Wednesday, March 31, 2010
Investec increases holding in Falkland Oil and Gas
Investec Asset Management Ltd have increased their holding in Falkland Oil and Gas (FOGL) from 7,242,666 to 7,666,666 shares. Somewhat positive sign after the panic of Monday and shows that in their opinion the risk/reward at the current share price is reasonable.
Norseman non-exec continues to buy
Norseman Gold PLC (NGL) non-executive director David Steinepreis has acquired a further 24,100 shares in the company for A$16,972 (£10,350), and he now holds a total of 4,337,957 shares. This follows Steinepreis’s purchase of 56,750 shares.
Coal of Africa target price increased
Morgan Stanley increased the target price of Coal of Africa (CZA) this morning from 171p to 200p.
Monday, March 29, 2010
Some of the top contrarian investors of our time and what we can learn from them
David Dreman
Dreman was once described by Kiplinger's magazine as the "consummate contrarian". His Kemper-Dreman High Return Fund was one of the best performing mutual funds ever in the U.S., being no.1 versus its comparative group for ten years from 1998. Dreman is author of the books, "Contrarian Investment Strategies: The next generation", "Psychology and the stock market".Dreman's investment strategy whilst running his High Return Fund was to focus on buying stocks that were either overlooked by other investors or beaten down by the market. In Dreman's view, investors tend to overreact to market conditions and routinely either under value or over value companies depending on what sector is "hot" at the current time and also overeact to market surprises such as profits warnings. Dreman's view was that by owning stocks that were currently in favour, any negative event has a serious downside whilst positive "surprises" would have little impact. He advises going against the crowd by buying stocks that are cheap because of an overreaction or fear on the basis of key financial measures. He also believes that a major market crisis like the one that occurred during 2008 and early 2009 as an outstanding opportunity to profit - "buy during a panic, don't sell".
In Contrarian Investment Strategies, there is an analysis of he calls the "major postwar crises" e.g. Gulf War, 1979 oil crisis. Apart from the Berlin blockade, one year after these crises the market on average was up between 22.9% and 43.6%, with an average of 25%. Two years after these events, the average gain was 37.5%.
Dreman bought stocks on the basis of 4 measures: earnings, cash flow (after tax earnings, adding back depreciation and other non cash charges), book value (value of a company's stock less all liabilities and preferred shares), and yield. His company focuses on those stocks with a market capitalisation of around $2 billion, a rising earnings trend quarter on quarter, a strong current ratio of at least 2 (measures the ratio of current assets to liabilities which is a measure of a company's ability to pay its short term debts).
However a valuable lesson for potential contrarian investors is to avoid being over aggressive in a concentrated sector when the market is in a particularly volatile positon. In April 2009, Dreman was fired as manager of the $2.2 billion DWS Dreman High Return Equity Fund after the fund lost 47% of its value over the previous 12 months. He aggressively bought beaten down financial stocks, based on a belief that the widespread pessimism on the industry was overdone. Unfortunately he was proved to be very wrong in his contrarian view of these financial stocks. In 1999, Dreman was also fired after his decision to avoid internet stocks led to his funds significantly under performing over the period. After being fired, he made returns well ahead of the market in the following few years. The difference between this period and that of 2008/2009 is that Dreman avoided try to generate big speculative gains in pursuit of a more conservative and medium-term approach.
Warren Buffett
Buffett is known as the greatest investor of all time and is one of the richest men in the world. The so called "sage of Omaha" is Chairman and CEO of Berkshire Hathaway, a company which has an average annual return to investors of 24% since the 1960's. Berkshire Hathaway was originally acquired in the 1960's and was a textile mill in Massachussets before being used a vehicle for acquisitions of other unrelated businesses. Buffett uses the same investment philosophy as Benjamin Graham in his famous book, "The Intelligent Investor". In 2008, Buffett said "It comes about from having an investment philosophy grounded in the idea that a stock is a piece of a business. If you look at it that way, there's no reason to get excited whether some analyst is recommending it or the company is splitting the shares two-for-one, or whatever. The only way to drive the extraneous thoughts out of your mind is to have a philosophy. And for us that philosophy comes from benjamin Graham and the Intelligent Investor, especially chapters 8 and 20. It's not very complicated stuff." He famously avoided the tech crash in 2000 because he said he didn't undertstand tech companies and he only invests in companies he can "get his head around". He avoids speculation and invests for the long term. He guiding principles when buying stocks are: 1) Consistent earnings growth 2) good return on equity 3) a simple business model 4) good management 5) large purchase 6) will to take an offer price. He also looks for an "enduring moat" i.e. a competitive advantage that is difficult to replicate. Buffett looks for "consumer monopolies" where a company's positon is virtually unassailable because of a strong market position or premier brand. Alternatively he may look at a company with the lowest production costs in the industry which would be difficult to replicate by a competitor.
