Portfolio Update - 30th January 2010. Market weakness makes swimming against tide tough!

Falkland Oil and Gas (FOGL), Desire Petroleum (DES), Borders and Southern (BOR) – All Falkland Oil shares have fallen this week on oil price weakness and investor fight from riskier assets. (As an aside, my contrarian short play on Emerging makets would have eventually played out, after 3 weeks of heavy falls. Frustrating to have closed the shorts just before the drops). Having trimmed by positions as euphoria in the Falklands Oil story hit fever pitch two weeks ago, I have topped up this week on FOGL. Continuing to hold as Desire’s Ocean Guardian rig is due to arrive in the Falklands shortly and drilling will start by mid-February.



Nighthawk (HAWK) – Despite an update on the Jolly Ranch project (which said that the real news was due in February on the status of the drilling campaign), the share price remains stubbornly subdued at 32p. News on the water flooding at the Revere project is also anticipated. Holding at 31.5p.


Coal of Africa (CZA) – News that the acquisition of South Africa coal producer, NuCoal , was completed was not enough to give any positive momentum to the share price which finished the week at 118p. NuCoal should produce 4.2 million tonnes of coal per year. The lack of clarity on the approval process for the Vele project is still unnerving investors despite the fact that the company said it is accelerating capex on the project using some of the proceeds from the placing in October 2009. CZA confirmed that it would commence production of export quality coal in this quarter from it's Mooiplaats mine. Holding


GW Pharma (GWP) – The share price slipped a little this week as the markets generally took a tumble. Position increased on this weakness. Holding for approval news on the cannabis spray for MS, Sativex.


ITV (ITV) – News that ex Royal Mail boss Adam Crozier was appointed as Chief Executive did not cause much excitement in ITV’s stock price. Continuing to hold on expected recovery in TV revenues, hoped deregulation in TV market pricing and product placement.


Amgen (AMGN) – Despite heavy falls in the U.S. markets last week, Amgen had a good week, rising above $58. Some profits taken at $58.5 but continuing to hold core position on anticipation of Prolia (osteoporosis drug) approval in EU in this half of 2010.


INTEL (INTC) – After selling most of the position prior to the results at over $21, weakness in the semiconductor sector this week gave a buying opportunity at below $19 and therefore have reinitiated several positions.


Micron Technology (MU) – The worst performer of the week, having hit close to $11 3 weeks ago, the stock continues to slide close to $8.7 and with an average buy position of just below $10 this is showing a loss. The recent legal settmement between Samsung and Rambus did not help sentiment but concerns that Samsung may ramp up DRAM production or that inventories will rise have not helped the direction of the stock in recent days. Continuing to hold but on review.


Google (GOOG) – Position close at $555 after Q4 results disappointed markets with a fall from over $580. Stock now at $529 and looking at re-entry point.


JP Morgan (JPM) – Position initiated at $39. JPM is one of the better plays in the U.S. financial sector and has fallen heavily in the last 2 weeks from $43-44 range.

Another bad week for the markets. Maybe time to top up on volatility?

It’s been a painful start to 2010 for many investors for those that piled in in the early part of January having seen 3 weeks of declines. The Dow Jones flew past 10,700 early in the New Year, but now stands at 10,067 haven fallen every day last week bar one. The DOW, S&P 500 both fell 3% in January and the Nasdaq dropped over 5%.

Friday will be a key day for economic data as the U.S. nonfarm-payrolls data will give important information on the unemployment rate. Key U.S. earnings next week include Pfizer (PFE), Cisco (CSCO), Exxon (XOM) and in the U.K. oil and energy stocks will be in focus with BP (BP.), BG Group (BG.) and Shell (RDSA) reporting

So far 78% of the 220 companies in the S&P 500 reported earnings above analysts' expectations, (Thomson Reuters). In a typical quarter (since 1994), 61% of companies beat Wall Street targets. For the 217 companies that published revenue estimates, 67% topped the consensus expectation.

At around 10,000 on the Dow and with the FTSE hovering just above 5,000, it is still my view that the market offers relatively good value at these levels especially if the UK Bank of England and Federal Reserve continue to signal a continued period of low interest rates.

Amazon and Microsoft boost sentiment a little in tech sector

The DOW Jones industrial average declined yet another 115 points to finish where it was in November at 10,120. The UK FTSE 100 finished down 71 at 5,145. Sentiment was not helped by poor results in the session from mobile phone chip maker Qualcomm (QCOM) which fell 15% as it cut its 2010 outlook and a muted response to Apple’s (AAPL) new tablet computer the Ipad, which after weeks of hype clearly didn’t live up to overheated expectations.

However, after the close last night Amazon and Microsoft both posted better than expected results. Online retailer Amazon.com (AMZN) shares rose 2.7% to $128.69, after an initial 8% decline as results came through. The company said its fourth-quarter earnings rose 70% to $384 million (85 cents a share) against expectations of $0.70 a a share, helped by strong holiday sales of electronics. Sales rose 42% to $9.52 billion against analyst forecasts of $9.04 billion.

The company also said its board has approved a plan to buy back up to $2 billion in shares which may signal that either the company is envisaging that future earnings growth may be harder to come by or they cannot find a better way to spend their cash reserves e.g. buying companies.

Shares of Microsoft (MSFT) fell 2% to close at $29.16 in after hours trade. Second quarter net income rose to $6.66 billion, or 74 cents a share, from $4.17 billion, or 47 cents a share, in the year-earlier period. Revenue rose 14% to $19.02 billion. The results included $1.7 billion in revenue deferred from prior quarters, related to pre-sales and a marketing program for Windows 7. Analysts expected earnings of 59 cents a share on $17.9 billion in revenue. 

At current levels of both the FTSE and DOW are starting to look attractive after being overbought in January. Technical traders of the S&P 500 are looking at 1050 as a support (it is currently 1085). After 6 months where it was easy to make money on the stock markets of the world, it is going to get a little tougher in the remainder of 2010. Choosing undervalued stocks is key rather than betting on broad sector plays such as emerging markets or commodities. For Contrarian Investor this is a much more interesting market to play with the volatility.

Astra Zeneca news today supports negative view on the company

AstraZeneca (AZN.L) disappointed the markets today with downbeat forecast for 2010 and failed to hit fourth quarter earnings estimates. EPS (earnings per share for 2010) would be in a range of $5.75 to $6.15, down from $6.32 in 2009. Astra's core pretax profit rose 10 percent to 2.88 billion in the fourth quarter, giving earnings per share of $1.42 on sales up 9.0 percent at $8.95 billion. Analyst estimates for earnings, which exclude certain restructuring costs and charges, to come in at $1.57 per share and sales at $8.85 billion. Sales of cholesterol-lowering drug Crestor rose 20 percent to $1.26 billion, while gastrointestonal product Nexium fell 7 percent to $1.28 billion.

 Astra said that "The next five years will be challenging for the industry and for the company, as its revenue base transitions through a period of exclusivity losses and new product launches," Revenue for 2010 will be hit by the expected loss of U.S patent protection for breast cancer drug. Arimidex and asthma drug, Pulmicort.


Astra said it expected a fall in sales of up to the "mid-single-digit" in 2010 as benefits from H1N1 swine flu vaccines and unexpected revenue from heart drug Toprol XL, thanks to market withdrawal of generic competitors, wash out.


In order to mitigate the impact of patent expiries and previous failures in the R&D pipeline on future earnings, Astra said it would buy back up to to $1 billion in shares in 2010 and would cut an additional 8,000 jobs as it seeks to cut costs.


As I wrote a couple of weeks ago, Astra’s relatively low P/E (2011 forward P/E of 8) versus its industry peer group is enticing but the news today’s supports the hypothesis that there is much risk in the company’s future earnings stream. The shares are down 3% today to £29.60.

Nighthawk Energy Update fails to ignite share price

Nighthawk Energy (HAWK) today updated investors on their key Jolly Ranch project in Colorodo. Unfortunately the market seems to have been signficantly underwhelmed, with an initial rise being followed by a 2.6% fall to 33.25p.

Todays RNS stated that the results to date "reinforcing confidence in the financial viability of the Jolly Ranch asset". David Bramhill (Managing Director) said that "We continue to be encouraged by the appraisal drilling results. Strong progress has been made and our understanding of the project has evolved."

