Owning Cypress Over SunPower Makes Sense; EMC Over VMware Doesn't

Cypress Semiconductor Corporation (CY) and EMC Corporation (EMC) have control over the majority of the outstanding shares of their spin offs as of EOY 2007. Cypress controls 51% of SunPower Corporation’s (SPWR) and EMC holds 86% of VMware,’s Inc. (VMW) outstanding shares. SunPower, which Cypress had purchased when it was a very small PV manufacturer, was spun out November 2005. VMware Inc., which EMC purchased for $625M in 2004, was spun out on August 2007.

The shares of SunPower have appreciated well over 150% since the spin-off in spite of the recent sell off. VMware shares more than doubled by the end of October and has since come down to the price at the time of the IPO. The current market capitalization of $6B and $22B for SunPower and VMware respectively exemplify how favorable these acquisitions have been for the parent companies.

The media has constantly speculated on the advantages of owning Cypress and EMC over their spin-offs SunPower and VMware respectively. The perceived benefits are lesser volatility and cheaper ownership. Below is an analysis that assumes a conservative valuation for the parent companies (at one times the revenue) and calculates the discounts realizable on the spin-offs by buying the parent companies instead of the spin-offs:

Cypress Semiconductor Corporation (CY):




























Data PointFormulaValue
Enterprise value of CY at one times 2007 revenueA$821.6M*
Enterprise value of CYB$3.07B
Enterprise value of CY attributable to its ownership of SPWR stockC=B-A$2.25B
Enterprise value of SPWRD$5.9B
Percentage of SPWR’s outstanding shares owned by CYE57
Enterprise value of CY’s ownership of SPWR stockF=D*E$3.36B
Percentage Premium/(Discount)G=100*C/F-100(33.06)

*Total 2007 revenue including SPWR was $1.6B.

EMC Corporation (EMC):




























Data PointFormulaValue
Enterprise value of EMC at one times 2007 revenueA11.9B*
Enterprise value of EMCB$30.96B
Enterprise value of EMC attributable to its ownership of VMW stockC=B-A$19.06B
Enterprise value of VMWD$21B
Percentage of VMW’s outstanding shares owned by EMCE86
Enterprise value of EMC’s ownership of VMW stockF=D*E$18.06B
Percentage Premium/(Discount)G=100*C/F-1005.54

*2007 total revenue including VMW was $13.23B

To recap, owning Cypress over SunPower makes good financial sense. One gets to own a mid-cap semiconductor company at one times the revenue and get exposure to the red-hot solar space at a significant discount. However, EMC in place of VMware is a risky option.

iRobot (IRBT) – Part 3 - Outlook

iRobot has a number of new products scheduled both in the consumer and defense market. The big positive is that many of the defense related announcements involve partnerships with bigger defense contractors. Below is a table that summarizes the new products and associated partnerships:






















ProductMarket SpacePartnershipComments
ConnectRConsumer NoneFeatures Wi-Fi, a video camera, a speaker, a microphone, and Internet phone capabilities. The ConnectR is intended for calling family members or monitoring pets, with the visibility of a web cam.
PackBot with iCX DetectionDefenseiCX TechnologiesThe iCX technology is used to detect explosives and the on-board capabilities allow destroying the IEDs.
PackBot 501 with TASER Stun-GunsDefenseTASERAdds ability to control dangerous suspects while keeping personnel, the suspect and bystanders out of harm's way.
FCS SUGVDefenseBoeingFuture Combat Systems (FCS) Small Unmanned Ground Vehicle (SUGV). A portable, reconnaissance and tactical robot that can enter and secure areas that are either inaccessible or too dangerous for soldiers.
WarriorDefenseTechnical Support Working Group (TSWG) fundedNext generation force multiplier - bomb disposal, re-supply, route clearance, perimeter petrol, and surveillance.


iRobot also has several research initiatives, of which some are bound to fetch returns in the long-run. The consumer side of the business has explosive growth potential. Good execution is chiefly dependent on building brand awareness and doing away with the perception of an early adopter type product in the market space. Partnerships in the consumer space that parallels the defense space approach should facilitate the company getting there in a higher gear.

