Full Disclosure Finance

By Andrew,

In a recent post I wrote about the deep-in-the-money calls option strategy. In the post I used Microsoft (MSFT) as an example of how to implement the strategy. Calculating the ‘premium’ based on the current stock price, the strike price, and the option cost we found that the July 2008 $24.00 calls (MSQGD.X) looked interesting. Using my paper trading account at Investopedia.com I set up an order to purchase 10 of the July $24.00 calls for a price of $5.90 or better. Microsoft’s stock took a bit of a dip on the day I placed my order and I ended up getting the calls for $5.15…even better. Unfortunately Investopedia doesn’t support good-till-canceled limit orders and I don’t have access to streaming option quotes so I’ll have to stay on top of the price action to see if it hits our target. Once the price of the calls reaches $6.15 we will assume that our sell order was executed locking in the $1000 gain. The calls are already at $5.70 meaning we are more than half way to our target. Since my ‘purchase’ the stock has only moved 2.1% while our calls have moved 10.7%…talk about leverage. I’m starting to see why options are so popular.

Stay tuned for more updates on our strategy experiment as well as other potential candidates that may fit the bill for deep-in-the-money calls.

By Andrew,

In a recent post I commented on the Visa (V) IPO and how I thought you should play it. The post was also published on Seeking Alpha, which is a financial site that publishes stock related posts from various blog sites and individual contributors. On the Seeking Alpha post a number of readers have left comments giving their two cents on Visa as a stock purchase. As you can expect the overwhelming majority of these comments are bullish. Considering that Visa was one of the most sought after IPOs in US history, this isn’t surprising. What was surprising was the over-the-top blind faith by some readers that Visa stock would do nothing but rise in value. Take a look at some of these comments…

“If you have a 3 year or longer horizon, this is a great entry point! It will trade at $200 in 3 years or less. If you are a trader, you will see choppy waters short term; after all, all the banks in deep capital need will sell to raise capital.”

Alright, so I agree with this reader, you probably will see choppy trading in the short term and with a 3+ year horizon this may be a very good entry point. But considering the hype around the IPO why not wait for this one to come in a bit before building your position? And the $200 price target is completely baseless. This next one is even better…

“i am 18 and bought about 1200 dollars worth at 59.5 and i think by the end of the year this stock will have a fair value of $80. with VERY little risk and a lot of upside earnings growth and the possibility that down the road visa europe will join the company there is too much upside to be had not to get in now.”

I’m not sure where this reader comes up with the $80 valuation or the upside earnings growth considering at this point we have very minimal visibility into the financials or growth projections at the company. And saying that there is VERY little risk in a market as uncertain as this one is dangerous thinking to say the least. Here’s my favorite…

“This is definitely a great stock to invest in… It might go up and down for a few days, but in the matter of a few months, maybe a few years, it will definitely be well over $200.00″

Again the $200 price target, and possibly in a matter of a few months none the less. Maybe the reason that these readers are throwing around the 200 handle is because MasterCard (MA) is currently trading around $220. Just because these two companies have the same business model does not mean that Visa is going to follow what MA did post-IPO. There are a lot of other factors that investors must consider and I don’t think the casual, first-timers realize this. When investors make investment decisions based on sentiment and blind statements like these, essentially what they are doing is gambling. Investments must be made on sound homework into the fundamentals of a company; anything else is downright dangerous. I’m not knocking Visa here, these readers may very well be right. But if you are going to pitch a bullish outlook in a stock you better be able to back it up with logical arguments. Do your homework before you put any money down and make sure you understand the whole story. Because the risk that comes with making decisions based on a lack of information can turn the VERY little risk that our reader talks about into a poor investment in a hurry.

By Justin

I’ve heard varying opinions on the Rent vs. Buy topic. These opinions come from people with all types of education (financial and otherwise) and all levels of income. One will say “We bought because a house is the best investment you can make”, while others will back it up with “We bought because we were throwing money away by renting”.

