Annual Checkup -- MVL

Marvel Entertainment (MVL -- click to register for free RT streaming quote) has been extremely quiet since their rough conference call back in November, though it did recover reasonably quickly from their shellacking and return in short order to the current $16 range -- my average cost is about $18, so I'm slightly in the red, but not particularly concerned about it. The only big news since then is a new toy deal -- Marvel is dropping it's own Toy Biz and contracting with Hasbro beginning in 2007 to create licensed toys based on the heroes of the Marvel Universe. It's hard to say what that will mean long term -- Marvel will get a lower royalty rate, but they also reduce their risk with pretty sizeable guaranteed payments, and get the advantage of working with a major toy power who may provide stronger distribution. I'm guessing conservatively that it's probably a wash, with some upside potential. Regardless, 2006 will probably remain a very lean year for Marvel -- during this transition to Hasbro they are downplaying their toy sales forecast for the year, and they are also being quite coy about their expected revenues from the two major films that feature their characters in the next 12 months, Ghost Rider and X-Men 3. As I wrote a few months ago when Marvel hit bottom with their low forecasts for 2006, I'm comfortable holding through this year because I think they're being more conservative than they need to (as a result of having already been burned) and, more importantly, because I like their risky plan to produce their own films starting with the 2008 slate and I want to take part in the potentially higher earnings they'll see from those releases. The shares will probably move this year in sympathy with the performance of their two major films, but I think the real action -- not unlike what I foresee for Dreamworks Animation -- is coming in 2007. I'll wait.

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Nice news from MEMC Electonic Materials (WFR)

MEMC Electronic Materials (WFR-- click to register for free RT streaming quote) just released 2005 full year and 4Q earnings, and they sure look pretty nice to me. They are still preliminary due to the tax confusion they've had this past year, but it sounds as though the annual figures, if not the 4Q, should at least be accurate, which is fine with me. And if you believe the wacky after hours trading, the market likes it just fine too -- up 5 or 6% at the moment, even after climbing more than 3% pre-earnings during the day today.

I guessed in my annual checkup that WFR might have gone up too far, too fast and be due for a little pullback of some kind ... but not if they're going to continue putting out good results and very solid guidance like this. If that continues, I'm very happy to have guessed wrong.

Their guidance for next year is in a very broad range, which makes sense given their reliance on overall demand in the volatile semiconductor industry and on pricing that they can't entirely control, but the low end of their range is just two cents lower than the average street estimate (at least, according to Yahoo Finance). The high end of their range is $1.70 a share, which blows away the high analyst's $1.56. They're putting together improving margins, growing sales, investing in dramatically increasing their polysilicon capacity and defending their intellectual property to differentiate their products, and paying down debt ... all good.

What struck me most was their announcement, which I hadn't heard before, that they're aiming to double polysilicon capacity to help them reap the advantages of a vertical supply chain even further, and they're really focusing much more than in the past on supply to the red-hot solar market.

Here's the quote from CEO Gareeb that was in the earnings release, in case you don't feel like reading the whole thing:

"Although MEMC has been quietly working on expanding its polysilicon capacity, we are now formally announcing that we are targeting our polysilicon capacity to grow from approximately 4,000 metric tons per year to approximately 8,000 metric tons per year over the next three years, as dictated by market conditions. The majority of this capacity will be usable for both semiconductor and solar wafer production and is anticipated to be accomplished within the constraints of our business model. This will provide us with significant opportunities to take advantage of a vertically integrated supply chain as compared to our competition, by providing security of supply for semiconductor wafer expansions and significantly increasing our penetration of the solar market. This polysilicon capacity expansion coupled with the opportunities available in the semiconductor and solar wafer industries would support an approximate doubling of our first quarter 2006 revenue run rate by the end of the decade, if market conditions allow"

I added the bolding. Still a little pie-in-the-sky, but I like that they have an ambitious plan.

I was pretty optimistic about WFR after seeing Taiwan Semiconductor's great earnings report and commentary on the explosion of demand for semis in late 2005 and into this year, which reinforced what we're hearing from most of the industry. It looks like WFR is really in good position to leverage it's vertical capabilities and it's exposure to tight polysilicon supplies to continue growing and, as importantly, to continue expanding their multiple now that management is beginning to run a tighter, very low debt ship. I think Wall Street can trust this company again, and though I'm nervous about being aboard if the semiconductor industry has another inventory glut, I'm hoping there will be some significant warning signs before that really comes into play in this cycle.

Good news for WFR ... now I'm looking forward to see if some of these same trends spell good news for Formfactor as well.

