind it, its acquisition of marquee brands such as Land Rover, its plans to launch a car that runs on compressed air in 2009 and a potential partnership with Chrysler to sell Jeep Wranglers in India. The old Willys Jeeps still hold a special place in the hearts of many Indians and introducing the Wranglers in India is a brilliant idea.

We also sold our positions in WiMax equipment provider Airspan Networks (AIRN) and student travel company Ambassador Group (NASDAQ:EPAX) for steep losses of 68.68% and 38.35% respectively. While I did not anticipate the extent of the impact a weak economy would have on Ambassador Group, which lost half its value on a single day after issuing a cautious outlook, the mistake with Airspan Networks was the classic mistake of investing in an emerging technology too soon.

Hopefully I will learn from these losses and avoid the four key mistakes of ignorance, greed, fear and hope in the years to come.