The competitive landscape is crowded with more powerful rivals even though the company has a head start in some areas. Below is a list of their primary competitors taken from their annual report:
  • Developers of robot floor care products such as AB Electrolux, Alfred Ka¨rcher GmbH & Co., Samsung Electronics Co., Ltd., LG Electronics Inc., Infinuvo/Metapo, Inc, Matsutek Enterprises Co Ltd. and Yujin Robotic Co. Ltd.;
  • Developers of small unmanned ground vehicles such as Foster-Miller, Inc. —a wholly owned subsidiary of QinetiQ North America, Inc., Allen-Vanguard Corporation, and Remotec — a division of Northrop Grumman Corporation; and
  • Established government contractors working on unmanned systems such as Lockheed Martin Corporation, BAE Systems, Inc. and General Dynamics Corporation.
The valuation is high on a going forward basis – the company is expected to earn 37 cents per share next year and hence is trading for a PE ratio of above 50. It is justified if the company is able to grow both revenue and profitability at an above average rate going forward. Given the potential for explosive growth in the consumer sector and the relatively low market capitalization, iRobot should be a very good fit in the small-cap aggressive growth area of a diversified portfolio.

Related Posts:

1. iRobot (IRBT) - Part 1 - Introduction.
2. iRobot (IRBT) - Part 2 - Business Issues.
3. iRobot (IRBT) - Part 3 - Outlook.

ARM vs Fixed Rate Mortgages: Fed Discount and Funds Rate Connection

Fed cuts only the discount rates, not all interest rates in general. Discount rate is the rate that the Federal Reserve banks charge financial institutions for overnight loans. This and the closely related funds rate are the only interest rates that the Fed administers and as such has absolute power over only those rates. Those rates are very short-term, making the Fed’s influence confined only to short term lending rates. The misconception however is the impression that the Fed is in some way paving way for cutting all interest rates including mortgage rates. A vague connection between discount rates and mortgage interest rates does exist but whether refinance decisions can be based on it is debatable.

Longer-term bond interest rates such as the 10-year constant maturity Treasury bond rate and the trend of the stock market are both good pointers for a correlation to the mortgage interest rates. The reasoning being
  • Stock market going down implies there is less demand for stocks and the investor’s money goes more towards the bond market. The bond prices go up and the interest rate on them goes down. A refinance decision based on such a parallel can be made if one is able to predict the direction of the rate or the future direction of stock prices.
Accurately predicting the direction of any market-driven interest rates and stock prices are exercises in futility and so those approaches are faulty, although the media projects them as being very valid. An approach is to make the refinance decision by pitting closing costs for the new loan against the monthly savings realized by refinancing. It pays to consider the length of the new amortization schedule against the existing schedule.

Refinancing to an adjustable rate mortgage (ARM) based on the correlation between short-term interest rates and the Fed discount rate is another option. Such a mortgage could be used as a stepping-stone to a fixed rate mortgage refinance at an opportune time in the future. The strategy lets you take advantage of the slow moving nature of some of the indexes the ARM’s are based on. The obvious advantage is its potential to buy time. Specifically, refinancing when the ARM rates are very low enables one to track the fixed rate mortgage indexes and to make a balanced decision in refinancing to a fixed mortgage over an extended period of time as opposed to having to commit to the available rate at the time of purchase of the property. The wide array of choices in the ARM market allows one to take as much or as little risk as one prefers. For example, a one-year MTA index based ARM with mortgage adjustments every six months after the first year capped at 2% have a lower interest rate but is riskier than a 7-year ARM with mortgage adjustments every year since then with a cap of 1%.

One potential downside to using refinancing is the possible loss of certain borrower rights under the anti-deficiency statute.

Last Updated: 01/2015.

iRobot (IRBT) – Part 2 – Business Issues

The company had its initial public offering (IPO) on 11/8/2005 for 4.3 million shares (roughly 20% of the total shares outstanding) priced at $24 valuing the company at $480M. The stock closed at $26.70 at the close of the first day of trading. Revenue climbed from around $15M in 2002 to $142M in 2005 and at the time of the IPO the YOY revenue growth stood at 70% and gross margin at 29%. Profitability has been elusive for the company because of very low margins. Below is a summary of the company’s financials over the last 3 years:


















Year2007*20062005
Revenue240M189M142M
YOY Revenue Growth273349
Gross Margin3733.528.8
Net Profit Margin1.25-2.01.91.8

* 2007 figures are projected.

