Annual Checkup -- WFR

Well, this looks like a reasonable company to examine today, thanks to the killjoys at Morningstar. MEMC Electronic Materials (WFR -- free RT streaming quote & portfolio tools) has had a very good year as their c0meback bid truly took hold amid a good market for their products. My shares were purchased back in June at an average price of $16.25, which seemed like a bargain even after WFR's 50% run earlier in the year, and now Morningstar has come out with a report pegging them as one of the more overvalued stocks on the Street (to be precise, they say WFR is trading at 328% of its fair value). Their complaint is that MEMC is in a commodity business (the supply of silicon wafers -- they're one of the top three or four worldwide suppliers, and the only big US one), and that their industry is very capital intensive and subject to significant downturns. All quite possibly true, though there are competitive advantages to be had in wafer design and production, as well as competitive pricing possibilities. One of my arguments when I first purchased shares in MEMC was that their capacity to produce their own polysilicon, which is in high demand from both the solar energy and semiconductor industries, might give them a bit of a pricing advantage over their competitors -- they don't need to buy polysilicon at high prices on the spot market. I wrote a bit about WFR back in November when their shares made a big turn, and it's been up up up since then. With semiconductors still on a tear and the solar power industry gobbling up all the silicon it can find, I still like WFRs prospects even if the price may have gone up a bit too far, too fast. I wouldn't be too surprised to see a minor selloff at these prices, but I think with chip manufacturers working at capacity WFR should still see a good market and good prices for the coming year ... no reason to sell, in my book.

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Annual Checkup -- PANL

I have hardly written about my investment in Universal Display (PANL -- click to register for free RT streaming quote) at all during the six months or so that I've owned it. I bought this one initially on a newsletter recommendation from the Motley Fool, and though it's extraordinarily speculative even in comparison with my other holdings I still like the company. My average purchase price is just a couple cents under $10, so I'm sitting on a nice little gain -- especially after today's news-related advance to near $13. PANL has moved wildly up and down on news, and the news has generally been of two varieties for this investment in LED intellectual property -- news related to government contracts and to possible products using their technology, and news about their scientific advances. Today's move and the other recent one that I mentioned briefly back in August are both related to the science of organic light emitting diodes (OLEDs). As with all other displays, OLEDs require a combination of core colors to display a full spectrum -- and the recalcitrant color that they've been trying unsuccessfully in recent times to produce has been blue. PANL produced a short-lived sky blue in August, and today announced a much longer lived (and therefore commercially viable) sky blue as well as an advancement in developing a richer hue of blue (sky blue is a big advance but isn't that useful -- a deeper blue is required to display a full enough spectrum to make a display viable). So cleary the science is going well, and PANL is on it's way to making it possible to create a completely-OLED display in the relatively near future (they've had to use regular LEDs for the blue so far). They've also gotten some more government contracts to study low-power LEDs for lighting (not display) and develop OLED screen technology for military applications, which is a nice way of funding their continuing R&D (this is not unlike SpaceDev's strategy, by the way -- use government contracts and grants to fund your R&D with an eye to commercial products being built based on the science you develop using those funds). Since their relationship with Samsung and other display manufacturing partners has not yet advanced to the product deployment level to any serious degree, and there are many competing technologies in this quickly changing space, I consider this to be a very long shot -- I'm not planning to invest any more in PANL in the near future, but I like what I've seen so far and I'm willing to hold this for some potentially dramatic returns several years down the line.

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Annual Checkup -- LGF

It wrote a bit about Lionsgate (LGF -- free portfolio tools and RT quote) a few weeks ago when the CEO said some things that weren't so entertaining. Not a lot has changed since then -- LGF still has a bright long term future, I believe, and they seem to be committed to refocusing on their strengths after making some mistakes with overspending on promotion for disappointing star vehicles this past year (thanks for nothing, Nicholas Cage and Usher). The big news since they downgraded their guidance is twofold: Hostel and Starbucks. Hostel took the concept of "American backpackers in European trouble" that so entertained back in the American Werewolf in London days and added about a thousand gallons of blood and gore, to great success. Hostel won the weekend box office for LGF last week, just as Saw II did a few months ago. And Starbucks and Lionsgate have agreed to comarket and codistribute Akeelah and the Bee, which could dramatically increase the audience for that film. While Akeelah is likely to get a lot of attention with this deal, its "inner city spelling bee" subject is a little cleaner than LGF's recent hits like Hostel -- these horror (analysts call them "genre") movies, cheap to make and popular as all get out, are clearly the way to go for almost-guaranteed profitability at the box office. Sprinkle in a few critical low budget darlings every year, and some cheap TV shows that get a lot of press, add a dash of children's programming that advertisers crave, and top it all off with a library of thousands of films and TV shows that are prime content for the VOD and next-generation DVD arena, and I think LGF looks great for the next few years (for dessert, you might look at the ongoing rumors about consolidation and see a nice buyout offer for this tantalizing studio and library). I bought my shares at an average price of about $10.50, so I'm still significantly under water, but I'm holding and I continue to think we'll see some great performance from Lionsgate over the long haul ... even if we have another tough few quarters.