Dreman was once described by Kiplinger's magazine as the "consummate contrarian". His Kemper-Dreman High Return Fund was one of the best performing mutual funds ever in the U.S., being no.1 versus its comparative group for ten years from 1998. Dreman is author of the books, "Contrarian Investment Strategies: The next generation", "Psychology and the stock market".Dreman's investment strategy whilst running his High Return Fund was to focus on buying stocks that were either overlooked by other investors or beaten down by the market. In Dreman's view, investors tend to overreact to market conditions and routinely either under value or over value companies depending on what sector is "hot" at the current time and also overeact to market surprises such as profits warnings. Dreman's view was that by owning stocks that were currently in favour, any negative event has a serious downside whilst positive "surprises" would have little impact. He advises going against the crowd by buying stocks that are cheap because of an overreaction or fear on the basis of key financial measures. He also believes that a major market crisis like the one that occurred during 2008 and early 2009 as an outstanding opportunity to profit - "buy during a panic, don't sell".
In Contrarian Investment Strategies, there is an analysis of he calls the "major postwar crises" e.g. Gulf War, 1979 oil crisis. Apart from the Berlin blockade, one year after these crises the market on average was up between 22.9% and 43.6%, with an average of 25%. Two years after these events, the average gain was 37.5%.
Dreman bought stocks on the basis of 4 measures: earnings, cash flow (after tax earnings, adding back depreciation and other non cash charges), book value (value of a company's stock less all liabilities and preferred shares), and yield. His company focuses on those stocks with a market capitalisation of around $2 billion, a rising earnings trend quarter on quarter, a strong current ratio of at least 2 (measures the ratio of current assets to liabilities which is a measure of a company's ability to pay its short term debts).
However a valuable lesson for potential contrarian investors is to avoid being over aggressive in a concentrated sector when the market is in a particularly volatile positon. In April 2009, Dreman was fired as manager of the $2.2 billion DWS Dreman High Return Equity Fund after the fund lost 47% of its value over the previous 12 months. He aggressively bought beaten down financial stocks, based on a belief that the widespread pessimism on the industry was overdone. Unfortunately he was proved to be very wrong in his contrarian view of these financial stocks. In 1999, Dreman was also fired after his decision to avoid internet stocks led to his funds significantly under performing over the period. After being fired, he made returns well ahead of the market in the following few years. The difference between this period and that of 2008/2009 is that Dreman avoided try to generate big speculative gains in pursuit of a more conservative and medium-term approach.
Warren Buffett
Buffett is known as the greatest investor of all time and is one of the richest men in the world. The so called "sage of Omaha" is Chairman and CEO of Berkshire Hathaway, a company which has an average annual return to investors of 24% since the 1960's. Berkshire Hathaway was originally acquired in the 1960's and was a textile mill in Massachussets before being used a vehicle for acquisitions of other unrelated businesses. Buffett uses the same investment philosophy as Benjamin Graham in his famous book, "The Intelligent Investor". In 2008, Buffett said "It comes about from having an investment philosophy grounded in the idea that a stock is a piece of a business. If you look at it that way, there's no reason to get excited whether some analyst is recommending it or the company is splitting the shares two-for-one, or whatever. The only way to drive the extraneous thoughts out of your mind is to have a philosophy. And for us that philosophy comes from benjamin Graham and the Intelligent Investor, especially chapters 8 and 20. It's not very complicated stuff." He famously avoided the tech crash in 2000 because he said he didn't undertstand tech companies and he only invests in companies he can "get his head around". He avoids speculation and invests for the long term. He guiding principles when buying stocks are: 1) Consistent earnings growth 2) good return on equity 3) a simple business model 4) good management 5) large purchase 6) will to take an offer price. He also looks for an "enduring moat" i.e. a competitive advantage that is difficult to replicate. Buffett looks for "consumer monopolies" where a company's positon is virtually unassailable because of a strong market position or premier brand. Alternatively he may look at a company with the lowest production costs in the industry which would be difficult to replicate by a competitor.