The rent crowd looks to maintenance, utilities, and taxes (those other fees that come with owning!) when they say that “You’re throwing away money paying operating costs which can be almost as much as my rent”. One friend who is financially savvy rents because it gives him more cash (from reduced expenses and use of savings) to use in the markets. He figures he can beat whatever return a house/condo would provide. Whether he actually does I am not privy to.

There are valid points on both sides, but the argument still hasn’t been settled once and for all.

Firstly, I’m going to be like every other person that has touched this subject and say that the answer (Rent or Buy) will be different for everyone because there are too many variables to issue a blanket answer. However, I don’t intend to cop out and leave it at that. There are some clear principles one can use to make a decision.

Key Variables affecting the Rent vs. Buy decision:
• Level of Financial Education
• Plan for Savings
• % Down Payment
• Property Market
• Stock Market
• Nature of Income
• Location

Let’s take a look at the parameters and discuss how they could impact your decision.

I will use a scorecard approach to each variable, assigning points based on your status. Add them up and compare your score to the chart in the final post in this series. It should give you an idea about what option would be better for your situation.

1. Level of Financial Education:
I think this one is obvious, but it is definitely worth explaining. The Rent vs Buy decision hinges on your ability to do something with your savings to earn a decent return. If you consider dumping it into a GIC to be a “good move”, this is a signal that buying is probably right for you. Here’s why:

GIC: Assume a GIC will be paying 5%, I’m feeling generous. So you rent and take your down payment money (assuming 20% of purchase price if you were to buy) of $50,000 and put it into the GIC. After year 1 your GIC is worth $52,500, for a gain of $2500 (5% return).
Condo or House: You use your $50,000 to purchase a house worth $250,000, leaving you a $200,000 mortgage. Assume your house appreciates at 5% (make this most accurate by researching property price increases in your area for the previous quarter) After year 1 your house is now worth $262,500 for a gain of $12,500 on your investment of $50,000 (25% return).

Comparison: The return on your money is 5 times higher by buying the house. Now, the gain on your place of residence is tax free, so your return is even higher relative to the GIC gain which is fully taxable as interest income.
But you’re not done yet. This is where the homework comes in. You need to subtract all of your related expenses from these gains.

GIC: Subtract your rent, tenant insurance, and any other expenses not common to buying a house. For example, don’t subtract internet if you will be paying the same for it whether you rent or buy.

Condo or House: Subtract your mortgage, taxes, insurance, estimated maintenance cost, and utilities.

Now compare the GIC and Condo or House numbers, which now don’t look nearly as good!

For fun, project the numbers out for 5-10 years to get an idea of their behaviour over time. Does this change the scenario?

Some people with a high level of financial education will look at a housing purchase as tying up a large portion of their savings. Putting $50,000 -$100,000 in their home (although you could likely convince your bank to let you take out some equity in your house if you really wanted to get into an investment) eliminates their ability to participate in other investments.

If you’re likely to use the money to buy some deep in the money calls, a great dividend stock, or want to put money into a company with a great long term story (see Sandvine, SVC:TSX) you may be able to generate a great return.

Let’s say that Johnny or Jane expert averages 25% a year for a 3-5 year period. Are they better off renting? Well if we take the $50,000 and it generates 25% in year 1 we would have $62,500 for a gain of $12,500. This would be a capital gain, so therefore taxed at half of your personal income tax rate.

If you bought a house for $250,000 as in the above scenario and it appreciates at 5%, you end up with a gain of $12,500 also.

Therefore, you would need a gain greater than 25% a year on your non-house investment, but accounting for the capital gains tax you will pay upon sale (30% bracket) 15% of the $12,500 in tax. This is equal to $1937.50 and decreases the return from 25% to 21%.