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I BS, UBS, We all BS (UBS)

I was actually a little surprised to see that I opened a position in UBS (UBS -- free RT quote) yesterday.

After writing last week that I was looking for a large-cap company to add to my portfolio, one that would be more stable than my current holdings but that would still be capable of some solid long term growth, I thought about it over the weekend and decided it would be either 3m or UBS that I invested in, and since UBS has been on an uptrend lately I put in a limit order at $101 just in case it dipped a bit for me. I didn't think it had, but apparently for a few minutes on Tuesday morning it hit 101 and I picked up a few shares.

So, surprise surprise, I bought UBS on January 10 at $101.

Though I was surprised, I'm happy to have this company in my corner. UBS is selling at nearly as low a value price as the big US banks, and certainly at a discount to most of the other big integrated financial services companies who have significant private banking and asset management operations. Several of the mutual fund gurus that I respect have UBS positions and make a compelling argument for it's growth prospects, including Bob Smith at T. Rowe Price Growth Stock and the Calamos guys among many others. I do regret that I didn't make this decision at the end of last year, before it had it's recent 10% runup, but in the long term I think this is a fair price to pay.

UBS is a combination of a lot of things, and probably one reason it's not selling at a higher price is the integration struggles they've had over the past couple of years. UBS is the biggest bank in Switzerland (after buying Swiss Bank) and runs the world's largest private bank, but it also runs a (formerly Warburg) investment bank and a big (formerly PaineWebber) brokerage in addition to doing asset management work around the world. You've probably noticed that you see the UBS name around a lot more lately, and that's because they've rebranded all of these businesses under that single moniker.

What appeals to me about UBS is it's international presence, and particularly it's presence in Japan and elsewhere in Asia. It sounds as though the Japanese are just getting ready to become large investors as well as savers (as befits the world's second largest economy), and UBS is well positioned there to pick up some of the big accounts that are freed up by the privatization of the postal service (which currently holds a huge portion of individual savings accounts). They're not the only ones fighting for Japanese position or for market share in other countries, of course, but they appear to be off to a successful start.

I was very close to deciding to buy Citibank instead, but ultimately picked the smaller (not that $100 Billion is small) and more global company. I'm hoping UBS is on a similar growth trend to where Citibank was several years ago -- they're less than half as big and have similar international breadth, so I'm hoping their growth can be more aggressive even if their dividend is significantly lower at the moment.

I probably will not watch UBS that carefully -- I'm interested to see what they do with their dividend policy over the coming year or two, as they're ripe for a new focus on increasing dividends to match their competitors and to get their cash flow into the hands of their investors, but otherwise I think this is a solid, diversified international financial play that touches on all important areas and important world regions, and I'm going to see if they do as well as I think they will. I'll let you know if I change my mind.

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Annual Checkup -- RYN

Makes sense to take a closer look at Rayonier (RYN -- free RT quote) today, since they just released some news that got a little attention and gave the shares a little haircut. Rayonier is a big timber and fiber company that owns big swaths of land primarily in the Southeast US and in New Zealand. It's also structured as a REIT, much like Plum Creek, the other big US Timber play, and the current dividend is about 4.5%. It's also instructive to note, though it doesn't affect my tax-deferred holdings, that this dividend generally comes through as a long term capital gain for tax purposes, not taxable income as with most REIT dividends. I wrote tongue in cheek about Rayonier's silly little 3-2 split a few months ago, but everything I wrote about Rayonier when I covered them in more detail in the Summer still holds true -- it's just that the price has increased pretty significantly since I opened my position in March at a split-adjusted $28.67. So has it gone up too fast, especially considering today's news that they're shaving a few cents off their 05 guidance two weeks before earnings come out? I don't think so. The reduced guidance was just because RYN decided to develop some residential and commercial real estate on its own instead of selling the land, which is probably good for better long term earnings, and Rayonier is a long term core holding for me that nicely diversifies my portfolio. I plan to keep it and watch the dividends pile up over a long, long time -- timber has historically provided stock-like gains with bond-like volatility, and RYN gives me that as well as two kickers to ratchet up returns: HBU and fiber. Rayonier sells timberland that has a "higher and better use" (HBU), most of which is in the coastal areas of northern Florida and southern Georgia, and their fiber business continues to experience high demand as their high-tech fibers expand from diapers into all kinds of other surprising areas. Not much to dislike in the long term, though as it's already a sizable part of my portfolio (third biggest holding after GOOG and BRKB) I am not interested in investing more in RYN at this point even if the price seems reasonable.