On the face of it, the results seem to be pointing in the right direction. The 15 wells drilled to date on Jolly Ranch have encountered over 150 oil bearing horizons in conventional and non-conventional zones. The Craig 4-33 well has been tested at an average rate of 130 barrels of oil per day (bopd) over a sustained two-week period and is now set to be placed on full production. Three further wells, Craig 10-28, Craig 12-28 and Craig 12-33 are currently undergoing completion and are expected to be placed on production in early February. An additional well, Craig 15-32H will undergo mechanical remediation after three of its four zones were sand fracced with oil.

Patience seems to be required with the real action due to start in February. The RNS today, promised share holder updates on a regular basis. As well as Jolly Ranch the Revere Water Flooding project results are still awaited. Things seem to be proceeding to plan, and I will continue to hold HAWK shares for further drilling updates which may validate the oil in place predictions released in July 2009 of some 1.5 billion barrels of oil in place.

Coal of Africa Completes NuCoal acquisition

South African coal miner, Coal of Africa (CZA) announced today thay the company had completed the acqusiiton of fellow coal miner, Nucoal for 467 South African Rand ($61 million) and this is fully funded by the share placing which took place in October 2009. The remaining proceeds of the placing will be used to accelerate capital expenditure at the Vele Coking Coal project. However news on the Government approval of the Vele Mine does not seem to be addressed.

AMGEN EARNINGS NOT OUTSTANDING, PROLIA APPROVAL KEY

The world's largest biotech, Amgen (AMGN), posted a disappointing Q4 performance after the close yesterday due to slowing sales of Aranesp, Neupogen and Enbrel. The stock price rose 0.8% after hours to finish at $56.20.

The company reported net income of $931 million, or 92 cents a share for Q4, compared with $925 million, or 87 cents a share, for the same period in 2008.Revenue for the quarter increased 2% to $3.81 billion and it reported adjusted earnings per share of $1.05 vs. $1.06 in 2008. Analysts expected Amgen to report earnings of $1.14, on revenue of $3.84 billion.

Amgen said it now sees 2010 revenue coming in between $15.1 billion and $15.5 billion. Adjusted earnings per share are seen between $5.05 and $5.25. Giving a forward P/E of 10.6 assuming earnings at the upper end of the forecast.This was bang in line of EPS of $5.11, on sales of $15.27 billion.

Sales of Amgen's flagship anemia product Epogen rose 9% to $703 million as prices rose, while sales of its newer anemia therapy Aranesp fell 8% to $648 million due to a fall in demand for cancer care related use.

The company announced hat it has submitted additional information to support U.S. approval of its osteoporosis drug Prolia (denosumab), The U.S. FDA said recently it would not consider approving the product until Amgen provided more supporting information. The European advisory body on drug safety recommended the drug for European approval at the end of 2009 and launch is expected during the second half of 2010 on this side of the Atlantic.

Given the low valuation on future earnings and prospects for Prolia, Amgen remains a strong buy for Contrarian Investor. For a biotech stock, Amgen offers good value.

Amgen posts Q4 2009 Earnings on Monday

Core biotech holding Amgen (AMGN) posts Q4 2009 and full year 2009 earnings after the market close on Monday.

25% of the companies in the U.S. S&P 500 report next week including Caterpillar (CAT), Conoco Phillips (COP),  Chevron (CVX), Boeing (BA), AT&T (ATT) and Verizon (VZ).

Planned stock sales by Google founders may further depress price

After Friday's closing bell, Google (GOOG) said co-founders Larry Page and Sergey Brin will each sell about 5 million shares under pre-arranged stock trading plans putting my holding in the frame once more.

Although the sale of the stock is likely to be spread over an extended period of time to minimize market impact. it may further knock sentiment on Monday after the disappointing reaction to Q4 earnings on Thursday. The co-founders hold about 57.7 million of Class B common shares, which represents around 18% of Google's capital stock.

Buy or sell of position to be reviewed Monday.

Strong results from disk drive makers look to strong PC market in 2010

Impressive Q4 results and a positive 2010 outlook from Seagate (STX) and Western Digital (WDC) last week support the prediction that this year will be strong for PC sales. It looks like the fundamentals for companies involved either in consumer or enterprise computer sales should do well this year. The Microsoft (MSFT) results due this week should be encouraging.

However, my holding in Micron Technology (MU) was hit hard last week finishing close to $9 despite this positive outlook on the markets in which it operates (DRAM chips). On Thursday,  Rambus Inc. (RMBS), the chip-design company, announced a major legal settlement with South Korea's Samsung Electronics. In the deal, Samsung (SSNHY) will pay Rambus $700 million over five years, and purchase $200 million of Rambus stock. Samsung, Micron and Hynix Semiconductor Inc that had been engaged in five and a half year litigation with Rambus over price fixing allegations. This leaves Micron potentially more exposed to a pay out after the Samsung settlement out of court. 

Portfolio Update January 23rd 2010

Falkland Oil and Gas (FOGL) – A volatile week for the Falkland Islands oil exploration companies. For example, FOGL peaked the week at 182p (where profits were taken) and finished Friday at 166p. Following an initial sale, the position was increased at 162p. The Ocean Guardian Rig is now off the coast of Brazil and is expected to arrive in the Falklands in the next 2 weeks. Drilling for Desire Petroleum (DES) will commence by mid-February. Announcements of rig sharing with Rockhopper (RKH) and potentially BHP/FOGL are expected any time soon. With rig arrival, it is expected that publicity for these oil stocks will drive prices higher and investors scramble on board. With these type of shares, its “buy on the rumour, sell on the fact”.

Borders and Southern Petroleum (BOR) and Desire petroleum (DES) – Position continue to be held in these Falkland plays for the reasons above.

GW Pharma (GWP) – Position increased this week as news on Sativex approval continues to be sought.
Coal of Africa (CZA) - Operational update expected any day. News on Vele mine approval anticipated. Position trimmed but still holding.

ITV (ITV) – With the General Election in the U.K. and World Cup expected to boost TV revenues from the very low levels of 2009, this continues to  be a hold. The negotiations for the Contract Rights Renewal are ongoing with the Competition Commission and OFCOM, the formula that dictates ITV’s ad rates. It is widely expected that the rules, which were created at the formation of ITV in 2003 by the merger of Carlton and Granada, will be relaxed. Potential upside from any relaxation in the rules for Product Placement in programming could generate a potential £100 million plus in additional revenues. Though debt is fairly hefty at over £700 million but this has been refinanced during 2009 but it is expected that aggressive cost cutting led by new Chairman Archie Norman should bring this under control. At 57p, ITV is below analyst targets of 70p and may still be a takeover target.

Nighthawk Energy (HAWK) -  Little movement this week, closing at 32p. Holding for drilling update.

Amgen (AMGN) – Despite the significant falls in the Dow Jones Industrial average in the latter part of the week, Amgen remained relatively resilient at $56.6 as a Republican Victory  in a Senate Election made Obama’s healthcare reform programme less likely to proceed drove up pharmaceutical stocks. Holding.

Google (GOOG) -  A trade in Google prior to the results did not produce positive results with a fall from $580 to $550 during the course of yesterday. Decision to sell under review.

Intel (INTC) – Positions trimmed during the week on Nasdaq strength on Monday and Tuesday. Holding  small position

Micron (MU) -  A very poor week for Micron with a fall from close to $11 to $9.13 as the semi conductor sector fell away at the end of the week. Holding but position at loss with purchases averaging $10.2.

Google earnings underwhelm market despite strong growth

Google (GOOG) posted fourth quarter earnings after the close last night and showed big profit and sales gains as it continued to see an increase in the number of users clicking on its Internet Adwords ads. This very much supports the investment thesis in ITV that media companies will see a significant recovery in revenues in 2010 as advertisers boost investment to more normal levels.

Google’s net income rose to $1.97 billion, or $6.13 a share, in the quarter ended in December, compared with $382 million, or $1.21 a share, in the same period in 2008. Excluding special items, earnings for the quarter were $6.79 a share, compared with analyst estimates of $6.48. After falling close to 5% in after-hours trading to $550, following the earnings announcement, the stock recovered to finish the session at $582.