Few factors that contributed to the anemic levels in the net margins over the last few years are:
  • Increase in head-count.
  • Litigation and other legal expenses.
  • Product mix and customer relationship management related expenses.
Management should ensure expenses are controlled and that it lags the annual revenue growth rate replacing the current inverse scenario. iRobot’s product mix strategy also leaves a lot to be desired. Though Roomba is a success story, most other consumer products notably Looj and Verro cater to a much smaller market. For an infrequent chore, consumers show a preference for outsourcing the job or renting a tool as opposed to owning a robot. There are already plans in the offing for products that can rake leaves, shovel snow, mow lawns, and wash windows and it pays to research the potential market and the competitive environment.

iRobot’s strategy of configuring the PackBot product successfully for multiple purposes should be extended to its consumer suite of products too. By combining the functionality in various products iRobot can definitely bring a versatile product to the market. For example, a base consumer robot with configurable options enabling it to function as the Roomba, the Scooba, the Dirt Dog, and possibly for other uses would be well received by the market. The company could see margins improve and the customer could be spared the agony of amassing products. The company should consider this shift as early as the next generation of Roomba. This will position the company to realize the vision of these robots making the switch from an early adopter type product to being the helper for “chief household officers”.

The significance of iRobot’s fairly large patent portfolio came into play in the pre-IPO days in 2005 when it successfully swept Koolatron, a rival out of the US. Koolatron’s “smart” vacuum under the KoolVac brand was termed a complete knock-off of the Roomba. Recently, the company also successfully sued Robotic FX, a rival in the military space – Robotic FX had managed to pocket a large military contract by underbidding iRobot - ultimately military negated the order. The company needs to continue being aggressive on defending its intellectual property (IP), as building knock-offs is not complicated.

The 3rd quarter saw the company disappointing Wall Street as results came in well below expectations. The problem was the delay in manufacturing the 5-series Roomba robots as a result of switching the manufacturing partner from Jetta to Kin Yat both in China. The company has justified this as a diversification move. Management has to be diligent on avoiding such negative surprises as the effects can linger on for a while.

The defense side has its own challenges when competing in the global marketplace. Strong partnerships along with a diversified and flexible manufacturing base are what the company should aim for going forward.

Related Posts:

1. iRobot (IRBT) - Part 1 - Introduction.
2. iRobot (IRBT) - Part 2 - Business Issues.
3. iRobot (IRBT) - Part 3 - Outlook.

iRobot (IRBT) – Part 1 - Introduction

iRobot designs and develops residential, industrial, and defense (US Government) robots. Their products are marketed both organically and with other partners. Manufacturing is turnkey from China for their residential robots while US manufacturing is employed for defense robots as US defense contracts mandates it for their industrial and governmental robots.

iRobot was founded in 1990 by Colin Angle, Helen Greiner, and Dr. Rodney Brooks who were roboticists at Massaachusetts Institute of Technology (MIT). The initial robots were limited use special purpose robots which included the Genghis for extraterrestrial exploration and Ariel with crab-like legs that detected and eliminated mines in surf zones. The year 1998 proved to be defining for iRobot as it received a DARPA contract for the tactical mobile robot program which was responsible for the development of the PackBot. The PackBot had three major achievements in the 2001-2002 timeframe that ushered in popularity for the company in the robotics field:
  • September 2001 – Searched the rubble of the World Trade Center in New York City after the September 11th terrorist attacks.
  • June 2002 – Searched caves in Afghanistan for ammunition and hostile forces.
  • September 2002 – Searched the Great Pyramids of Egypt. The live event was televised globally.
The company entered the residential space with the introduction of Roomba - the vacuuming robot in September 2002. Sales of Roomba pushed one million units in the first 2 years. The 2nd generation Roomba (Discovery series) was introduced in 2004 and the Roomba 5-series in 2007.
iRobot has sold more than two million of their residential robots and 1200 of their industrial and governmental robots to date. Majority of their residential sales are for their Roomba vacuuming robots while on the industrial and governmental side, PackBot took the lead. The PackBot’s are installed in the war zones of Iraq and Afghanistan.

