Continual Evolution

Trade: Buy LOOP

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Loopnet is the leading online marketplace for commercial listings. They charge subscription fees for premium content to real estate brokers. Such businesses benefit from network effects once they gain a lead, and the consequent moat protects their margins. It seems to me that LOOP is well on the way to becoming the leading site and hence should benefit.

The current price is attractive, perhaps because the market is nervous about subprime contagion into commercial real estate; I think this is a good buying opportunity for what looks like a long term winner.

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Trade: Buy CRYP

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Cryptologic is a Dublin based supplier of software to online gambling sites. US banned online gambling late last year, plunging the stocks of CRYP as well as their competitors.

CRYP seems to have planned for this eventuality by rapidly shifting most of their business to Europe, including relocating their HQ. I think they will be able to get back to their historical level of margins as they rebuild their business and thus I think that the market over-reacted to the news. Thus this stock has uncertain outcomes but low risk since most of the worst case scenario has already been priced in. The stock should recover with news flow of European and Asian customer deals.

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Trade: Buy HNSN

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Hansen Medical makes robotic catheters which has the potential to significantly extend the surgeon's capability. Founded by the same person who started Intuitive Surgical. It has just received FDA and European approvals for one kind of catheter (mapping probe) and recently shipped to its first customer. I think there is a very good chance of a spate of other catheters getting approved as the benefits of robot assisted surgery get more widely known.

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Adjusting allocations

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In light of the downturn and in order to get my portfolio to become compliant with Meritocracy rules, I have sold half my positions in ALNY and SLT and intend to buy two new stocks early next week.

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Trade: Buy AEO

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Yesterday I bought American Eagle shares. I think this is one of the best managed of the teen/preteen retailers as measured by their consistent long term record of growth as well as EBITDA/EV of 16%, EBIT/EV of 14% and EBIT/Tangible-Capital of 74%. People fear sudden changes of fashion as well as a consumer slowdown due to the spread of subprime crisis, allowing me to pick up this stock on the cheap. I can't say whether this will show a significant gain in six months, but I think the stock should do well once the current subprime storm blows over.

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Trade: Buy PMTI

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Yesterday I bought Palomar Medical, a leading producer of aesthetic laser products. Along with steady growth and well managed financials (EBITDA/EV = 13%, normalized EBIT/EV = 9%, EBIT/TC > 100%) they have huge upside potential because of their partnership with consumer giants Gillette as well as Johnson & Johnson to make lasers that can be used at home. This feeds into secular trend due to the demographics of aging population. The stock was recently hammered due to a perceived miss in the royalty revenues PMTI receives from other competitors. In my opinion, this "miss" is not significant; the royalties are simply an indication of technology leadership. In the long term I expect PMTI as well as ELOS to dominate this niche and the sector to consolidate.

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Trade: Buy IBN

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Yesterday I bought ADR shares of ICICI Bank, the leading private bank in India. Basically it is an indirect way to play the growth of Indian economy which I feel is on a long term convergence path. The formerly socialist economy was dominated by extremely inefficient state run banks, allowing nimbler and aggressive competitors like ICICI to rapidly take market share via innovative, technology led service offerings. They have four growth "cylinders":
- consumer loans to the newly forming g middle class
- industrial loans to companies building out Indian infrastructure
- remittances home from emigrants as well as facilitating Indian companies expanding abroad
- a new rural initiative thru clever use of technology to achieve scale

The first three cylinder are firing and the fourth has a decent chance of succeeding. As a near term catalyst, ICICI plans to sell a stake in its insurance subsidiary near the year end, which is also market leader in the fast growing insurance market. This should add visibility to this hidden gem within ICICI and could provide a nice bump to the stock.

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On hold

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I've been on hold during the storm of these past few days as I don't think the credit market tightening has trade implications for my portfolio holdings. Most of the losses seem related to the emerging market stocks (IBN, SLT, FMCN), probably due to the usual flight for safety during such times. If this is correct then these stocks should revert back to normal once the US situation normalizes; I only hope this happens within the six month window of this competition.

I still need to adjust a couple of percentages to bring the portfolio into full compliance but I think I'll wait until the special situation with HNR plays out; this should happen once Chavez has signed the new contractual agreement.

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