The stock fell initially on disappointment with the average price paid per click on a Google advertisement in the quarter. Google said the average price paid by advertisers rose 5% compared to the same period last year.The company said its paid clicks, or the number of times that users clicked on advertisements and generated revenue, rose 13% in the fourth quarter compared to the same period last year. Google had posted 14% year-over-year growth in paid clicks for its quarter ended in September.

Google’s stock has risen close to 100% since the lows in 2008 and expectations are very high. Though the results are impressive, they have underwhelmed the market which has built super charged growth into the share price. A short term trade in Google pre earnings release was initiated  but has not delivered and will be reviewed at today's open.

U.K. General Election result should drive direction of the Pound

This morning there was an interesting debate on CNBC after the future direction of the British Pound versus the Euro. The Euro has been under pressure over the last few weeks as Ireland, Portugal, Spain and particularly Greece struggle with huge budget deficits and sharply declining GDP’s.

If the Bank of England decides to maintain rates at 0.5% despite the worrying inflation numbers released for December, the pound could come under pressure as other economies raise interest rates faster as their growth recovers faster. This is already happening in Australia and although the U.S. Federal Reserve seems to be reluctant to raise interest rates in 2010, 2011 may be a different scenario particularly if U.S. treasury auctions to fund the huge budget deficit start to become difficult.

Both the Labour government and the Conservative opposition in the U.K. acknowledge the current budget deficit needs to be tackled but detail on is scant as the Election looms this summer. VAT moved back to 17.5% from 15% in January and several tax increases are due to hit in the next financial year starting April but the deficit remains a significant concern for the U.K. economy. The issue of government debt (Gilts) to fund this budget deficit has been supported by the Bank of England’s Quantitative Easing (QE) programme, but this will come to an end this year. In Q3 2009, the Bank of England bought some £97 billion in Gilts as part of QE.

The risk is that this Summer’s General Election will produce a Hung parliament where no party has an overall majority and this will slow down efforts to bring down the deficit. If this happens there will be a double whammy as Gilts continue to be issued and QE slows down to soak up the issue of this debt. The price of Treasury’s will fall as demand drops for these securities and the yield will rise. If the deficit is not dealt with quickly, there is a risk of Credit Rating Agency downgrade, reducing the U.K., triple A rating which again would push Treasury’s lower and the pound. A clear Conservative party win should reassure investors and drive Sterling and government debt prices higher. Therefore the future direction of the Pound seems linked not only to the future movements in Interest rates but are intrinsically linked to the Election. Uncertainty spooks investors, and a party without a clear electoral mandate through a majority in Parliament may be bad news for investors in Sterling.

Cadbury - Buffett expresses doubts on takeover price

Yesterday, Kraft Foods (KFT) of the U.S. increased its bid for the UK confectioner Cadbury (CBRY) to £5 per share in cash and 0.1874 Kraft shares for each Cadbury share (up from its previous offer of £3 per share in cash and 0.2589 Kraft share for each Cadbury share). The deal values Cadbury at a 13 times 2009 earnings. Last night Warren Buffett, a major shareholder in Kraft, said that the company had over paid for the acquisition to proceed with the share price having almost doubled since the bid (closing yesterday at £8.34) was announced and valued the company at £11.5 billion.

The combined firm will overtake Mars/Wrigley to operate as the leading player in the global confectionery market but with margins under pressure as the price of raw materials continues to rise, U.K. workers union fears that that Kraft may take an axe to the Cadbury organisation to aggressively cut costs may be the key driver to deliver a return on this investment.

With Buffett, expressing his reservations about the deal, Kraft management have a lot to prove. As the history of these type of high premium takeovers shows, shareholders are often disappointed. Let’s see if Kraft management follow the trend.

Falkland Islands Oil companies show share price correction

After seeing 20-40% increases in the share prices of the four Falkland Oil exploration companies over the last 2 weeks, we are finally seeing a correction down with falls over around 10% since the highs seen yesterday morning.

As it stands today, the market capitalisations are:

Desire Petroleum DES £392 million (excluding placing and open offer)
Borders and Southern Petroleum BOR £312 million
Falkland Oil and Gas FOGL £236 million
Rockhopper RKH £139 million

The combined value of these 4 companies now stands at over £1 billion and this is without any results from drilling. Positive news is due in February when the Ocean Guardian rig arrives in the Falklands to start drilling for Desire in the Nortern Basin (where Rockhopper also have rights). Through its farm in with BHP Billiton, news is expected from FOGL on the potential deep water rig which is needed to drill in the Southern basin of the Falklands (where BOR and FOGL have acreage).

Given the hype which was driving these stocks, it was prudent to trim my positions signficantly. FOGL sold at 182p and today bought back at 162p. Also bought into Desire at 125p today and continue to hold position in BOR. The excitement should continue when the Ocean Guardian arrives in February, but have used controlled risk stops on Contracts for Difference (CFD to limit the down side risk.

ASTRA ZENECA (AZN) - cheap or not?

BACKGROUND

AstraZeneca is one of the world's largest pharmaceutical companies, with 2008 sales of $31.6 billion and $6.1 billion in profits. 2009 sales are expected to top $32 billion.


It is interesting to note Astra Zeneca's (AZN) relatively low forward price/earnings ratio (around 8 for 2010 and 2011) versus its peer group and healthy dividend (4.1%). This appears to make it attractive versus other companies in the pharmaceutical space who generally trade on p/e ratio's above 10.  But before buying the stock "hand over fist" it is worth considering that the company formed from the merger of Astra of Sweden and Zeneca of the U.K. in 1999 has experienced a run of failures of drugs in late-stage clinical trials which makes the earnings picture hazy from 2014 onwards. Despite substantial R&D investment, the company's development pipeline has failed to produce a strong stream of future blockbuster drugs. Phase III clinical trial failures over the last 5 years include Galida for diabetes, Exanta to prevent thrombosis (blood clots), NXY-059 for stroke, Iressa for lung cancer, and AGI-1067 for prevention of atherosclerosis (hardening of the arteries).


After this long run of failed late-stage clinical trials, in order to boost its pipeline, AstraZeneca completed the acquisition of vaccine maker MedImmune in June 2007, paying $15.2 billion, a significant price premium to what analysts considered a good buy. Subsequently, AstraZeneca consolidated its biologics portfolio in MedImmune having also acquired Cambridge Antibody Technology (CAT) in 2007 again at a premium price.


AstraZeneca has eleven blockbuster drugs (with $1 billion or more in annual sales) in five different therapeutic categories. The strong performance of these drugs has driven earnings growth in recent years. These are (based on 2008 sales):

• Nexium $5.2 bn- gastro intestinal
• Seroquel $4.2 bn - anti psychotic
• Crestor $3.6 bn - cholesterol lowering
• Symbicort $2.0 bn - respiratory
• Arimidex $1.8 bn - cancer
• Pulmicort $1.5 bn - respiratory
• Atacand $1.5 bn - cardiovascular
• Casodex $1.3bn - cancer
• Synagis $1.2 bn - infection
• Zoladex $1.1 bn - cancer
• Prilosec $1.0 bn - gastrointestinal

POTENTIAL NEGATIVE DRIVERS
Litigation
AstraZeneca's most successful drug for the treatment of psychiatric disorders is Seroquel. Seroquel competes in the antipsychotic drug market, and can be used to treat  conditions such as schizophrenia.  However, the drug may significantly increase the risk of diabetes and the company is facing several thousand lawsuits involving 15,000 patients alleging that the company knowingly downplayed weight gain and diabetes risks. In mid 2008, AstraZeneca won a U.S. patent battle against generics manufacturers, securing its exclusivity to Seroquel until at least 2011.Sales of the drug were $4.45 billion in 2008.


Patent Expiry
Patent expiry issues are the largest drag on AZ's earnings outlook. Pharmaceutical patents generally last about 20 years during which a pharmaceutical company has an exclusive right to manufacture a particular drug (it can take well over 10 years to bring a new drug to market from discovery). After the patent expires, generic versions of the product can be produced and sold by competitors. Generic medication is cheaper than brand medication, undercutting the pricing power of the original pharmaceutical producer. Generally speaking the loss of patent protection for brand named drugs may reduce sales by close to 90%.