Below is a summary of iRobot’s current residential products:






















Product Date Introduced Function Comments
Roomba 9/2002 Home Vacuuming Now in its 3rd generation, Roomba vacuums all types of floors, has intelligence to navigate rooms, avoid getting stuck or falling, and self-dock.
Scooba 5/2005 Floor Washer Takes in a cleaning solution and uses it to prep, wash, scrub, and dry hardwood floors.
Dirt Dog 9/2006 Garage/Workshop/Patio Cleaner A vacuum-less technology suited for rough surfaces. It is designed to pick up woodchips, nuts, bolts, etc. using high speed counter rotating brushes.
Verro 4/2007 Pool Cleaner Cleans pool floors, walls, and stairs. Runs on 24V motor. Cleaning takes about an hour.
Looj 9/2007 Gutter Cleaner Cleans K-style, aluminum, vinyl, or metal gutters. Cleans a 60-foot section in about 10 minutes. It operates using a 7.2V nickel-cadmium rechargeable battery.


Below is a summary of iRobot’s current industrial/governmental products:
















Product Date Introduced Function Comments
PackBot 9/2001 Military Missions Flexible payload allows for varied missions. Payload ports are equipped with Ethernet, USB, power, and 2 video ports. Portability and ease-of-use allows a single person to control multiple robots.
R-Gator 10/2004 Unmanned mission vehicle with manual override Designed for Perimeter Petrol, Resupply, Route Clearance, and Surveillance/Reconnaissance.
PackBot 510 2/2007 Military Missions 2nd generation PackBot that is 30% faster. Able to lift 30 pounds but still portable and deployable by a single person.


The pace of new product introductions accelerated in 2007. The indication from the company supports this trend of using common technology for products serving different purposes.

Related Posts:

1. iRobot (IRBT) - Part 1 - Introduction.
2. iRobot (IRBT) - Part 2 - Business Issues.
3. iRobot (IRBT) - Part 3 - Outlook.

401k/IRA Retirement Account – 2007 Performance Summary

Our retirement accounts represent about 30% of our total assets. They are spread out over two Fidelity accounts, one Vanguard account, and one Schwab account. Our work history accounts for this spread than diligent planning. Currently our employers use Fidelity and Schwab. Here is a summary of our holding and performance details of the mutual funds held in our 401K and Individual Retirement Accounts (IRA):

Current Employer 401k Account 1:



















Symbol% of PortfolioFund FeesFund Return 2007 (After Fees)Comments
Dodge & Cox Stock Fund (DODGX)18.060.520.14A Large cap value fund with a history of outperforming the S&P500 index. Has very low turnover ratio. The fund is very big (~70B) and so outperformance may be harder to come by going forward.
Fidelity Diversified International Fund (FDIVX)15.940.9716.03Diversified large-cap international growth fund. This fund is very big at over 58B. Turnover is at 58%. Has a history of outperforming its related index, the MSCI EAFE.
American Beacon Small Cap Value (AVPAX)13.181.06-6.64A Small-cap value fund with about 1.2B of total assets under management. Turnover at 48%.
Hotchkis & Wiley Mid-cap Value (HWMIX)11.781.02-14.77A mid-cap value fund with about 2.4B of total assets under management. Turnover at 45%.Top 10 holdings account for 38% of assets.


Current Employer 401k Account 2:
















Symbol% of PortfolioFund FeesFund Return 2007 (After Fees)Comments
Calomos Growth A (CVGRX)0.361.4423.26A 12B large cap growth fund. The top 10 holdings represent about 27% of assets.
Schwab S&P500 Index (SWPIX)0.300.365.34An index fund that tracks the performance of the S&P500 index benchmark.
William Blair International Growth (WBIGX)0.351.6718.13A 5B large cap international fund with between 10 and 25% exposure to emerging markets.