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Annual Checkup -- MIDD

I keep getting distracted, so my annual checkup is taking a bit longer than usual this year. Now it's time to take a look at Middleby (MIDD -- click to register for free RT streaming quote). This is a great company that was called to my attention by the Fool more than a year ago, and I've been holding shares for close to a year. It has quietly been a dramatic performer and risen much faster than I would have predicted. I wrote a while back about what the worldwide increase in pizza consumption means for Middleby, a commercial oven manufacturer, and that growth is continuing ... as is the growth in MIDD's business, which has been nicely reflected in the stock price. But as I near the one year holding point and look at a stock that has grown significantly faster than I expected and has seen some dramatic multiple expansion, should I think about lightening my position? Given the performance of MIDD's CEO over the past two years, it's hard to give up any shares -- they have consistently increased earnings, increased efficiency, and handled some challenges very well (such as the rising steel prices). My position was picked up at an average price of just under $48, so I'm sitting on almost a 100% gain, and I wouldn't feel comfortable buying more Middleby at this point even though I think they'll continue to grow well -- I do fear that the growth will tail off a bit and the multiple ought to come back to earth as that happens. I plan to wait until their next earnings report before doing anything, so I'll take the chance that the price may dip if they report any disappointment, but I want to err on the side of caution in selling my MIDD shares because I hate to give up ownership in a company that is so well managed and so well positioned for the big global trend of chain restaurant growth. If it looks to me like the company is likely to have difficulty keeping up this growth over the next couple years when I hear from the CEO next month, I'll consider selling half of my position -- otherwise, this is a hold for me.

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Great Googaly Moogaly (GOOG)

OK, so I was mostly not paying attention to the market last week. That means on occasion I caught a few tickers while driving around and watching the XM display, and once or twice got a look at my portfolio, but didn't really read anything of any substance.

And Google (GOOG -- click to register for free RT streaming quote)is now, by a significant amount, the largest single stock holding in my portfolio.

So you can understand how I was a little trepidatious as I saw a flicker of difficult days flicker by in the corner of my eye -- down $20 on Monday. Down another $50 on Thursday and Friday. What the heck?

I was beating myself up a bit about this over the weekend when I had a little more time. See, I have been considering for a while whether or not to lighten up my GOOG holdings by a little bit -- maybe sell off 25% or so just to ease my mind. But I wanted to wait to have this argument in my head until after I hit the one year holding mark, since the shares I would sell are in a taxable account.

But man, looking at that $399 price on Friday made me smack myself and think that I should have sold at $470 when I had the chance.

Of course, no one ever hits the highs when they want to sell. But I certainly could have sold some at $450 or 460 -- nice round numbers that seemed a little crazy.

But instead, I held fast and didn't even think too much about it -- wait for a year, I thought, wait for the lower tax bite. Come Saturday I agonized ... I told myself, that waiting just cost you $70 a share!

Of course, now I feel much better ... GOOG has recovered quite nicely today, taking back half or so of Friday's disastrous 8% drop.

But in reality, those taxes mean more than you think. As many investors do, I really didn't think about how much of a difference taxes make. The difference between a top 35% (or whatever it is precisely) tax rate and the low one year rate of 15% would be in itself enough of a return to make for two quite nice years of investing.

So if I had sold at $470 and bought at 200, to make the math easy, I would have had a 270 profit. 35% of that is (calculator, please...) about $95. So my actual profit would have been $175 a share. Not as nice.

Even if the stock stays on the low side and I sell at 400 in March at the lower 15% rate, I still would come close to doing as well as if I had sold at the very top two months earlier. At $400 I would have a $200 profit, taxed at 15% that's $170.

Close enough to make it worth holding, in my book, so now I don't feel as anxious about "missing the top". After seeing the FARO fiasco and having to sell today, it's nice to remind myself that patience is almost always an investing virtue.

And hey, shades of 1999 -- I heard on the radio today that some analyst set a "long term" price target on Google of $2,000. Haven't seen anything on that in print, but it makes for a nice daydream ...

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Buy High, Sell Low (FARO)

Well, sometimes three weeks makes a big difference. I spent a fair amount of time reconsidering FARO Technologies (FARO -- click to register for free RT streaming quote) back in December, and then early in January I decided that I would hold on and hope that my assessment of management and of their ongoing business prospects was correct.

Those of you who watch the company or can see the little chart on the right will note that it fell dramatically on Friday on a shocking revision to their earnings guidance, and if you've watched the company for more than a month or so you'll note that this isn't a first. It's been a bad year to be a FARO owner.

Their ongoing business prospects may still be fine, and, frankly, I think their market is still pretty good ... but I have now really lost faith in management, and whenever that happens a little red "sell" flag flies across my mind.

So today I sold FARO at a significant loss -- I had bought early last year at an average price of about $27, and sold today at $14.98.

Ouch.

There are few things that are constant about me as an investor, I've found. One of them is that I have tried with some success to be extremely patient about selling, whether it's to lock in gains or get rid of losing positions -- and for the most part, that works out. But it definitely didn't work this time -- in retrospect, my initial fears for Faro were correct, and my more rational calculation at a later date was wrong. Of course, there was no way to know that at the time.

My experience with Design Within Reach (DWRI-- click to register for free RT streaming quote) another flop of an investment that I sold recently, was pretty similar -- in both cases, management seemed to lose control of the company and failed completely to communicate effectively with investors. DWRI is a much worse company than FARO in other ways, in my opinion, but the problems with management followed a similar track over the course of the past six months or so. Maybe both of those companies will recover and be great investments over the next few years, but it seems a bad bet to me.

I think holding on to companies that you believe have a bright future is still the right way to go, even if their value has gotten ahead of them or they've had some bad news impact their stock price. But even if that's the right way for me to invest most of the time, it sure backfired here.

So fare thee well, FARO. I had high hopes, but it no longer seems like management has enough control over the company's growth, expenses or operations -- being this far off on your estimates isn't acceptable, especially when it happens a few times in a row and management is engaged in selling a significant portion of their shares. There are too many fish in the sea to hold on to this one.

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