Eight patents on drugs that represent 60 percent of Astra Zeneca's current sales are due to expire by 2016. The company also has eight products near the end of its product pipeline and launch. However, it is not clear whether all of these drugs will receive regulatory approval or whether they can replace sales lost to generics.

AstraZeneca's Pulmicort was the subject of a patent infringement settlement in late 2008. Israel-based Teva Pharmaceutical Industries had released and been selling a generic version of the drug in the United States, but AstraZeneca threatened with a law suit and successfully forced a settlement. Teva will cease sales of the drug until December 2009, when it will pay AstraZeneca royalties.Nexium, which treats stomach ulcers and heartburn, is one of the world's biggest selling prescription medicines with annual sales of around 2.6 billion pounds. AZ has reached an agreement with Ranbaxy to produce a generic version from May 2014, delaying introduction of competition by several years.

POTENTIAL POSITIVE DRIVERS

New drug indications
AstraZeneca's anti-cholesterol drug, Crestor had $3.6 billion in sales in 2008 with its patent due to expire in 2016.. In December 2009, the U.S. FDA panel backed an expansion of Crestor's labelling to treat patients with relatively low cholesterol levels who are otherwise at risk for heart disease. This expansion could open the market for Crestor significantly, the FDA estimates by an additional 6.5 million patients, and 2012 projections for the drug now reach $6.75 billion, almost double 2008 sales.


New products

One promising drug for AstraZeneca is Brilinta, a late-stage development drug which thins blood and helps prevent complications after surgery or in those patients at risk from stroke or heart disease. The drug, also known as ticagrelor, has been shown in a study to have lower death rates than competitor Bristol-Myers Squibb Company (BMY)'s Plavix.

During 2009, data from the PLATO trial of 18,600 patients with acute coronary syndromes (ACS) demonstrated a 16% relative risk reduction in death from cardiovascular causes, myocardial infarction (MI) or stroke and a 22% risk reduction of death from any cause, compared to current market leader,Sanofi Aventis' Plavix.The extent of this benefit in favour of Brilinta was at the top end of analyst expectations' and even outshone Effient in terms of efficacy, Eli Lilly’s (LLY) antiplatelet agent which received regulatory approval in 2009.. However, while Effient’s improved efficacy over Plavix comes at a significant cost of an increased risk of major bleeding, the Plato data showed no overall difference between Brilinta and Plavix in major bleeding rates.

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There were some concerning safety and efficacy signals from the PLATO data. Although Brilinta was similar to Plavix looking at the risk of major bleeding events, AstraZeneca's drug did cause significantly higher rates of minor bleeding, as well as showing a trend for increased intracranial bleeding and strokes, although these were not statistically significant. In addition, Brilinta caused a higher rate of breathlessness and increased blood levels of uric acid and creatinine, side-effects that have not previously been observed with either Plavix or Effient. However, most analysts and experts do not expect these more minor safety issues to be a barrier to approval, although clearly they will attract particular regulator scrutiny and will be part of any post-approval risk management programme. What was attracting slightly more concern was sub-group analysis which revealed an anomaly in the U.S., the biggest commercial market for Brilinta. The Plato trial was divided into 66 sub-groups, 33 covering safety and 33 over efficacy. Of the 33 efficacy sub-groups, 30 were consistent with the overall trial results, however two groups in North America showed no benefit with Brilinta with a trend towards a worse outcome. Trial investigators are so far at a loss to explain this anomaly, having already re-examined the data for clues. The negative result could be down to regional differences in patient populations or practice patterns, or just a “statistical fluke”.

Whilst clearly a risk, and of specific concern for FDA approval, given the overwhelming nature of the overall positive data, the drug is likely to be approved, but the regulators may well request  additional studies in the U.S.  which may put back approval 12 months or more.

One of AstraZeneca's largest new products is Onglyza (saxagliptin), a diabetes drug co-developed with Bristol-Myers Squibb and approved in the U.S. in mid-2009. However, even before its launch in 2009, competitor Novartis has developed a drug called Galvus. The two drugs share significantly similarities in chemical structure and pharmaceutical action, so it is unclear how Onglyza will perform in the market


Dividend Yield
Astra Zeneca has a commitment to paying a good dividend. Currently the stock is yielding 4.2%.


SUMMARY
The firm faces many challenges in the mid to long term.  AstraZeneca's prospects after the year 2010 are unclear. Despite a 28% increase in research and development spending in 2007 to $5 Bn and another $5 Bn in 2008, it has failed to produce any truly ground breaking drugs to complement its portfolio largely due to bad luck with late stage clinical trial failures. Brilinta is a vital component of AZ's patent expiry protection plan.


BUY OR AVOID?
Positive news on Crestor and Brilinta is a solid start to cover the $20 billion plus of patent expiries due over the next 5 years. But much remains to be done in terms of new products and as the company knows only too well, commercialisation of drug discovery doesn't always go to plan.


AZ is purely focused on pharmaceuticals unlike competitors like GlaxoSmithkline, Johnson and Johnson and Novartis which means that drug failures have a disproportionate impact on future earnings growth. In addition the patent expiry situation will hit earnings hard if new products of a signficant size are not delivered consistently.

The company may also embark on another round of acquisitions to strengthen the R&D pipeline and they have a history of paying top prices. On the other hand, AZ itself may be target of a takeover but at close to £46 billion market capitalisation, it would be difficult particularly in this environment where bank funding of debt is still not normalised. A friendly merger, perhaps with the likes of Novartis is a more likely scenario.


Although the company is not expensive based on classical valuation metrics, the risk appears signficant that things may not go to plan due to the usual uncertainty with clinical trial success and regulatory scrutiny. I am avoiding Astra Zeneca for now, especially with price going over £30 with the pharmeceutical sector being upgraded over the last few days. AZ seems a share to buy on a set back rather than now after its very strong run from close to £27 at the end of 2009 to its current £31 (52 week range £21.47-£31.08). Amgen remains a favourite for Contrarian Investor in this sector.

Earnings in full flow this week

Lots of interesting U.S. financial stock earnings this week kicking off with Citigroup on Tuesday (U.S. market closed Monday), followed by Goldman Sachs and Morgan Stanley later in the week. IBM and Google as well as Advanced Micro Devices are key technology stocks in focus for earnings. General Electric and McDonalds should also influence sentiment.


In the U.K. Land Securities should give further information on the state of the commercial property market and Taylor Wimpey on residential property.

EDUCATION SEGMENT - Contrarian Investor's Guide to stock picking

DECIDE YOUR INVESTMENT STYLE
Investors make money in several ways:

1. Long term value investors in the ilk of Warren Buffett “the sage of Omaha”. They buy and sell stocks on the basis of perceived value in the price based on fundamentals and tend to hold as long term investments.

2. Trading investors, who look for short to medium term opportunities in stocks, currencies and bonds. They can hold for hours or even minutes looking for quick profits on fast changes in valuations.

3. Stock picking investors have several approaches. They either go for:

-- A Game Changing pick which is going to change the landscape of an industry e.g. Apple with Ipod,. Investors can profit in these stocks by doing research and buying in before the crowd and especially the investment community get the stock on their radar.

-- Inflection Point stocks have poor business model that they’re aiming to turn around and fix. Buyers find a turnaround early often when sentiment is at its weakness and make very large gains albeit it at some risk.

-- “Under the radar” stocks are stocks no one is talking about , but can produce explosive growth if the fley blossom

4. Income seeking investors looking for solid and preferably growing dividend payments

5. Contrarian investing

The greatest profits are there to be had if you manage to find that out of favour stock which is due to a significant re-rating before the City or Wall Street Analysts rediscover it. Warren Buffett once said “Be fearful when everyone is greedy, and be greedy when everyone is fearful". When the Sunday Newspapers are talking about the stock market on the front page its often a strong signal to sell or buy. If the headlines are full of stories about “All time highs” then it might be a time to slim down the portfolio and conversely if the papers talk “Crisis in the markets. Depression looms!” then its normally a sign that bargains are there to be had. Another sure sign indicator of problems ahead in a particular sector is large amounts of fund manager advertising for a particular fund just at the time the sector peaks. A classic illustration of this was the launch of several emerging markets funds in the Spring and summer of 2007 and early 2008 often in highly specialist markets such as the Middle East and Africa or Commercial Property Funds. These funds have fared particulary poorly in the subsequent period during 2008 and 2009

The markets and particularly private investors behave like a flock of sheep. Selling their holdings at the bottom because according to the press there is no light at the end of the tunnel. In the case of small capitlisation stocks under £50 million in value this can be particlaularly problematic since the number of sellers can be relatively large and the number of buyers is very small. Hence the price drops dramatically. Those with stop losses that trigger an automated sale if the price drops below a certain level also join the chain reaction and within a short period of time a company with a reasonable market value has dropped to below its cash in bank value.