Rollover IRA Account:

























Symbol% of PortfolioFund FeesFund Return 2007 (After Fees)Comments
Vanguard Index Trust 500 Index (VFINX)6.940.185.39An index fund that tracks the performance of the S&P500 index benchmark.
Vanguard Pacific Stock Index (VPACX)2.650.274.78An index fund that tracks the performance of the MSCI Pacific index benchmark.
Vanguard Total International Stock Index (VGTSX)2.73NA15.52A fund made up of three other Vanguard funds - the European Stock Index Fund, the Pacific Stock Index, and the Emerging Markets Stock Index Fund.
Vanguard Inflation Protected Securities (VIPSX)2.540.2011.59Invests in inflation indexed bonds (primarily US) with maturities between 7 and 20 years.
Vanguard Target Retirement 2035 (VTTHX)0.03NA7.49A fund made up of other Vanguard funds with an AAP of 90% stocks and 10% bonds.
Vanguard Long-Term Bond Index (VBLTX)2.500.186.63An index fund that tracks the performance of a market-weighted bond index with a long-term dollar-weighted average maturity.


Old Employer 401k Account Yet To Be Rolled Over:



















Symbol% of PortfolioFund FeesFund Return 2007 (After Fees)Comments
T. Rowe Price Growth Stock (PRGFX)8.070.7010.37A large cap growth fund with 38% turnover rate. The fund is fairly large at ~21B.
T. Rowe Price International Stock (PRITX)7.030.8713.43A large cap international growth fund with about 7B assets under management. Invests in both developed & developing economies.
Fidelity Select Technology (FSPTX)2.140.9519.78A sector specific fund focused on large cap technology stocks with about 2B in assets under management. Top 10 holdings account for 45% of total assets.
Fidelity Select Health Care (FSPHX)2.430.8712.45A sector specific fund focused on large cap healthcare stocks with about 2B in assets under management. Top 10 holdings account for 38% of total assets.


The total returns this year were rather mediocre at 2.29%. The performance doesn’t compare very well with the returns of popular indices and slips further when pitted against the stock portfolio that we manage. Following reasons contribute significantly for such a mediocre performance:
  • Our mutual fund selections had their pitfalls and our preference for managed funds as opposed to indexed funds resulted in the double-whammy of index underperformance along with higher fees. The relatively newer HWMIX in the mid-cap and AVPAX in the small-cap area both fall into this category. Further, DODGX had a rare rough year barely providing a positive return for the year.
  • Our employer plans are limited in the number of mutual funds to choose from.
  • We did not take advantage of the flexibility associated with the vast amount of investment options available when old employer accounts were rolled over to an IRA. Our failure rollover one of our old employer accounts to an IRA resulted in less flexibility and higher fees.
  • We did not plan well to allocate our 401K funds based on an Asset Allocation Plan (AAP).
We plan to look into reallocating our 401K portfolio accounts and rolling over the old employer account not yet rolled over into an rollover IRA account. The ultimate aim will be for an overall split-up of 40-40-20 across Domestic, International, and Bonds/Alternative.


Related Posts:

1. 401K/IRA Account 2007 Performance Summary.
2. 401K/IRA Account – Asset Allocation for 2008 – Part 1.
3. 401K/IRA Account – Asset Allocation for 2008 – Part 2.
4. Retirement Portfolio – Mid Year Update.
5. Asset Allocation Adjustments to Retirement Portfolio in the face of market correction.
6. 401K/IRA/Retirement Account 2008 Performance Summary.
7. 401K/IRA/Retirement Account 2009 Reallocations.
8. 401K & Retirement Accounts Performance - Mid Year 2009 Update.

