Revisiting Cymer and LTC Properties

I'm not a particularly religious man, and that fact definitely helped me last week. It allowed me to literally not fear being sent to hell (as several readers wished I would be) for recommending Icos(ICOS Quote) before the Food and Drug Administration knocked the wind out the company's hopes for bringing an important drug to market this year.

But what really seemed to set a couple people off was my pointing out that the Icos position taken in InsiderInsights' Recommended List was stopped out before the gap down. Also, my reviewing of the newsletter's very good track record in what's been a very messy market was taken by some readers as my not making a proper mea culpa for the bad pick.

So to clear the air, let me just state: I'm not always right, and don't pretend to be.

A stark indication of my own awareness that the stocks I'm in aren't all guaranteed one-way winners is the fact that I advocate tight stop losses to limit losses and protect profits.

The verbal caning I got did supply some useful information, though. What I realized was that this column needs to focus more on updating stocks I present. Stopped-out positions and company updates are weekly features of the many stocks I follow in InsiderInsights and should be in this column as well.

Being so bearish on the market and shy of adding new positions, this is a good time to start. So below are updates of two stocks I've mentioned in past columns, and what I suggest investors do with them now.

Still a Bright Idea

After Cymer(CYMI Quote) released a good quarter and offered very encouraging guidance, its shares were taken down by, in our opinion, skittish investors taking profits. I guess I can't complain, though, because I was among the profit-takers. Putting myself on a short leash and setting pretty tight stop losses, I had ratcheted up my stop to $45 to protect the nice profit I had, and was taken out during the weakness (my original piece on Cymer ran in January).

Still, it's a shame. I feel strongly that this stock will be significantly higher 12 months from now, and will take a second position as soon as the chart firms.

Cymer is the world's leading supplier of excimer lasers used in semiconductor manufacturing. Although this is not, on the surface, a great industry to be selling into right now, Cymer's products are important to all the major chipmakers as they gear up for the technology upgrade cycle, which is now under way. Cymer's light sources are therefore in demand, even though many end products incorporating yesterday's silicon chips are experiencing slow sales.

This demand is demonstrated by Cymer's first-quarter results, which once again showed sequential revenue growth and proved that its sales clearly bottomed in the third quarter of 2001. The company even crossed back into profitability, earning 12 cents a share after posting two quarters of losses. This profit came even after this R&D-heavy firm spent 24% of revenue (equal to 35 cents in after-tax earnings per share) on, well, R&D.

Cymer was cash-flow positive to the tune of $237,000 in the first quarter, and, having raised cash last quarter, held nearly $11 a share of this liquid stuff on its balance sheet.

The company confirms that its product mix continued toward its newer product line in the first quarter, which shows that Intel(INTC Quote) and other major players are gearing up for making chips with ever more computing power. Sales of consumables used in older products also increased for the first time in five quarters, showing that Cymer's customers are doing better all around.

Year-over-year revenue and earnings comparisons are still unflattering (and would have been even more so if Cymer hadn't stopped amortizing goodwill last quarter), but we believe that is not the reason the shares are weak. Instead, we blame it on this damned market.

When you feel comfortable that CYMI's chart has firmed, take a position.

The REIT Stuff

The turnaround at LTC Properties(LTC Quote) is proceeding nicely, and I still see enough upside to suggest that readers establish a position right now if they haven't already done so (click here to see my original discussion of the company).

LTC is a REIT that invests primarily in long-term care (assisted-living) facilities. The company suffered from the foolhardy overexpansion in this sector by its tenants, who subsequently ran into financial troubles.

The bet with LTC is that the problems of its tenants had reached their peak, and that the firm could pare down costs, sell assets and become well again itself.

So far, so good.

Funds from operations increased to 34 cents a share in its recently announced first quarter, and LTC declared another 10-cent dividend to common stockholders. This is the second quarterly dividend for common shareholders since the company turned off the spigot to deal with its financial woes.

At this pace, the indicated yield on LTC is 4.9%. Management is not guaranteeing this payout will continue for the common stock, however, but has indicated that if it can pay, it will. But LTC's preferred shares are still the better play for income investors.

InsiderInsights' Recommended List and I personally are in LTC's common in anticipation of another 20% appreciation from present prices, as revenue creeps up and expenses (particularly interest expenses) drift lower.

LTC chief financial officer Wendy Simpson indicates that the company intends to pay down about $11 million of its now $160.5 million in mortgage loans and notes by year-end, and expects bank borrowings to be reduced by $5 million.

Reminding us that risk remains, however, LTC announced that it had to terminate five leases with a troubled tenant, and that a couple of loans with that same tenant are in default.

Simpson points out that the properties had been performing well, however, and that it was the tenant who had the problem. This means that finding new tenants for the properties is possible, and in fact, two of the five properties have likely already found another taker. This bodes well that any impairment charge needed for these properties later this year should not reverse LTC's turnaround.