Well known contrarian investors like Warren Buffett looks for under valued investments that are “out of fashion”. His company Berkshire Hathaway has been one of the success stories of the investment community and made Buffett one of the richest men in the world by investing in companies which can deliver long term growth in profits or earnings per share. He famously avoided the technology boom and bust in 2000/2001 since he only invests in companies he or his team can fully understand and have a history of sustainable profitability. He chooses stocks on the basis of metrics such as % gross margin,return on equity, return on capital employed


CHECK OUT THE FUNDAMENTALS

First of all ask yourself a few questions.

How does the price/earnings (p/e) look? – The FTSE 100 currently trades at an average P/E of 18, the DOW Jones Industrial Average trades at just over 18  and the S&P 500 trades at close to 91. But rather than looking at a P/E in isolation to ascertain the valuation of a share, you need to look at it in comparison to its sector.

e.g. let’s look at the historical and forecast p/e’s of pharmaceutical stocks in the U.K.

                                                                Latest p/e            Forecast p/e

Glaxo Smithkline (GSK)                            11.9                10.4

Astra Zeneca (AZN)                                    9.6                 7.8

Shire (SHP)                                                  61.9              21.0

So based on expectations of the forward p/e Astra Zeneca Looks cheaper than GSK, whereas Shire looks expensive , probably due to a an expectation of a takeover at some point which drives a sector premium.

Is the balance sheet OK? -  check the cash and short term investments on the balance sheet versus the debt of the company. This can be easily fond on the internet using sites like www.yahoo.com  or www.digitallook.com .When is the debt due for repayment? Could there be a fund raising to raise cash to bring down debt? If you divide the cash the company has by the number of shares in issue, this will give an indication of cash per share. Some of the big tech names in the U.S. have significant cash on their balance sheet, e.g. Intel, Apple, Google which gives support to their share price.

Have directors been buying or selling shares? – Consistent buying or selling of shares by directors can be indicative of a company’s prospects but take this with a pinch of salt e.g. a company director may need to sell stock to meet a personal obligation rather than because of an issue with the company. Again, many web sites have information about director deals including the ones cited above.

Broker recommendations – How many brokers are saying that the share is a buy, hold, strong buy, sell. If every broker is selling a stock is a buy this can often be a contrarian indicator because expectations are universally high. With such a company, one earnings disappointment can drive a stock much lower. The converse is true with a company which everyone advises to sell, but any surprise on the upside can cause broker reratings and a large move up.

               

2.   WHAT IS THE INVESTMENT THESIS?

Why are you buying the shares of this company and why are you devoting your assets to buying it versus another company? You should always have an investment thesis for buying a stock e.g. because it pays a good dividend, because it’s launching a new product, because its a consumer recovery play, because its earnings are growing faster than any other company in its sector.

3.    WHAT IS THE NEWS FLOW?

Ask yourself, what are the catalysts for a change in the share price. Although overall market sentiment and the sector the company operates in is a significant shifter of the price, it is often news flow that drives a share price change either up or down. This particularly impacts oil and gas or  mining companies where asset valuations can change rapidly on the announcement of a discovery. Biotech and pharmaceutical companies can also see a dramatic change in share price, particularly in the case of small cap shares. Look at historic news flow, particularly regulatory announcements to ascertain what is likely to come up in the near future, either good or bad.

4.    WHAT IS THE MOMENTUM OF THIS STOCK?

There is an excellent adage, “never catch a falling knife”. Looking at a company with depressed share price can give the illusion that it is cheap based on the historical share price. Make sure you check the fundamentals, particularly earnings estimates before jumping in because the stock can get cheaper still! Timing the purchase of a stock is everything. Often the share price chart of a share looks frightening because it been up and up over a period of time. But you should ask yourself the questions, what are the fundamentals and what is the news flow to check whether its the right time or definitely the wrong time. For companies who are still not making profits, then clearly future news flow is the primary concern and then the strength of the balance sheet.

5.    WHAT IS THE OVERALL MARKET SENTIMENT LOOKING LIKE?

Probably 50% of the likely direction of a stock is dictated by the overall market sentiment. If the market is likely to be heading in a certain direction, investors will Sector Rotate. That is:

Examples of Sector rotation:

Defensive stock rotation: Tobacco, pharmaceuticals, utilities, Consumer staples, Defence

Growth stock rotation: Technology, Consumer products, Property, Commodities

For example, it may be a bad time to buy a tech stock if the overall market is heading for recession. Conversely, a tobacco company may be a good buy.

6.    DO YOU GO LONG OR SHORT?

With the advent of Spread Betting and Contract’s for Difference (CFD)’s through providers such as IG Group, it is easy to either sell a stock short and make money if the stock price falls or go long and make money if the price appreciates. The benefits of either CFD’s or spread betting is that they are leveraged vehicles i.e. you can buy a substantial amount of shares using margin (more than you could if you just bought the stock with the same amount down), which can accelerate your gains or your losses.

If you believe a stock is significantly over valued, then sell short. For example I was looking at the Cinema Company IMAX in the U..S. last weekend which had risen by close to 50% over the last few weeks as Avatar 3D fever gripped the cinema sector. Directors starting to sell as the valuation got into the stratosphere. After hitting $14 earlier in the week, I was tempted to go short. In fact, it dropped before I could get the position in but it is around $12.50 now.


DIVIDEND POLICY
The U.K.in particular has a strong dividend payment culture in contrast to some of other countries such as the U.S. where companies are increasingly less focused on the this shareholder payment mechanism and instead tend to reward share holders through share buy backs which have the effect of boosting earnings per share by reducing the number of shares in circulation - the profit in effect is split around a fewer number of shares. A high dividend yield is often sought by so called “income investors” which look for quarterly or annual dividend payments. The dividend yield is calculated by diving the dividend payment by the share price. A company with a solid and growing dividend payment gives support to a longer term holding in a particular stock and when combined with earnings growth can be a powerful formula for above average investment returns. Pharmaceutical, Tobacco and Utility stocks, the classic defensives tend to pay above average dividend and usually have a progressive dividend policy where payments are increased annually above inflation.

Portfolio Update January 16th 2010

INTEL (INTC) - After the market close Thursday, the chip manufacturer announced better-than-expected fourth-quarter earnings and a strong outlook for the year ahead. Despite rising after hours yesterday, they finished 3.2% down at $20.80. With a forward p/e of 13 and with the company's 2.7% dividend yield supported by $12.9 billion in cash on its balance sheet, with just $2.4 billion in debt, INTC looks strong for 2010. After selling 50% of my  stock prior to the results, bought back in yesterday. Looking for $22-23 in short term.


AMGEN (AMGN) - The stock traded in a narrow $55-57 range this week after guiding down estimates for 2010 earlier in the week. Holding on news of osteoporosis drug, Prolia in Europe.


MICRON (MU) - Have traded MU, selling several times above $10.8 and have bought back at $10.1. With memory chip prices improving, Micron is postioned well for the semiconductor recovery.


JP MORGAN (JPM) - Position sold Thursday prior to Friday results.  JPM finished down 2.26% at $43.68 as Q4 results disapointed on the top line as bad debts continue to be a concern and there was surprise that despite the repayment of TARP (toxic asset relief programme) in 2009, the dividend was not increased. Under Jamie Dimon's leadership this is one of the stronger U.S. financial instritutions and will be looking to buy in on any continued weakness.


FALKLAND OIL AND GAS (FOGL) - The share continues to sharply move up , finishing the week at 168p, a climb of over 20% as Falkland Islands hysteria begins. Some profits taken but holding on deep water rig news or agreement to share Ocean Guardian Rig with Desire Petroleum.