Random Musings on Apple products after Steve’s MacWorld 2008 Keynote

A friend of ours suggested we watch this Keynote that Steve Jobs gave at MacWorld 2008. Even though we try to stay abreast of the Tech field, we are not technophiles by any stretch of the imagination and are yet to purchase an Apple product up to this point. Here is a summary of our thoughts on the four new things that Steve Jobs announced:



















Product Purpose Price Comment
Time Capsule/Time Machine Wireless backups$299-$499 Comes in two models - 500GB & 1TB model. Enables wireless backups from Apple computers that have Mac OS X Leopard operation system.
iPod Touch & iPhone Music Player & Smart Phone $299-$399 Five new apps – Mail, Map, Weather, Stocks, Notes, iPhone – SMS multiple people.
iTunes Buying songs & renting movies $0.99-$4.99 Can use Apple TV, a $229 gizmo to see movies on TV without a computer.
MacBook Air Worlds thinnest notebook computer $1799 0.16”-0.66” thickness. 13.3” backlit wide-screen monitor, full-size keyboard, track pad with gestures, Intel Core 2 Duo 1.6GHz, 2GB RAM, 80GB Flash HD.


The most likely product we might consider buying from this list is the iPod Touch. The maps feature could possibly replace our GPS player - the fact that it doesn’t have a cell receiver makes us a little hesitant – it has Skyhook Wifi hotspots based technology but not Google’s cell phone tower triangulation technology. We will probably find good use for the wireless Internet features as well. On the other hand, songs from iTunes and movies are both things that we may not use. Our existing Sandisk mp3 player is not getting enough use as such and watching movies on a small screen or ponying up $229 for Apple TV are both alternatives that do not sound appealing to us. We will wait to see Steve’s next innovation in techno thrill.

Advantage Energy Income Fund (AAV) – Part 3 - Outlook

Natural Gas Prices are expected to hold steady in the $7-$8 range for an extended period of time limiting the potential return for Advantage shareholders. The contrary opinion is that as gas-to-oil price ratio is the highest in history and should the oil prices stay high, natural gas price should follow suit to approach historical level for that ratio. In either scenario, Advantage is cushioned as they have been able to operate profitably when natural gas prices stayed around the $7 mark.

Advantage’s stock price performance over the last two years were well below average as the price slid from twenty something per share in early 2006 to be below ten recently. However it is noteworthy that in the previous four years the stock price did quadruple. The total returns including distributions over the life of the trust (formed 2001) has been reasonable at around 20%. The following factors in combination paved way to create the current attractive valuation for these trusts:
  • Confusion regarding the effect of the tax changes,
  • Concerns surrounding its increasing debt as Advantage funded several acquisitions with debt in the past two years, and
  • The negative surprise for investors in the size of the latest dividend cut.
Below is a spreadsheet that shows how reasonable Advantage’s current valuation is using a number of measures:






















Measure Valuation
As a multiple of P&P reserves* 13.27
Relative to current yield 6.25
As a multiple of cash flow 7.35
As a multiple of Book Value (BV) based on 10% calculation 0.83
As a multiple of Per Flowing barrel oil equivalent** 59,705

  • *Enterprise Value - $2.03B.
  • **Production – 34000 boe/day.
Being a relatively small company with a fairly large amount of debt leaves Advantage vulnerable to a drop in oil and gas prices. This risk should be weighed against the fact that the valuation is very reasonable when making an investment decision.
To summarize, Advantage is an aggressive/risky holding operating on the gamble that energy prices will stay elevated going forward. Given the valuation and the tax pool status, it is a good choice as an income holding in energy portion of stock portfolios.

Related Articles:

1. Advantage Energy Income Fund (AAV) Analysis - Part 1 - Introduction.
2. Advantage Energy Income Fund (AAV) Analysis - Part 2- Business Issues.
3. Advantage Energy Income Fund (AAV) Analysis - Part 3 - Outlook.

Introducing Kids to Snow Sports (Sledding/Skiing) in the Lake Tahoe Area

The right gear is essential to enjoying winter sports. Snow accessories are easier to come by for kids above three in Bay Area stores but stores closer to Tahoe stock for all age groups. The Internet is a good resource too.

Sledding

There is a universal appeal in going down the bunny slopes on small saucers and sledding is a good stepping-stone for kids five and under. The two options are
  • Sno-Park
  • Groomed Private Sledding hills
Sno-Park’s availability is on a first come first served basis. You are responsible for your gear and rental options are non-existent, since there is not much convenience offered unless otherwise mentioned at these places. Sno-Parks are crowded on the weekends and the biggest negative is that the slopes are not groomed. An annual pass is all one needs to access most of the Sno-Parks in the country. On groomed sledding hills employees are available to monitor the activity in the place. Boundaries are generally roped off. Most of the slopes require that sleds be rented from the facility. The rental fee is separate from the entrance fee but is generally nominal. Most sledding hills do not offer the convenience of a lift. A hint is to hit the slopes early since that translates to freshly groomed snow when the sun is not intense. After around 11:00 AM the hills turn icy making the ride bumpy.