It would seem that you need to be realistic with your investment performance.
In order to match the gain on a property by using an investment, here’s a quick guideline:

E.g. Property Appreciation Rate (P) = 5%, Income Tax Rate (I) = 30%, Down Payment Amount (D) = 20% Required Rate of Return on Other Investment (IRR)=?

So to calculate the rate of return required to keep up with a house we do:
IRR = P / (D/100) / (1-(I/2))

For the example, you would need a return of 29% to equal the return on your house purchase. This would take a high level of financial education.

Scoring: 1-5 Give yourself a 1 if you think a high interest savings account is a great place to put your money. Give yourself a 5 if you can read a financial statement effectively and have successful experience with a variety of investment products.

Stay tuned for Part 2 where I’ll get into Plans for Savings and % Down Payment and how they will impact the Rent vs Buy decision.

By Andrew

Any good investor knows of the numerous options strategies available to them, but few have a strong understanding of how they should be used. There are so many that it is tough to get a good grasp of them all. Options can be very powerful investment vehicles because they provide leverage compared to owning individual stocks. I’ll be the first to admit that my options knowledge is limited. But the goal of this site is for us to broaden our investment knowledge and hopefully educate you in the process. The more weapons you have in the arsenal the better positioned you will be to profit in any market environment. So today I wanted to talk about an options strategy that I do understand. Deep-in-the-money (DITM) calls.

I first read about this strategy in a column by Lenny Dykstra on TheStreet.com…as in three time All Star Lenny Dykstra of the 1986 MLB World Champion NY Mets and 93 National Champion Phillies. A call is said to be in-the-money when the strike price is below the current share price of the underlying stock. If the strike price is above the current share price the call is said to be out-of-the-money. The idea with deep-in-the-money calls is to look for companies with solid fundamentals that have been overly punished for one reason or another. If the decline is overdone or unjustified one can get in-front of the eventual correction by buying the calls at a discount and cashing in as the stock bounces back. Because the calls are leveraged to stock price, any moves in the underlying stock will be captured by the price of the calls. The options are purchased 4 to 6 months out, leaving plenty of time for the required move to materialize. In Dykstra’s strategy he calculates a premium to screen potential purchases. To get the premium for an option you take the strike price for the option, add the price of the call (its premium), and subtract the stock’s present value. A stock with a premium of $1.00 or less is considered to be a good buy. Say for example you found a call option with a strike price of $24 for a stock that was currently trading at $27.50. This means that you would be willing to pay up to $4.50 for that specific call option ($24 + $4.50 - $27.50 = $1.00). Once you find a stock that meets these requirements a good-till-canceled (GTC) limit order is placed for 10 options at the target price. Options can be very volatile so to be successful in this strategy you need to stay on top of your open positions and lock in profits when you have them. Once the order has filled you can place another good-till-canceled limit order at $1.00 above the purchase price ($5.50 in the above example). If the stock moves and the call price goes up by $1.00, a profit of $1000 is locked in by the automatic limit order. In our fictitious example above you only need to put down $4500 to purchase the 10 calls, but because each call represents 100 shares you are actually controlling 1000 shares of the underlying stock. The capital required to purchase 1000 shares of the common stock would have been $27,500. This is called leverage. By putting down $4500 and locking in the $1000 profit you are leveraging the underlying stock for a 22% gain.

Let’s look at a real world example. Microsoft Corp. (MSFT), along with many of the other big cap tech stocks, has been on a slide since the beginning of the year. It was a $37 dollar stock as recently as November, but has gotten punished along with the rest of the market. It has recovered slightly (closed March 25th at $29.14) but is still at a significant discount, trading at 16.58x trailing earnings and 13.88x forward earnings. The company’s past two quarterly earnings announcements have been stellar and there is no reason to believe that trend won’t continue through 2008. The July 2008 $24.00 calls (MSQGD.X) are currently priced at $5.90, which gives us a premium of $0.76 ($24 + $5.90 - $29.14 = $0.76). Going out to July gives us 4 full months to get the required bounce in the share price. To utilize this strategy we would place a good-till-cancelled limit order for 10 of the July $24 calls at $5.90 (requiring a capital investment of $5,900). Once the order fills we will immediately place another good-till-cancelled limit order to sell the calls at $6.90. If we get a move in MSFT that boosts the call price to $6.90, the order will automatically execute to lock in our $1000 gain (good for 17%).