Marc Faber
Faber, known as "Dr Doom" and for his newletter, "Gloom, Boom and Doom Report " He was a managing director at Drexel Burnham Lambert Ltd Hong Kong office from the beginning of 1978 until the firm's collapse in 1990, a company known for its dominance of junk bond trading during his tenure. The company ultimately failed after being mired in criminal and SEC investigations. In 1990, he set up his own business, Marc Faber Limited, which acts as an investment advisor concentrating on value investments with tremendous upside often based on contrarian investment philosophies. Faber is famous for advising his clients to get out of the stock market one week before the October 1987 crash, forecasting the end of the Japanese bubble in 1990 and calling the bottom of the market in March 2009.
John Neff
John Neff managed the Windsor Fund for more than 30 years which averaged a return of 13.7% during the years 1964 to 1995 when he was running the fund against a gain of 10.6% in the S&P 500. He had a similar approach to Buffett in not spending lavishly on corporate premises and buying a modest property. In his book, "John Neff on Investing" he talks about his focus on beaten down stocks with low price/earning's ratio's, that had posted new 52 week lows or had published a particularly bad piece of news. In fact Neff described himself as a "low price-earnings investor" targeting companies with a p/e 40-60% below the market average, believing that stocks with a high p/e had so much expectation built into them that they often fell at the slightest piece of bad or even expected news. On the contrary, companies with low p/e's, had the benefit that "indifferent financial performance by low p/e companies seldom exacts a penalty". Neff seperated the badly run low p/e companies by looking at earnings growth, buying companies with consistent and "reasonable" growth i.e. more than 6% but not more than 20%. He believed that firms with a very high earnings growth had too much risk. Another Key part of his approach, was to look for stocks with a good dividend payout, for this reason he focused on total return (EPS Growth plus dividend yield). Finally he would make sure the free cash flow was strong.
Neff talks about the the difficulty of deciding when to sell a stock. He says "investors fall in love with a winning stock and hold onto it too long - particulary when their contrarian stance has been vindicated". May investors fear that they will sell winners too soon and miss out on even greater gains but Neff said "Instead of groping for the last dollar, we gladly left some upside on the table. Catching market tops was not our game. This was preferable to getting caught in a subsequent downdraft, which is never a pretty picture". Neff sold stocks when there was deterioration in the stock's fundamentals (earnings growth) or it's price approached the target set when it is was bought.
Anthony Bolton
Anthony Bolton is widely regarded to be the U.K.'s most successful fund manager. Over twenty five years he delivered a market-beating annual return of 20% in his Fidelity Special Situations Fund, 7 % higher than for for the FTSE All-Share index. In his book, "Investing Against the Tide - lessons from a life running money", he talks about his contrarian style. Much of his success came from buying stocks in turnaround situations. A key element in this approach is to meet with the management and satisfying himself that they know what they're doing and can execute their plans.
Using technical indicators and charts, he attempts to establish where we a company is in its cycle and invests accordingly. Bolton's philosophy is that you have to do something different to the market in order to achieve superior returns, "if you want to outperform other people, you have got to hold something different from other people. If you want to outperform the market, as everyone expects you to do, the one thing you mustn't hold is the market itself." He focused on stocks with recovery potential, who had unrecognised growth, had a unusually low and unjustified valuation based on its earnings or had takeover potential,.