BORDERS AND SOUTHERN PETROLEUM (BOR) - The company holds a 100% interest in five production licences in the South Falkland Basin. In November Borders & Southern raised £113m, enough to finance the drilling of three wells. Is is likely to share a rig with fellow south basin explorer,  Falkland Oil & Gas. This is partly because Borders & Southern‘s licences are in the deep waters to the south, but also because Desire and Rockhopper have already secured their rig. Position initiated at 66p.


GW PHARMA (GWP) - Position increased. Price now 93p.  Awating news on European approval of lead product, Sativex


ITV (ITV) - Position initiated at 55p with positive momentum in media stocks and turnaround story under Archie Norman. 


NIGHTHAWK (HAWK) - Holding with drilling news from Jolly Ranch and Revere projects still expected shortly.

ITV upgraded by UBS and Product Placement

ITV up 2% this morning as UBS adds ITV to European media most preferred list .

It has been said that goverment proposals to allow U.S. style product placement in programming is good news for ITV. However, whilst certain parts of the industry (particularly ITV) are continuing to lobby hard for it, there have been some strong counter arguments against from bodies as diverse as the BMA & ISBA. IWith the ongoing concerns over alcohol consumption, and with an election due this summer in the U.K., they are unlikely to allow something that with a couple of controversial incidents, could easily be very difficult politically. The recent history of this government & Ofcom, at least when it comes to advertising, has also shown that they usually come down on the side of regulation over liberalisation. Even if the government did decide to allow it in principle, the regulatory framework may be prescriptive, which would require a further, time consuming period of consultation.

Portfolio adjustments January 15th

Yet another disappointing quarterly production update from gold miner Hambledon Mining (HMB) drove the stock down 16% yesterday. Given the huge increase in the Gold price over the last couple of years, the management have failed to keep ongoing maintenance and productivity issues in check, All patience lost with the company and position closed.

Position initiated in Borders and Southern Petroleum (BOR), another Falkland Islands Oil play given likely deep water Rig announcements from Falkland Oil and Gas (FOGL) in the short to medium term and looking cheap on relative valuation to FOGL and Desire Petroleum (DES). Position increased in FOGL following continued strength in the share price, now up over 20% since position started.

Position in JP Morgan (JPM) closed following strength pre earnings and increased in GW Pharma (GWP) on likely news flow relating to Sativex.

INTEL (INTC) produces a great earnings beat!

Intel (INTC) reported a fourth-quarter profit of $2.3 billion, or 40 cents a share, compared with a profit of $234 million, or 4 cents a share for the same period 2008. Revenue was $10.6 billion versus expectations of $10.2 billion, up from $8.2 billion for the same quarter a year before. Adjusted income was 55 cents a share, compared with analyst estimates of 30 cents a share

For the current quarter, Intel said it expected revenue of $9.7 billion, with an a potential upside or downside of $400 million, versus expectations of $9.3 billion, Chief Executive Paul Otellini said in a call with analysts that the outlook for semi conductors was improving and that Intel's major business units posted sequential gains in sales. Its PC client group, focused on chips and other products for desktops, notebooks, netbooks and wireless devices, reported a 10% increase. its data center group, focused on servers, work stations and storage systems, reported a 21% jump Its Netbook Atom products, rose 6%.

The results support the thesis that demand in enterprise and consumer segments is improving as economic recovery gathers pace.

Will be looking to reduce position in INTC on opening strength.

Alcoa disapointment delivers weak start to U.S. earnings season

Dow Jones Industrial component, Alcoa (AA) delivered disappointing fourth quarter 2009 results after the close on Monday, causing an 11% drop in the price to $15.52 (-$1.93) and leading the Dow industrials down 36 to 10,627. The FTSE 100 dropped 39 to 5,499. After Monday's closing bell, Alcoa reported a quarterly net loss of $277 million, or 28 cents a share, compared to a year-earlier loss of $1.2 billion or $1.49 a share, when aluminium prices collapsed.

Analysts had expected the company to earn 5 cents a share on sales of $4.9 billion. Excluding charges, Alcoa said it earned 1 cent a share worrying the markets that economic recovery may be slower than anticipated. A short term buy trade in Alcoa prior to the earnings release therefore disappointed and the position was closed at the open yesterday. 

Weakness in semiconductor stocks gave a good re-entry point for Micron (MU) and for an increase in the Intel (INTC) position with the results due Thursday.

After initially moving into positive territory, Amgen 's (AMGN) price was hit as it said 2009 earnings would come in close to the low end of its forecast, sending its shares down a most 2 percent at one point before closing the session down 1% at $56.03. Continued uncertainty about Amgen's potential block buster osteoporosis drug Prolia (denosumab) also weighed on the stock, as the company said it has not yet responded to a regulatory request for more information on the drug.

Speaking at the JP Morgan Healthcare conference on Tuesday, Chief Executive Officer Kevin Sharer said the company's full-year earnings would be close to the low end of its forecast of $4.90 to $5.05 per share. Analysts on average expected $5.04 per share. 2009 revenue would be at the midpoint of the company's projection of $14.4 billion to $14.8 billion. Analysts were looking for $14.7 billion. Sharer confirmed $4 billion in cash at the end of the 3rd quarter.

A drop in JP Morgan (JPM) to close to $43 at one point during the trading session gave a buying opportunity with results due Friday.

In the U.K., Falkland Islands oil play, Falklands Oil and Gas continued its upward move, rising 7.5 or 5% to 153p as Investec declared a 5% notifiable interest in the stock. 

Week ahead - earnings season starts with Alcoa

Earnings season in the U.S. kicks of with Alcoa(AA) on Monday, which given commodity rebound should be encouraging. On Wednesday, the Fed Beige book report will give further insights on the state of the U.S. economy. On Thursday after the close, Intel (INTC) reports and this will give a good idea of the outlook both for tech and semiconductors specifically.

In the U.K., further evidence on the health of retailers will be demonstrated by Tesco (TSCO) on Tuesday.

Portfolio Update Jan 9th

Coal of Africa (CZA)
Closed at 128p yesterday so showing close to a 30% profit. The Telegraph Newspaper cited takeover rumours as the driver of the increase, but the underlying fundamentals of coal demand are improving and this has increased sector prices across the board over the last 2 weeks. Demand from India and China remain particularly strong. Still awaiting news on Vele mine approval.

Have taken some profits, but still holding a substantial position.

Nighthawk Energy (HAWK)
Remains flat at 35.75p. News on drilling from Jolly Ranch and Revere expected during January. Holding.

ITV (ITV)
Position initiated in ITV at 58p. Evidence suggests significant pick up in TV revenues and positive outlook for 2010 driven by World Cup and global economic recovery which should bring back advertisers into the market.

GW Pharma (GWP)
Position moved into profit following buy at 84p. Now 90p to sell. News awaited on Sativex registration in UK and Spain. Holding.

Falkland Oil and Gas (FOGL)
Position increased with average buy price of 136p. One of Investor's Chronicle Tips of the Year for 2010 which was published yesterday which drove a significant increase in the SP to 143p. Holding.

Hambledon Mining (HMB)
Position initiated in gold miner at 7p.Q4 production and underground mine update due next week.

Amgen (AMGN)
Position increased following FDA review news on ESA's which sent share price to $55 at low. Average buy $56.7. Current price $56.8. Holding on earnings and product approval news.

Intel (INTC)
Position initiated at $20.8.

Johnson and Johnson (JNJ)
Position initiated at $63.9.

Positions closed
Desire Petroleum

FDA review triggers jittters in Amgen and J&J

Yesterday Amgen (AMGN) dropped by as much as 2%, to a low of $54.65 before rebounding and finishing the day at $56.27 (-0.92%) as the U.S. Food and Drug Administation (FDA) announced plans to consult outside experts to re-evaluate the use of Amgen’s Aranesp and Johnson u& Johnson ‘s Procrit anemia drugs when given to patients with chronic kidney disease

An article published in the New England Journal of Medicine on Wednesday, said the agency "anticipates convening a public advisory committee meeting in 2010 to re-evaluate the use of drugs known as erythropoiesis-stimulating agents (ESAs) in people with chronic kidney disease. Amgen's Aranesp and Epogen and J&J's (JNJ) Procrit are both ESA’s.