I’ll keep you posted on how this pick works out as well as any other opportunities that I stumble across.

By Andrew

The Dow was down nearly 300 points today lead by commodities with Gold making its biggest drop since June of 2006 and Crude Oil down nearly 5%. Yet Wall Street still managed to pull off the Largest IPO in US history. Late Tuesday Visa (V) priced the 406 million shares of their Initial Public Offering at $44 per share, raising $17.9 billion in the process. This morning the stock made its market debut at $69 before trading a whopping 177 million shares on the day. The stock cooled off slightly as the day went on but still closed up an impressive 28% at $56.50. Great news for the lucky few who were able to get in on the IPO, but for the majority average Joe investor how do you play this. Well, you could have bought in this morning and then lost 18% on your position…probably not the best strategy. Or you can sit back on the sidelines for a while until you can evaluate this company in more depth and figure out what direction the market is going to take this stock. Everyone wanted a piece of this IPO today hoping that they were getting a piece of the next MasterCard (MA), which is up over 350% since its IPO in May 2006. There was no way that it was going to be able to hold up the highs from this morning trading 177 million shares, especially in the tape we saw today. If you want to play Visa, wait for the stock to come in a bit before you start to build a position. And buy in small blocks so you can lower your cost basis if the market gives you the opportunity. At this point there isn’t much data on the stock in terms of revenue, income, cash flow, or prospective top and bottom line growth. As with any stock you should do your homework and evaluate the fundamentals before making a final decision.

Visa makes money through transaction fees which are cashed in every time a cardholder makes a purchase. And with more and more people paying for non-discretionary staples such as gas, groceries and household bills with their credit cards, Visa has been able reap the benefits. Throw in the steady growth in online shopping, which almost always requires a card, and you’ve got the makings of a winning stock. Unlike the lenders that issue the cards, Visa is well insulated from credit problems because they don’t carry any consumer debt on their books. Visa posted revenue of $5.2 billion last year as it handled more than more than 44 billion transactions (far ahead of rival MasterCard). For the Q1 2008 Visa grew earnings by 70% compared to the previous year and management anticipates year-over-year earnings growth of at least 20 percent for the next two years. I’ll be interested to see what valuation the market is going to give this stock once more data is made public. I’m guessing the P/E ratio will be fairly steep due to the hype surrounding the IPO and this business model in general.

As a side note, this IPO is also extremely bullish for the investment banks that brought Visa public. The team, lead by JP Morgan (JPM) and Goldman Sachs & Co. (GS), is expected to collect more than $500 million in fees from the IPO. JP Morgan is a double winner as Visa biggest customer and shareholder. Look for both of these investment firms to generate huge payoffs from this massive deal.

Disclosure: None

By Justin

I have been examining some more real estate deals lately and am back in a situation where I am debating putting 5% down to get into a deal with lots of upside.

This may or may not be a great idea. As part of my due diligence, and to learn from my past experiences, I want to analyze my potential rates of return with varying down payments.

The basic principle for mortgage insurance on investment properties still applies: Do your best to only borrow 80% of your loan value from your primary lender. Use a combination of your down payment and another source for the other 20%. This will avoid mortgage insurance in the first place. However, this is not an option for everyone. We don’t all have friends and family or a large line of credit to borrow from.

Here’s the key data on the place:

Purchase Price:$250,000
Closing Costs: 2.5% of purchase price
Initial Investment for Renovations: $10,000
Maximum Potential Selling Price in 6 months: $300,000

Expenses for Sale:
Real Estate Fees (5%) = $12500
Mortgage Penalty for Early Sale = $1500
Misc (Legal / Insurance) = $900

Alright, so I first analyzed the Cash on Cash Return resulting from a purchase with varying down payments.