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Annual Checkup -- ISRG

I last wrote about Intuitive Surgical (ISRG -- free RT quote) about a month ago when I asked "is the valuation intuitive?", and nothing significant has changed in that time -- even the share price today is roughly where it was then, which is saying something for a skyrocket like ISRG. I have been buying on the way up at roughly $70, $90, and $110 and don't have an overall huge return on paper at this point (with an average cost of $87/share, I'm sitting on about a 40% return at this afternoon's price), but this is certainly one of the few extremely fast growers in my portfolio, right in league with Google and Vertex this year even if I didn't get in early enough to see all that gain. So when does it stop going up? Or does it? I am certainly expecting that at some point in the next few quarters ISRG is going to miss its numbers -- they have clobbered the numbers on the positive side with every release this past year, but with earnings relying so much on a relatively small number of units sold as they build out the installed base of Da Vinci systems, there are bound to be quarters when they sell fewer units than we expect. There will also be a point next year when taxes start to get factored into their earnings, as they are expected to pay taxes for the first time in 2006, though certainly all serious ISRG investors are already expecting this. As soon as any big dip happens, the naysayers will finally be right, and they will crow about the fact that ISRG has reached a saturation point with their surgical robots. I think that's Nonsense. This technology is here to stay and is already dominant in one type of surgery (prostate) and growing in several others -- this is the beginning of robotic surgery, which I expect to revolutionize operating rooms around the country. Check out Dr. Domenico Savatta's blog to see what he's doing with the da Vinci and follow the clinical experience of a trailblazer. When I did my back-of-the-envelope calculations last month I figured we're good for at least a several hundred percent return from here to roughly a $15 billion market cap if the company meets it's intended installed base of 4,500 machines ... but the caveat, beyond the fact that management might be too optimistic, is that I don't know whether that will be in two or three years, or in ten. I already have overweighted in ISRG so I don't plan to add any more shares this year unless the price falls dramatically, but I think ISRG management is actually lowballing the number of installations they might be able to do before they saturate the market, and I think the long term future is extremely bright. I've seen estimated that 2004 saw 24,000 robotic surgeries and 2005 had about 36,000, and experts are predicting that in 2006 that number will double to 70,000. It would take something drastic to get me to sell.

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Annual Checkup -- IMAX

It was an interesting way to end the year for Imax (IMAX -- free RT quote). They had two big moneymakers on the Hollywood side of their offerings in Harry Potter and the reprise of Polar Express, and they've got impressive sounding direct-to-Imax offerings in last summer's Magnificent Desolation moonwalk film and the upcoming star power for their undersea 3D film with Johnny Depp and Kate Winslet, but the stock recently took a nose dive after an analyst downgraded them on reduced expectations for new installation growth among midsize commercial theater operators. As I wrote a few weeks ago, I'm not too worried about the possible reluctance of those small operators -- Imax is so early in their buildout of theaters and has such a strong order backlog that it's going to be a while before they need small multiplex operators to sign on in order to keep their growth rate up. I like that Imax is doing extremely well with international installation growth and that those overseas theaters are proving to be huge draws, whether it's in Israel or Europe or Korea with huge crowds gathering, or with their new deals to install theaters in South America, India and China. It's true that Imax continues to garner most of their cash flow from the installation of new theaters, but with a relatively modest valuation for their growth rate and a clear demand for the product and a focus on remastering Hollywood hits for the mega screen, I think they've got a good future. This is definitely a speculative bet, and I'm not planning to add any more to my position unless the valuation gets extraordinarily out of wack, but I plan to hold and see how this new generation of the Imax story plays out around the world.

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