Portfolio Overview: Evaluating First-Half Performance

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Issue 273: Tuesday, July 3, 2007

In This Issue

Page 1 Portfolio Overview: Evaluating First-Half Performance Page 2 A Look at the First Half

Page 6 The Telecom Connection Portfolio

Portfolio Overview:

Evaluating First-Half Performance

Now that the iPhone has hit the streets of the U.S., the suspense of “Who’s in it?” has been resolved as well.

Technical evaluation company Semiconductor Insights did a teardown of an iPhone over the weekend for EETimes. The video is available on YouTube (do a keyword search on

“semiconductordotcom”), or you can just go to the EETimesWeb site.

And the winners are? Marvell (MRVL) has the wireless LAN component, and Texas Instruments

(TXN) has a power management part. Unfortunately, the iPhone shows no signs of a Cypress

(CY) PSoC (programmable system on a chip). It looks like the surprise winner is Infineon (IFX), with the S-Gold 2 digital baseband.

Since this is traditionally a week lacking in activity (except for the occasional attempt by

companies to slip a negative preannouncement by the Street) due to the July 4 holiday, I thought that I would depart from the “normal” approach and take this opportunity to look at where we are in the model portfolio. This isn’t a name-by-name review of the entire portfolio, but rather how I approach it, its performance and where the names are in the grand scheme of things. It’s a good exercise, and something I do all the time (a lot more frequently than every six months).

Over the next week or so we’ll see a number of preannouncements because the bulk of earning reports will not be until the week of July 16. There have been a few negative announcements thus far -- such as California Micro Devices (CAMD), Digital River (DRIV) and LSI (LSI) -- but nothing that I’ve heard from them suggests there is a fundamental change in overall demand in the sector.

Last, I would like to take this opportunity to wish all subscribers and readers a safe and sane Fourth of July holiday. Happy Birthday, America!

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The Model Portfolio: A Look at the First Half

We’ve had a good first half, as you can see in the table below, but keep in mind that it is only one-half of one year. Great track records are not created by having a blow-out year (I’ll always take one), but rather by finishing consistently in the money.

What we have here is history, and this week the game simply continues.

Performance for the First Half of 2007

Benchmarks

Dow Jones Industrials 7.6%

S&P 500 6.0%

Nasdaq Composite 7.8%

Nasdaq Telecom 11.0%

Nasdaq Computer 9.5%

Philadelphia Semiconductor 7.3%

The Telecom Connection Model Portfolio 15.0%

Source: Yahoo! Finance

One thing that I like to do when looking at portfolio performance is see where it’s coming from. As you can see in the table on the next page, we have a number of companies that are contributing -- not just Apple (AAPL).

Granted, this is only over a six-month period (some may think that’s too short, while others think that’s too long), but if your performance is all coming from two or three companies, you have a problem and need to look into it.

I have intentionally not included the options positions because, with the exception of the Dell (DELL) call contracts, they’re being used to hedge the downside on current equities. The Dell calls gave us the opportunity to swing for the fences, with limited capital at risk in a grossly oversold (at the time) stock that was in the throes of downward spiral.

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Model Portfolio -- Equity Breakdown

YTD Performance* Percentage of Portfolio Apple (AAPL) 43.8% 8.5% Cypress (CY) 38.1% 8.1% Corning (GLW) 36.6% 5.5% Texas Instruments (TXN) 30.7% 3.6% Qualcomm (QCOM) 14.8% 3.8% Google (GOOG) 13.5% 5.5% Alvarion* (ALVR) 13.2% 3.2% Verizon (VZ) 10.6% 1.8% Riverbed* (RVBD) 8.4% 1.1% eBay (EBAY) 7.0% 5.6% Cisco (CSCO) 1.9% 2.9% Marvell* (MRVL) 1.0% 4.8% Microtune* (TUNE) 0.0% 4.6% Microsoft (MSFT) -1.3% 4.6%

Sun Microsystems (SUNW) -3.0% 2.5%

Level 3* (LVLT) -3.0% 2.0%

NeuStar (NSR) -10.7% 3.8%

Qimonda (QI) -11.8% 4.0%

Motorola (MOT) -13.9% 6.2%

Cash -- 8.6%

*Note: From date of purchase; acquired after 1/1/07.

Source: Yahoo! Finance There are two questions I ask myself when I look at the data in this table.

• First, whether it’s in the top-half or bottom-half of the table, what could or should happen to change that positioning or why will it stay the same?

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I’m not suggesting that Apple will be up another 44% in the second half of the year, but the real question is: Has there been a change in its fundamentals? Whether it’s the products, the markets, the pricing, the margins and/or the competition, what’s changed (if anything) and how will it impact the stock going forward? Of equal importance, how much of that is already reflected in the stock now?