• Cash on Cash Return = Annual Net Income / Down Payment

Some people also include closing costs and renovation expenses in the denominator. This will decrease your Cash on Cash Return, which is fine because COCR is only useful for comparison. For this example, my net income included all estimated expenses (taxes, utilities, insurance, mortgage).

The breakdown is as follows:

As you can see, a lower down payment results in a higher COCR. Despite the higher mortgage payment and lower monthly net income, putting less money down gives me a higher rate of return.

This favours a long term hold approach where there are no clear plans to sell.

Lesson 1: If you plan on holding for a while, favour a lower down payment.

Next, I examined a potential quick sale resulting from some renovations to increase the value. These renovations would be performed either way, but I would have the option to sell if I choose.

I analyzed varying down payment amounts with the sale. I also altered the length of sale because this would influence the amount of cash coming in (from rent) and the return on investment.

The chart clearly shows that ROI is reduced with both time and a lower down payment. This contradicts the COCR analysis because the highest return comes from a high down payment. The time component is obvious because, even including appreciation of the property, when the shorter sale’s profit gets annualized its multiplier is relatively large.

Lesson 2: If you plan on selling quickly, and will be paying mortgage insurance, a higher down payment is best.

Now I have two lessons to guide my investment property purchases.

I will work to unify these two approaches to allow for a “governing” principle over down payment amounts. However, I think this is a good start and it will guide my decision making over the next few weeks with regard to this property.

By Justin

I’m always interested in new equipment that is cost-effective (provide a decent payback period) and better for the environment. Let’s face it, most of us will talk the green stuff until we’re blue in the face but won’t adopt until it actually impacts our pocketbook. There has been plenty of research to back up this claim but we are finally starting to see some great products that you can feel good about buying.

Not exactly the most glorious piece of equipment, but we all have a water heater. Until recently, I didn’t think much of a water heater because they haven’t changed a bit. Until now!

I’ve discovered the tankless water heater and pretty soon we’ll all have them in our homes and cottages. These save money and space and last twice as long as tank models. In North America, these things haven’t been overly important until now. However, it appears tankless water heaters have been used in Europe and Asia since the Second World War.

Here’s the old water heater (left) beside a tankless model:

Many companies with solid reputations such as Bosch are producing these water heaters. They are also being sold by the likes of Home Depot. The residential market is great for these products because you can literally walk into the store and order them like a cup of coffee. If you are a commercial customer requiring larger units, often they are not stocked by most retailers. In that case, you’ll be searching the net to look for someone to serve you or you can ask your local HVAC outfit. I don’t have any good references, so I would just be giving you the results of a Google search if I linked anything.

So, these new gadgets save some space right? I can hear you saying “I’m not sold yet”. How do lower energy (gas / hydro) bills sound? How about a longer operating life?

Here’s some details to back it up.

Heating water consumes an average of 30% of our total energy bills.

Moving to gas will incur higher capital costs, but operating costs will be reduced by 50% compared to electric models. This principle applies for tank and tankless models.

Tankless water heaters use a minimum of 20% (up to 40% depending on usage, high usage will save more) less energy for gas-gas / electric-electric comparisons. When you start to look at changing from an electric tank to a gas tankless the operating cost savings can be as high as 60%! Keep in mind that it is difficult to obtain accurate numbers because most of the people providing them sell tankless water heaters. Consumer Reports is a good source for reviews on most products, but they only have two related articles with limited detail.

I have summarized some of the best info I could find in the table below:

As you can see, capital costs are higher but operating costs are lower for tankless models. After you factor in the extended life of the tankless versions (and calculate the actual capital cost / year of operating life) payback periods shrink to less than 1 year for gas and electric. If you won’t be owning the model for its entire operating life, the payback scenario changes. For a gas tankless vs. tank comparison you would get your money back after 11 years. Electric tankless vs. tank will get your money back in less than 3 years.