The drugs came under scrutiny two or three years ago after studies showed high doses could lead to heart complications or in very rare cases even death. An FDA spokeswoman said an "important question" for the advisory panel would be what level of haemoglobin doctors should try to achieve with the drugs . In the journal article, they said "optimal haemoglobin targets have never been established" for patients with chronic kidney disease and clinical trials had raised "major concerns regarding the use of ESAs to increase hemoglobin concentrations" in chronic kidney disease patients above levels needed to avert blood transfusions. But the studies "do not rule out the possibility, however, that modest increases in the hemoglobin level could be beneficial," they added.

Sales of ESA drugs are a significant contributor to earnings, particulary in the case of Amgen. Amgen reported third-quarter Aranesp sales of $675 million. Sales of J&J's Procrit and anemia drug Eprex were $542 million in the quarter.

Given that both Amgen and J&J have aggressively tightened the labelling of their ESA products to minimise risks which has hit earnings from their drugs signnicantly, it is likely that these products will contain to be mainstay of therapy in patients with Chronic Kidney disease given the lack of viable alternatives at the current time. Thought the FDA hearings will undoubtedly hit sentiment, especially for Amgen, it is considered unlikely that Aranesp, Epogen and Procrit will be withdrawn from the market. Additional monitoring may be requested which may further hinder sales, but forthcoming news on new products from both J&J and Amgen makes any downside likely to be covered by these new innovations.

Position increased in Amgen at $55 and position initiated in J&J at $63.

Intel (INTC) a great entry point for a quality stock

It finally looks to be the right time to buy into the Intel (INTC) story. There are several compelling reasons to go long on this one.

1. Product launches
Intel is getting into high gear with their Core processor family early on the new year, as they are set to release 6 new desktop processors and 11 mobile processor in January. There will also be 3 new chipsets for desktop PCs and 4 oriented towards mobility.Of most relevance, all processors in the series feature a built-in GPU - for the first time ever it is possible to purchase a CPU that features a built-in GPU that is entirely separate from the chipset. This is known as a General-Purpose computation on Graphics Processing Units (GPGPU) and refers to the technique of using a GPU, which typically handles computation only for computer graphics, to perform computation in applications traditionally handled by the CPU. They also have improved efficiency, allowing them to use less power and generate less heat than existing processors, such as those based on other architectures. It is claimed that the chips provide close to double the processing and graphics performance than their comparable predecessors. The new chips are manufactured using the 32-nanometer process, which makes them smaller and more power-efficient than earlier chips. Based on the Westmere architecture, the transistors are a step away from chips manufactured using the 45-nanometer process.

Compared to previous chips, the new processors speed up high-end tasks like graphics display. Related tasks would run close to two times faster than previous chips. Intel has also integrated graphics chips into the new processor package, which could make the chips capable of playing Blu-ray movies or high-definition games.

2. Good valuation

Although Intel is trading on a historical P/E of 49 which looks expensive, earnings are expected to recover signficantly in 2010. Analysts expect earnings to be in the $1.5 range, and this can be expected to increase as economic prospects around the semiconductor market improve. Therefore earnings of $1.5-1.7 in 2010 seem reasonable giving a forward p/e of 11.2-13.5. This compares favourably with others in the sector such as Advanced Micro Devices (AMD) (estimated loss in 2010) or National Semiconductor (NSM) (forward p/e of 21.4 based on $0.7 earnings).

3. Strong fundamentals for enterprise and Consumer chip segments in 2010

As discussed on a previous posting relating to Micron, the fundamentals for PC demand and semiconductors is signifcantly improving in 2010 driven by economic recovery, low inventories, rising prices and the launch of Windows 7.

At just over $20 (52 week range $12.05-21.27), Intel has some very positive attributes. Although the FTC (Federal Trade Commission) in the U.S. announced an investigation into the company's actions in early December and issues with the EU Trade Commission remain, this is expected to impact earnings only marginally if at all. Buy initiated at $20.8

ITV looks good play on advertising recovery

ITV revenues look to be strong in January (up 6.5% versus 3% for the total TV market) as revenues from advertisers floods in (source Aegis group),

With Archie Norman taking the helm at the company and a strong rebound in media expenditure looking likely, and Goldman Sachs adding ITV to its conviction buy list with a 70p target,  now seems to be a good time to invest in ITV.

Position initiated at 58p.

Update on portfolio - January 5th 2010

Nighthawk Energy (HAWK)
Average buy price 35p. Currently 35.75p to sell. Hold with news from Revere and Jolly Ranch project imminent.

Coal of Africa (CZA)
Average buy price 99p. Currently 115p to sell. Rising South African Coal prices driven by strong Indian Subcontinent demand have moved the share price up from the £1 level. Further news on Vele project and move from AIM to main market are catalyts for further share price appreciation. Holding.

Desire Petroleum (DES)
Buy at 85p. Sold at 108p. Placing and open offer deadline extended to January 11th. Open offer at 70p means that shares may well be sold on receipt which may depress share price during mid January. Watching for possible re-entry.

Falkland Oil and Gas (FOGL)
Buy at 132p. Holding at 128p.

JP Morgan Emerging and Templeton Emerging.
Short positions closed at loss due to continued strength in Emerging markets stocks.

Micron Technology (MU)
Buy at $10.3 closed at $11. Share on watch for repurchase.

Amgen
Average buy at $57.5. Currently at $57.8. Holding due to imminent drug approval news.

GW Pharma (GWP)
Buy at 84.5. Currently 88p to sell. Holding with European Medicines Review agency due end January. Approval of Sativex lead drug likely Q1 2010.

EDUCATION SEGMENT: Contarian Investor's investing mistakes laid bare - one's you can avoid!

I would be the first to admit that I’ve had my share of expensive mistakes when it comes to investments. I first started investing in 1998, prior to the technology/internet bubble. In those days it was easy to make money! You bought an internet stock with no profits in sight or a hot Nasdaq stock like Amazon or Ebay and you just watched your profits grow by the week as the stampede to buy shares by the "man in the street" turned into a frenzy. There wasn’t a thought given to valuations - was a loss making company worth £1 billion, who cares? Solid companies like utilities or even Buffett's Berkshire Hathaway, which actually made profits, were sold on mass to fund purchases of hot tech. Technology funds sky rocketed and Initial Public Offerings (IPOs) for new companies on the market double, tripled or more in the first 24 hours. The news papers said it was the place to be, the start of the next revolution.

Of course in the end it all ended in tears for many amateur investors. Although I did well at the time the mistake I made was calling a bottom on the carnage and bought back too early. I made the fatal error of looking at relative prices. For example if something was £35 in 2000, well surely it must be worth £5. No way, it was worth 5p before I knew it. A lot of people lost an awful lot of their hard earned savings at this time and it was probably their first foray into the stock market. Many of them would never return again to the world of investing. Looking at a valuation of a company in relation to its expected profits is so important and also accepting that sometimes you make a mistake a cutting your losses are major lessons I learnt in the early part of the new millennium.

Then in my early investing years I took all those magazine and newspaper tips with a little too much enthusiasm. Share magazines and Newsletters can be helpful to give you the low down on what’s going on in the market but the weekly buy or sell tips are often fairly speculative and you can easily lose your shirt if you’re not careful. Many small cap shares in the U.K. are sold via market maker intermediaries. These guys set the price of shares and of course they read these tips and move the price up as soon as the tip is published. Readers buy immediately at this inflated price. I often find some good ideas in magazines and through internet sites but I often hold back, take a good look and then wait a week or so for the price to settle down a bit.

Internet bulletin boards can also be a curse on the small investor. During the tech boom in 2000 dubious posters so called “pumped and dumped” dodgy stocks on the basis of “hot inside information”. 95% of the time most of the information was wrong or even intentionally misleading with the intention to try and get uninformed investors to buy shares in the worst type of companies. The British site www.iii.co.uk has good discussion forums but everything that is said should be treated with extreme caution. Always do a check on information before you go ahead and trade. I well remember trawling these bulletin boards looking for my next investment and ending up with egg on my face most of the time.