Those same questions (and more) need to be answered for the names at the bottom of the list. I actually feel comfortable with Qimonda (QI) and Motorola (MOT) at the bottom of the list. Granted, I’d much prefer that they weren’t down at all, but both are exiting troughs and should rebound in a seasonally strong second half.

NeuStar (NSR) is something of a different animal. Its fundamentals are great: revenue growth of 36% in the 12 months ending March 31 and gross margins in the mid-70% range. But the stock is languishing. I don’t have an answer to this riddle today, but it is something that I watch very carefully. There would appear to be a lot of “potential” there, but we all know what they say about potential.

Marvell is on a short leash as well. While it should see improvement from the hard-disk drive industry in the second half, the company’s push into wireless communications has to begin bearing fruit in the second half as well. Here, again, is a name with potential.

The other big short-leash stock for me is Sun Microsystems (SUNW). This is a turnaround play that needs to keep turning, and I’d like it to turn a little faster. The status quo will not do, and you cannot wait forever. The history of technology and telecom is littered with names that were great turnaround stories that never turned and never got bought out like so many had expected.

Perhaps the most difficult stocks to make decisions about are those that wind up in the middle, like

Microsoft (MSFT) and even Cisco (CSCO). They are performing well from a fundamental standpoint, but (like Neustar) the stocks don’t do much. They don’t have the really big top-line growth to warrant the big P/E, but they generate globs (yes, that’s a technical term) of cash and have great balance sheets. But, if the stock is not performing, what are the catalysts? What is the timing of those catalysts? Is there another name that is more attractive from an investment perspective in that time frame? Is it just time to sell it and move on?

• The second question that you have to answer from a portfolio perspective is: What is the weighting?

Yes, it’s great fun to enter an investing contest and create a “portfolio” of a few very high-risk names. Why not? It’s only paper, and just like the lottery, hey, you never know. But presumably you’re dealing with real money here and you’re managing the portfolio professionally.

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So ask yourself: Are the names you’re confident in (based upon all the questions you asked yourself before) a sufficiently large percentage of the portfolio to make a difference? A stock that doubles isn’t going to do you a lot of good if it’s only a half-point position. Obviously, the opposite side of this coin is in play as well. Names that have been performing poorly but that you want to keep for their longer-term potential: How much weight do you want from those in the portfolio?

There are other decisions that are much harder to make because they involve being willing to trade around core positions. If I think Cypress is a very good long-term holding (and I do), there are going to be times when I know it has gotten ahead of itself for whatever reason. Those are the points at which it takes courage and confidence to say, “Now is the time to take some off the table.” Depending upon your timing, sometimes this can be accomplished with options like I’ve done with a number of names recently.

Paring back winners and protecting gains is very hard to do, in part because we’re convinced they’re going higher. It’s common sense; that’s why we own them. Just think about how badly you always feel when you leave money on the table. It’s tough, but remember how badly you feel when you sell stock down 15%, 20% or more. No one’s saying you should sell it to zero, but the dollars you take off the table are real profits vs. the paper ones we all dream about.

There are going to be times when Cypress corrects or gets oversold for some reason that I know is temporary, inaccurate or possibly an unnecessary overreaction and the company’s fundamentals haven’t really been impacted. That’s the time jump into an overweight position. While that’s easier to do than taking money off the table, there’s always that last bit of indecision hanging around saying, “What if they’re right?” If you know your investments, the companies, the technologies and the markets, it becomes quite a bit easier. But it’s never simple. Certainly, one way to reduce the capital at risk is with options (like the aforementioned Dell call contracts), but again you have to have the timing right.

The bottom line on weighting is relatively simple: You need positions big enough to matter, and with that comes risk. Risk gets mitigated with diversification, but you don’t want to diversify away your performance. Hey, if that’s what you want, buy an index.

If you’re an avid reader of TheStreet.com, you know there is no one way to invest and make money. There are no hard-and-fast rules, which is my reasoning behind discussing what I do at this juncture and every couple of weeks in between. This is what works for me and has for years.