The length of time you plan to use the water heater will obviously influence your decision in the above cases.

Bottom Line: If you plan to stay in your house for a while go gas tankless. Even though the payback versus gas tank would take 11 years, compared to either electric model you’re still way ahead.

If you have installed a tankless system I would appreciate some feedback on the ease of installation and whether the promised savings have materialized for you.

By Justin

You may have heard about the good news handed down in the recent federal budget by Finance Minister Jim Flaherty regarding a tax-free savings account.

This is good news by the way! Big business was looking for more, but a tax free savings account was long overdue considering the US has had the Roth IRA since 1998. Many other good ideas have been published in recent editorials, but most of these debate the merits of this program relative to other options. This minimizes the importance of putting something in place to shelter gains for the average Canadian and generate more action from the retail investor.

The new Tax Free Savings Account (TFSA) differs from a Roth IRA in the following ways:

1) Roth IRA withdrawals are tax free once you turn 59.5 years old and you have had the account open for 5 years. The TFSA provides full flexibility to withdraw and contribute, at any age, in any amount.
2) Annual contribution limits for the TFSA do not depend on age, whereas the Roth has higher limits for those 50 and over.

Here are more details on the TFSA as they apply to Canadian citizens:

• Canadians 18 and older can contribute a maximum of $5000 per year.
• Contributions are not deductible for income tax purposes, however, all capital gains and investment income earned in the TFSA are NOT TAXED.
• Unused room can be used in the future. For example, if you contribute $2000 in one year, you then have $3000 of room that can be used in any future year. The next year you could put in $8000 if you wanted.
• Funds can be withdrawn and put back in at any time without affecting your contribution limit.
• You are allowed to contribute to a spousal TFSA.

Okay, the verbiage is officially over. What does all of this mean? Who does this account favour?

This means we now have polar opposite investment vehicles, as seen in the diagram below:

In terms of who will get the maximum absolute benefit, it will be those in the highest tax bracket. This is because their personal tax rates are highest (as high as 46.1%), so they would be saving the most with a tax free account.• Investments with interest income are taxed at the maximum rate (your personal income tax rate). Interest income can come from GIC’s, bonds, high interest savings accounts, and private loans. Some income trusts classify part of their distribution as interest income and part as a dividend.

• Dividends received from foreign companies are taxed at 100% of their value rather than being grossed up by 45% and then subtracting a federal and provincial dividend tax credit. Therefore, foreign dividends are also some of the highest taxed investment products.

A TFSA offers greater savings for these investments because you pay a higher tax rate and would therefore have greater savings.

In terms of relative tax savings, it would be useful for everyone to put their investments that incur the highest level of tax in their TFSA. However, the analysis is complicated by the fact that one would contribute to both the TFSA and RRSP.

Anything you put into your RRSP will be taxed at your personal rate when you withdraw. This means capital gains, dividends, and interest income will all be treated the same upon withdrawal. Therefore, if you are choosing between putting something into your RRSP and your TFSA, it doesn’t make much difference what the taxation rates are on the investment types. It then becomes a decision of whether you want the tax savings now or later and if you have enough to maximize both accounts.

Small Business Owners: Here’s a little tidbit to leave you with. If you’re the owner of a small business and you’re paying yourself a dividend, not a salary, to keep your tax payments down, you won’t build up RRSP contribution room (because it is based on earned income). This means your RRSP contribution room will be small or non-existent and the TFSA could then be your only option.

I’m still learning more about the best strategy for the TFSA versus RRSP if you plan to contribute to both. Look for more on this topic from the major Canadian business magazines and us at FDF.