Skiing

Granlibakken helped our kids make the transition from sledding to skiing. The bunny hill sported a rope pull that is very easy for kids to get used to. The T-bar lift was a hurdle, especially for the kids. Help from parents is valuable to keep the confidence level up and to get the core skills embedded in them. Another option is to take ski lessons from instructors. Advanced reservations are recommended for the lessons. A number of the slopes around Tahoe offer ski lessons for kids tailored to varying skill levels and age groups.

From Granlibakken we moved onto Homewood where the kids tried the green and the blue runs. Compared to the T-bar lift, the lift chair was welcome rain. The green runs are fairly easy, but the blue runs can be harder for younger kids. We could however see very small kids enjoying the black runs with ease.

Deals

A few years ago, Costco had a prepaid ticket purchase program that offered two adult lift tickets for Homewood at $54 (regular pricing is currently $44 online), which included free passes for two kids as well. That deal was excellent and we used it a number of times. Occasionally, similar deals become available and the sizable discounts make them very worthwhile.

"Kids ski free" deals are hard to come by for children above six. For children five and under, there are some such deals.

Related Posts:

1. Introducing Kids to Snow Sports (Sledding/Skiing) in the Lake Tahoe Area.
2. Tahoe Donner Skiing – Family Experience/Review.
3. Frugal Living – Skiing Story.
4. Lake Tahoe Ski Areas (Granlibakken, Tahoe Donner, Boreal, Homewood, Kirkwood, Heavenly, Squaw) – A Comparative Review.


Last Updated: 01/2015.


Advantage Energy Income Fund (AAV) – Part 2 – Business Issues

Early December 2007, Advantage announced a dividend cut of 20%. This cut was expected, as the Canadian dollar gaining strength along with depressed natural gas prices does not work in favor for the company. The size of the dividend cut was the sticker shock and the price per share slipped more than 10% following the announcement from an already depressed $10.25 per share. Even after the dividend cut, the yield was still pretty high at 14% and with the price dipping another 15%, the yield is attractive at 16%. Below is a look at natural gas prices over the years and the correlation to Advantage’s distribution and payout ratio:

























Year Natural Gas Average Pricing Distribution Payout Ratio
2007* 7.30 1.35 ~85%
2006 6.86 2.66 101%
2005 7.98 3.12 84%
2004 6.08 2.82 93%
2003 6.07 2.71 88%
2002 3.71 1.73 89%

  • 2007 information above is for the first 9 months.
Advantage’s dependency on natural gas prices is mitigated by the following factors:
  • Hedging – the company has an active hedging program that aims to hedge roughly 50% of production. For the fourth quarter of 2007, approximately 42% of the net natural gas production is hedged at an average floor price of $8.09/mcf and an average ceiling of $9.42/mcf. For the first quarter of 2008, it has hedged 22% of the net natural gas production at a floor price of $8.85/mcf and a ceiling of $10.19/mcf.
  • Asset Diversification – Over the years, Advantage has steadily managed to increase its oil reserves as a percentage of total reserves.
  • Waning Competition from the majors - Drilling and production in Canada are down as majors are not channeling revenue into gas drilling and that will have an impact going forward.
Advantage along with other Canadian royalty trusts is negatively affected by a Canadian tax law change that comes into effect in the 2011 timeframe for existing trusts. At that point, the tax-exempt status on distributions expires and the trusts will pay taxes as regular corporations. Advantage is well positioned to minimize the effect of these taxes for an extended period of time because of the existence of $2B in tax pools in its books. This is a very good hidden asset that should allow it to escape the negative impact of the tax law change for the foreseeable future after the 2011 timeframe.