Then there were the “punts” on high risk oil exploration or mining companies. There was a Caspian sea oil exploration company called Atlantic Caspian which was drilling for oil. Of course they didn’t find a thing and the company is no more. Fortunately I saw the writing on the wall before the end and sold out in the nick of time but I still lost money. Then there was the catastrophic investment in Asia Energy based on a “sure thing” tip, an AIM listed company trying to exploit a licence to cut coal in Phulbari province in Bangladesh. I remember the day well when I was driving home from work and listening to the BBC radio news when it announced a riot in Bangladesh with several people killed by riot police protesting against the potential open cast mines impact on their villages. Of course the price crashed. The company is now called GCM resources and is still trying to get the project off the ground 2 years on. Great lesson here, be very careful when investing in individual stocks in politically risky parts of the world. Collective investment vehicles like unit trusts/mutual funds are a far more sensible way to trade if you have a taste for the emerging markets. If I ever get a tip now where I’m told it’s a no brainer I always think to myself these days that “tips are strictly for waiters”!

I wish I could say that there was a magical formula for success as some books and newsletters claim but unfortunately there isn’t. Making money in shares is about research first and foremost. Adapting your strategy in light of current events is also very important. Who would have believed a few years ago when the banks were generating huge profits that in 2008 the Wall Street investment bank Lehman Brothers would fail and the U.K. government would nationalize Northern Rock as well as taking major stakes in many of the other British banks. In early 2008, the analysts were talking up commodities based on the “super cycle” theory which had the flawed hypothesis that prices would continue to climb into the stratosphere. Then there was the so called “decoupling” hypothesis with the forecast that the BRIC economies (Brazil, Russia, India, China) would be able to produce sustainable double digit growth even if the mature markets of Europe, Japan and the U.S. went into recession. Again, the crash in Emerging markets during the end of 2008, put pay to this assumption.

And it seems I am not alone in making mistakes. I was at a meeting with a private investor and he commented that he had bought shares in the U.K. retailer Marks and Spencer back in 2008. When I asked him why he had bought a retailer just at the time the U.K. was in recession and retailers were struggling (in fact many were going bust at this time in December 2008), he said “well they looks cheap compared to where they were before. I’m down 50% on my investment but I’m sure they’ll come good”. I respond ended well they just might get cheaper! Another short term investment turned into a long term investment!

Of course, mistakes are made, lessons are learnt and you move on. The famous Hedge Fund Manager, George Soros, who made his name by “breaking “ the Bank of England by betting against the pound and hoping it would leave the ERM (Exchange Rate Mechanism) .On Black Wednesday in 1992 the Chancellor of the Exquerer Norman Lamont admitted defeat and the pound was devalued netting Soros a reputed $1.1 billion., In a recent book called the The Crisis of Global Capitalism, he said “Most people are reluctant to admit they are wrong; it gave me positive pleasure to discover a mistake because I knew it could save me from financial grief”.

The most common mistakes I have made or seen are:

1. Not being diversified enough

Having too concentrated a portfolio in a certain sector or too much concentration of money in only a few shares can be the kiss of death if sentiment turns against it. If you put all your eggs into one basket your risk profile goes up significantly. Look at all those people who lost everything in the U.S. energy company Enron collapse in late 2001. In 2000, it claimed its revenues were over $100 billion and Fortune Magazine named it as America’s most innovative company for six consecutive years. Sure the profit manipulation by senior management including founder Ken Lay took many years to expose but thousands of investors poured their entire life savings into the company buying all the way down from a high of $90 (when insiders were selling huge blocks of stock) all the way down to virtually zero. The Enron sage is of course very sad for these people but they never should have put all their savings in one stock, especially not their pension funds, into this one company.

2. Not doing the right level of research
Most private investors are reluctant to delve into some of the fundamental measures such as debt, profitability and therefore fail to foretell potential issues down the line such as debt restructuring, dilutive share issues and the like which can hammer a share price. I have recently read a popular share dealing book written by a non professional investor and I was surprised that he felt that this sort of homework was unnecessary. I am not saying that you need to be accountant delving through the Profit and Loss Account and the Balance sheet but a lot of the web sites not can show the main measures without ploughing through pages of numbers. Take a 30 minute look at the financials and check out some other potential warning signs such as director share selling, big institutional sales, recent profit warnings.

Trading in U.S. shares has the advantage that all the quarterly earnings reports are accompanied by analyst conference calls which are available to download by private investors. Transcripts are also available on websites such as www.seekingalpha.com.

3. Being hit by despondency following some bad calls

How many potential investors buy a stock or two on a hot tip, lose a fortune and then never return to the stock market ever again as they lose half their money in 3 months. The answer is quite a few! Over the long term stocks have outperformed all other forms of investment. This is especially the case with companies that pay sustainable and growing dividends. In periods of poor stock market performance, the yield of the major indices such as the FTSE 100 can be substantial, this is the dividend payment as a proportion to the share price. You are effectively rewarded for holding a share and this payment can be higher than a savings account. Make your mistakes, learn from others mistakes and swallow your pride and move on. Persevere with the markets, it can be a lot of fun.

4. Buying shares on tips not on the basis of research
Newspapers and financial magazines can be a useful source of information about the markets in general or news on a particular stock. However, never buy or sell shares based on just what you read in these publications. Check facts, do your research and wait for the price to settle before you jump in. Remember that hot tips from the guy at the pub that says that company X is going to be taken over next week should be treated with extreme caution.

Brokerage reports are another area of caution. Many analysts are late cuttings their earning s estimates and their recommendations on a stock, How many “top analysts” were still recommending banks in 2008 when the financial crisis was beginning to play out?

5. Not cutting losses when the share price drops sharply and waiting for the rebound – “don’t let a short term investment become a long termer”

It is hard to admit you’ve made a mistake and sell a losing investment. Human psychology plays a part. It is much more effective to deploy your cash working in a company which is solid with a growing share price rather than waiting potentially for years for a dog stock to recover and waiting for that nasty negative figure to turn to a blue positive. Sometimes the losses do recover, most of the time they don’t in a sharply declining stock. Another thing to watch for is the “dead cat bounce” This refers to a very sharp decline in the price of a stock which is immediately followed by a small and temporary rise before resuming its downward path. Often this rise is triggered by short sellers buying back shares to cover their positions or small investors trying to call a bottom which is ultimately reached much later. You should try and ignore the price you paid and think in terms of I am investing my money in the best company or could it grow faster elsewhere.

6. Looking at historical prices and using this as a benchmark

Investors often look at a share price chart and use this as a benchmark of where a price should be expected to return to in the case of shares which have had a heavy fall. A great example of this was the banking sector. UK banks Northern Rock and Bradford and Bingley fell from pounds to zero in less than a year. Just because a share was at a price historically high level never means it will return there. Also be aware of share splits, where shareholders shares are for example doubled up which has the effect of halving a price.

7. Not spreading risk by buying a position all at once

It’s almost impossible to time the purchase of an investment perfectly. If you are buying a large position consider buying in blocks to reduce the risk of a sharp fall in a short period around your purchase. Although this means your dealing costs are increased, by choosing a reasonably priced online broker these can be mitigated.

8. Not taking profits or letting some profit run

Timing is everything as they say. The share pundit Jim Cramer once said “Bulls make money, bears may money but pigs get slaughtered”. What Cramer meant is that you can make money on shares going up or down but don’t be greedy and take a little off the table and bank some profits. If your shares are up 20% on your buy price, perhaps sell 35-50%, leaving your other shares to run whilst you have some nice profit in the dealing account. Conversely many investors sell everything too early. I myself have been guilty of this as the excitement of a gain takes over. Over the next few weeks, the share price has subsequently doubled again making me curse myself for not having more patience. As stated above, taking some profit whilst letting some of your profits run is a good compromise. The advantage of CFDs and Spread Betting is that you can adjust your guaranteed stop loss upwards to guarantee your profit, but if the price drops sharply subsequently your stop loss is triggered and your profit is banked. Some firms even offer trailing stop losses which automatically trail the current share price.

9. Don’t Overtrade
Sometimes patience really can be a virtue when it comes to the stock market. Sometimes it pays to leave the portfolio alone. Research shows that the most successful traders have periods when they do little or no investing. Maybe there just aren’t any really good opportunities, the market is stuck in a range which makes it neither showing value nor over expensive so both long and short investors stay on the sidelines.

10. Don’t take internet bulletin boards too seriously
Watch the bulletin boards on iii.co.uk and advfn.co.uk with interest but don’t base your investment decisions on what’s said on them.