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Issue 273: Tuesday, July 3, 2007 Company Name Date Initiated Cost Basis per Share No. of Shares Amount Invested Current Price % Gain/Loss IXTC at Buy Date IXTC Return Apple Computer AAPL 02/09/2006 $ 69.22 400 $ 27,686.00 $ 127.17 83.73% 203.51 30.88% Alvarion ALVR 02/22/2007 $ 8.24 2000 $ 16,480.00 $ 10.07 22.21% 249.10 6.92% Cisco Systems CSCO 02/07/2005 $ 18.08 600 $ 10,845.00 $ 28.10 55.46% 184.29 44.53% Cypress CY 09/14/2006 $ 16.16 2000 $ 32,320.00 $ 24.18 49.63% 202.16 31.75% Cypress (put options)

CYUX – 20 contracts 06/28/2007 $ 0.90 2000 $ 1,800.00 $ 0.75 -16.67% 256.18 3.97% Dell (call options)

DLQAX – 25 contracts 02/22/2007 $ 4.10 2500 $ 10,250.00 $ 7.20 75.61% 249.10 6.92% Dell (call options)

DLYAD – 20 contracts 03/08/2007 $ 4.15 2000 $ 8,300.00 $ 9.50 128.92% 236.57 12.59% eBay

EBAY 11/25/2005 $ 40.25 1000 $ 40,247.00 $ 32.15 -20.12% 189.11 40.84% Corning

GLW 02/15/2006 $ 24.46 1000 $ 24,460.00 $ 25.90 5.89% 203.35 30.98% Corning (put options)

GLWWE – 10 contracts 06/28/2007 $ 1.55 1000 $ 1,550.00 $ 1.40 -9.68% 256.18 3.97% Google

GOOG 02/09/2006 $ 371.45 60 $ 22,287.00 $ 534.34 43.85% 203.51 30.88% Google (put options)

GOPUW – 1 contract 06/28/2007 $ 25.30 100 $ 2,530.00 $ 20.40 -19.37% 256.18 3.97% Level 3 LVLT 02/22/2007 $ 6.03 2000 $ 12,060.00 $ 6.01 -0.33% 249.10 6.92% Motorola MOT 06/17/2004 $ 21.66 2000 $ 43,310.00 $ 17.88 -17.43% 179.63 48.28% Marvell MRVL 01/23/2007 $ 18.30 1500 $ 27,450.00 $ 18.32 0.11% 232.33 14.64% Microsoft MSFT 09/26/2002 $ 23.82 900 $ 21,432.00 $ 30.02 26.05% 92.19 188.91% NeuStar NSR 11/30/2006 $ 32.45 750 $ 24,337.50 $ 29.73 -8.38% 231.52 15.04% Apple (put options)

QAASB – 4 contracts 05/17/2007 $ 7.00 400 $ 2,800.00 $ 0.25 -96.43% 247.42 7.65% Apple (put options)

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Issue 273: Tuesday, July 3, 2007 Qualcomm QCOM 2/21/2006 $ 38.31 500 $ 19,155.00 $ 43.86 14.49% 237.13 12.32% Qimonda QI 2/21/2006 $ 16.63 1500 $ 24,940.00 $ 15.58 -6.30% 237.13 12.32% Riverbed Technology RVBD 6/14/2007 $ 40.44 150 $ 6,066.00 $ 44.17 9.22% 250.56 6.30% Sun Microsystems SUNW 0/02/2003 $ 4.56 2700 $ 12,312.00 $ 5.22 14.47% 159.65 66.83% Microtune TUNE 2/08/2007 $ 5.23 5000 $ 26,150.00 $ 5.20 -0.57% 242.65 9.77% Texas Instruments TXN 9/14/2006 $ 31.76 550 $ 17,468.00 $ 38.20 20.28% 202.16 31.75% Texas Instr. (put options)

TXNVU – 6 contracts 06/28/2007 $ 1.84 600 $ 1,104.00 $ 1.69 -8.15% 256.18 3.97% Verizon

VZ 10/19/2005 $ 31.64 250 $ 7,910.00 $ 42.12 33.12% 178.50 49.22% Verizon (put options)

VZVV – 3 contracts 06/28/2007 $ 2.80 300 $ 840.00 $ 1.95 -30.36% 256.18 3.97%

The Telecom Connection Portfolio – Performance Total Average Return 19.24%

2007 YTD Return 16.35%

Performance results listed here reflect values of stocks as of the close of the most recently completed trading day, and do NOT take into account dividends paid, interest earned or commissions. Results are updated overnight and posted prior to the market open the following business day. Sales are taken from the most recent purchase of that stock unless otherwise stated. The 2007 YTD Return figures reflect changes since the beginning of 2007. The Total Average Return figures reflect changes since inception on 8/14/2001.

Nasdaq Telecom Index Performance

Portfolio Inception Open Level Current Level % Gain/Loss Since

Portfolio Inception

2007 YTD Return

Nasdaq Telecom Index (IXTC) 8/14/2001 270.32 266.35 -1.47% 12.57%

At the time of publication, Mr. Faulkner was long CY, INTC, MRVL and MRVL calls, NSR, QI, TXN, TUNE.

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