By Andrew

In my last post I disclosed a holding in Sandvine Corp. (SVC.TO) and had promised a full fundamental analysis on the company. Well it was a rough week last week for shareholders of Sandvine. On Thursday Sandvine announced that they were cutting their 2008 revenue forecast to $80-85 million from the previous $100-110 million. The stock has fallen 62% since, closing today just over $1 per share. The adjustment came less than three months after Sandvine originally issued 2008 guidance ($100-110 million) which fell below consensus analyst estimates. The original announcement caused a significant decrease in the share price and, in my opinion, created a great entry point into the stock. But now after the most recent development I’m on the hook for a 70% decline in my position relative to where I bought in. Obviously my great entry point wasn’t so great after all. In my defense, my sentiment on the stock being cheap around $3 was echoed by a number of other individual investors including Justin, our friend Jeff McLarty over at Blue Moat, and a number of people we spoke to at Sandvine. Most of the analysts covering the company held similar bullish views including Scotia Capital who upgraded SVC to 1-Sector Outperform on March 3rd and Canaccord Adams who reiterated their buy on weakness on March 5th (the day before the revenue cut). I’m not stating this to justify my mistake. However, I am confident in saying that not many people saw this coming.

If you think about the reasons Sandvine stated for the adjustment it does seem logical and maybe that means that we should have seen it coming and been more cautious. In the announcement Dave Caputo, the CEO of Sandvine, stated that customers are taking longer to make decisions due to weakening economic conditions. Basically what he is saying is that the the credit crisis and subsequent slowdown in the US and global economy is starting to affect them being able to do business. In today’s market even hinting at the fact that your business is going to be negatively impacted by the weakening US economy is essentially the kiss of death. It is widely accepted that the US is probably already in the middle of a recession and there is a huge surge away from the ‘recession-affected’ and into the so called ‘recession-proof’ stocks. The equipment that Sandvine sells to Internet and wireless providers is a purely discretionary product at this point; it is a proven great technology but not essential for everyday business. So when things slow down and these providers are looking for ways to trim their budgets, spending $25 million on non-essential equipment probably isn’t at the top of their lists. Add to that the whole Net Neutrality issue and you’ve got the makings of a true battleground stock.

SVC is currently trading at a P/E multiple of just 7.6x trailing earnings. If the company can keep earnings relatively flat in 2008 and then continue growth in 2009, assuming the US economy has turned the corner by that point, the shares are very cheap purely on a valuation basis here. The company expects to do $8.2 million in revenue in Q1. To hit their estimates they will have to make up the remaining $72+ million in the final three quarters of 2008. This means they expect business to ramp towards the end of the year. Going into the slowdown Sandvine was well positioned to be the industry leader when it came to Deep Packet Inspection (DPI) technology. I believe that when the economy turns around and more providers adopt this technology, which they will eventually, Sandvine will still be positioned to be the industry leader. I remain bullish, albeit a bit more cautious now, on the stock and will probably add to my position to bring my cost basis down. I do believe that the most recent development is very negative for the stock in the short term. However, I believe the long term story remains intact. If you want to be long this stock I think you need to update your timeline from a 2-3 year timeline to a 3-5 year timeline at least. If nothing else, at these levels I have to believe that some of the major players in the Internet networking industry (Cisco anyone?) will be taking a close look at Sandvine as a potential takeover target to get a foot in the door of this emerging technology.

So that’s all for now on Sandvine. I’ll keep you posted on any new purchases or changes in the story.

Disclosure: Long Sandvine

By Andrew

Its been a while since my last stock purchase update, so I wanted to bring everyone up to speed on my current holdings. I’ll state the number of shares, the purchase price of the stock, and a brief justification for the purchase.

1. 50 shares of Research in Motion (RIMM) @ $87.03

This holding was actually a gift I recieved at Christmas this year (thanks Grandma!!). I took control of the shares in my TradeKing account on January 17th, 2008. The $87.03 per share was the price at the close on the 17th, which is kind of arbitrary since the stock was a gift and technically is 100% profit. I’m still not completely sure how I handle this stock for tax purposes if I were to sell.