Provincial royalties is another area that has a potential impact on Advantage. Specifically, Alberta recently unveiled plans for increased royalties in the 2010 timeframe. The risk is fairly contained at the moment as royalties are tied to the rate per well – Advantage has a huge amount of lower rate wells and so the impact is little.

Related Articles:

1. Advantage Energy Income Fund (AAV) Analysis - Part 1 - Introduction.
2. Advantage Energy Income Fund (AAV) Analysis - Part 2- Business Issues.
3. Advantage Energy Income Fund (AAV) Analysis - Part 3 - Outlook.



Advantage Energy Income Fund (AAV) – Part 1 - Introduction

The business plan for Advantage Energy Income Fund, an oil and gas (O&G) royalty trust based out of Calgary (Alberta, Canada) calls for acquiring and developing O&G reserves in Western Canada. The fund sports a monthly dividend policy as like most Canadian Royalty trusts. For US investors these distributions are:
  • Qualified dividend income.
  • Subjected to a non-resident withholding tax of 15%.
To be eligible for the withholding tax credit the fund needs to be purchased for a taxable account. The credit cannot be claimed for a tax-deferred account such as an IRA essentially making investments in foreign royalties not suitable for such accounts. Unlike American counterparts, CanRoys are exempt from paying taxes on the distributions till 2011. Also, their operations and asset base are NOT depleting as they are allowed to expand by investing or acquiring other assets.

The fund has 154 Million Barrels Of Oil Equivalents (boe) in Proved and Probable reserves with a reserve life span of 11.8 years. The natural gas weighting of the fund based on reserves is at 58% and by production that number is 65%. The higher weighting in gas classifies the fund as gassy as the prospects are tied more to natural gas prices than to oil prices. As of the 3rd quarter of 2007, daily production stands at 29,236 boe/day. 2008 production is expected to reach between 32000 and 34000 boe/day as volumes from the July 2007 Sound Trust Acquisition get factored in.

Advantage's production and reserves are concentrated within three areas located in Alberta, northeast British Columbia, and southeast Saskatchewan. Advantage operates approximately 85% of its production base. Below is their properties map and details of their key drilling activity:





















Name Production Resource Ownership Reserve P+P Efficiency Comments
Martin Creek 2755 boe per day Liquid Rich Natural Gas W.I. 75%, 100% operated 10.2 years less than $15000 per boe per day 4-year drilling inventory
Sunset 743 boe per day Light Oil W.I. 75% 100% operated 17.6 years $14000 per boe per day 3-4 year inventory possible
Westerose 681 boe per day Oil W.I. 52%, 100% operated 17.5 years $19000 per boe per day 23 future drilling locations
Nevis 2450 boe per day Light Oil W.I. 93% 100% operated 11.8 years $21000 per boe per day 3-4 year drilling inventory



Related Articles:

1. Advantage Energy Income Fund (AAV) Analysis - Part 1 - Introduction.
2. Advantage Energy Income Fund (AAV) Analysis - Part 2- Business Issues.
3. Advantage Energy Income Fund (AAV) Analysis - Part 3 - Outlook.

The SINLetter.com Stock Contest

SINLetter.com, one of the more prominent online free stock newsletter sites announced a three-month stock-picking contest. Contestants get to pick three stocks on the long or short side and the winner will be announced at the end of three months. We were invited to participate and these are our picks:

















Stock Symbol Position Comments
LDK Long Chinese wafer manufacturer growing at over 100% for the foreseeable future, but the growth and margin improvement potential are yet to be reflected in the valuation.
FNM Long A moderate-risk investment in the financial sector with exposure to the mortgage-meltdown.
GROW Long Manages mutual funds focused in the emerging market and commodity sectors. The stock is down significantly despite the fact that its funds performed well.



As it is a short-term (3 months) contest, the spirit of our selections is based on the guess that chances of winning will be higher if one chooses high-risk high-reward type of stocks. We had a very rough first day, as our selections settled well below the highs of the day. As per the contest rules, the returns for the first day is calculated from the highest price for the day for long picks and that resulted in all of our picks showing sizeable losses for the day.

Our opinion on stock contests in general is that they are unpredictable, but it is a fun educational experience.

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