The Waterloo, ON based company sells the wildely popular BlackBerry smartphone, which has become the industry standard mobile phone, email and internet access device for corporate North America. They are starting to gain market share in the personal-use wireless space and recently signed a deal with Alcatel-Lucent to sell the BlackBerry in China. The mobile phone market in China is enormous and RIM has the potential to eat up a boatload of that market share once the BlackBerry starts shipping. On a valuation basis RIM is actually pretty expensive, trading at 57 times trailing earnings. However, they have earned this rich valuation due to their rapid rate of growth. Revenues are growing at 40% year-over-year and their expected 3-5 year EPS growth rate is an unbelievable 70%. The company recently announced that they expect to sign 10-15% more subscribers in the current quarter than originally expected. As long as RIM continues to exhibit strong domestic and international growth I believe that they have the potential to generate some great returns.

2. 20 shares of ConocoPhillips (COP) @ $75.35

In today’s market no portfollio is complete without some type of energy stock. ConocoPhillips is an integrated oil and gas company that operates in six different segments: Exploration and Production, Midstream, Refining and Marketing, LUKOIL Investment, Chemicals, and Emerging Businesses. They are a diversified energy company with exposure to all segments of the oil and gas industry from exploration to marketing. In addition, their exposure to natural gas helps insulate them from being tied to the price of crude oil. ConocoPhillips is very cheap on a valuation basis, trading at less than 9x trailing EPS and 7.8x forward earnings, compared to an industry average of 11x and 24x trailing and foward earnings, respectively. Even if the demand for oil slows in the US (which I have my doubts about), the worldwide demand, especially in the developing nations, is just too great not to have some type of oil and gas company in your portfollio.

3. 25 shares of Biogen Idec (BIIB) @ $60.00

Biogen Idec is a biotechnology company which engages in the development, manufacture, and commercialization of novel therapies in the areas of oncology, neurology, immunology, and cardiology. The companies comercial drugs include AVONEX and TYSABRI for the treatment of multiple sclerosis, RITUXAN for the treatment of non-Hodgkin’s lymphomas, and FUMADERM for the treatment of psoriasis. In addition, the company has a very solid pipline with 5 Phase III and 1 Phase II clinical trials for drugs under development, as well as a number of preclinical stage projects. The difference between Biogen and most other biotech companies is that Biogen is actually making money. Biogen has shown strong double diget year-over-year revenue and EPS growth and trades at a modest 22x earnings. In October, Biogen announced that it was putting itself up for sale to the highest bidder. The news sent the stock soaring nearly 20%. Two weeks later Biogen called off their search for a potential suitor saying that they didn’t generate any serious interest. In a classic market overreaction, investors pumbled the stock sending it 20% lower than where it was trading before going up for sale. This created a great entry point into an undervalued stock. Nothing had changed at Biogen Idec in the two weeks that it was up for sale but the stock was trading at a 20% discount. And with Big Pharma looking for ways to bolster their lagging piplines and activist investor Carl Icahn increasing his stake in the company, Biogen remains a potential takeover target. The stock is still trading about 10% lower than where it was at the beginning of October, and is still undervalued in my opinion.

4. 560 shares of Sandvine Corp. (SVC.TO) @ $3.53

Sandvine Corporation is a Waterloo, Ontario based company that develops and markets broadband network management equipment and solutions for broadband service providers. The Company’s network management equipment and software solutions help broadband service providers identify, monitor and apply policies on network traffic. Sandvine is a local Waterloo company that Justin and I first started following through a number of friends who work there. We’ve both owned stock since shortly after they went public and have followed it fairly closely, including going to a shareholder’s meeting. I’m planning on doing a full analysis of Sandvine in an upcoming post, so I write any more on that here. But check back soon for my Sandvine post.