Faber, known as "Dr Doom" and for his newletter, "Gloom, Boom and Doom Report " He was a managing director at Drexel Burnham Lambert Ltd Hong Kong office from the beginning of 1978 until the firm's collapse in 1990, a company known for its dominance of junk bond trading during his tenure. The company ultimately failed after being mired in criminal and SEC investigations. In 1990, he set up his own business, Marc Faber Limited, which acts as an investment advisor concentrating on value investments with tremendous upside often based on contrarian investment philosophies. Faber is famous for advising his clients to get out of the stock market one week before the October 1987 crash, forecasting the end of the Japanese bubble in 1990 and calling the bottom of the market in March 2009.
John Neff
John Neff managed the Windsor Fund for more than 30 years which averaged a return of 13.7% during the years 1964 to 1995 when he was running the fund against a gain of 10.6% in the S&P 500. He had a similar approach to Buffett in not spending lavishly on corporate premises and buying a modest property. In his book, "John Neff on Investing" he talks about his focus on beaten down stocks with low price/earning's ratio's, that had posted new 52 week lows or had published a particularly bad piece of news. In fact Neff described himself as a "low price-earnings investor" targeting companies with a p/e 40-60% below the market average, believing that stocks with a high p/e had so much expectation built into them that they often fell at the slightest piece of bad or even expected news. On the contrary, companies with low p/e's, had the benefit that "indifferent financial performance by low p/e companies seldom exacts a penalty". Neff seperated the badly run low p/e companies by looking at earnings growth, buying companies with consistent and "reasonable" growth i.e. more than 6% but not more than 20%. He believed that firms with a very high earnings growth had too much risk. Another Key part of his approach, was to look for stocks with a good dividend payout, for this reason he focused on total return (EPS Growth plus dividend yield). Finally he would make sure the free cash flow was strong.
Neff talks about the the difficulty of deciding when to sell a stock. He says "investors fall in love with a winning stock and hold onto it too long - particulary when their contrarian stance has been vindicated". May investors fear that they will sell winners too soon and miss out on even greater gains but Neff said "Instead of groping for the last dollar, we gladly left some upside on the table. Catching market tops was not our game. This was preferable to getting caught in a subsequent downdraft, which is never a pretty picture". Neff sold stocks when there was deterioration in the stock's fundamentals (earnings growth) or it's price approached the target set when it is was bought.
Anthony Bolton
Anthony Bolton is widely regarded to be the U.K.'s most successful fund manager. Over twenty five years he delivered a market-beating annual return of 20% in his Fidelity Special Situations Fund, 7 % higher than for for the FTSE All-Share index. In his book, "Investing Against the Tide - lessons from a life running money", he talks about his contrarian style. Much of his success came from buying stocks in turnaround situations. A key element in this approach is to meet with the management and satisfying himself that they know what they're doing and can execute their plans.
Using technical indicators and charts, he attempts to establish where we a company is in its cycle and invests accordingly. Bolton's philosophy is that you have to do something different to the market in order to achieve superior returns, "if you want to outperform other people, you have got to hold something different from other people. If you want to outperform the market, as everyone expects you to do, the one thing you mustn't hold is the market itself." He focused on stocks with recovery potential, who had unrecognised growth, had a unusually low and unjustified valuation based on its earnings or had takeover potential,.
Couldn't resist Rockhopper at these levels
With the huge fall out from the Desire Petroleum (DES) Liz well on all the Falkland Island drillers, the next prospect on Ocean Guardian drilling schedule looks interesting. During the previous drilling campaign by Shell in the 1998, oil was found on the Rockhopper prospect that the Ocean Guardian will start to drill early in April. After my holdings were sold automatically this morning falling through guaranteed stops, I have perhaps foolishly decided to reinvest back in Rockhopper (RKH) with a smaller position in Falklands Oil and Gas (FOGL). Having fallen from around 85p to its current 41.5p since January after the current 12p decline, the fall seems to have been overdone as the geological structure on Rockhopper's prospects are different to Desire's and I believe largely unrelated (not being a geologist). RKH's market capitalisation is only £76 million, despite a £50 million placing at the end of 2009, versus Desire's £167 million (it was over £300 million prior to today's announcement). The news flow in coming weeks will be largely from Rockhopper so I can see many Desire investors jumping ship to RKH to perhaps recoup some of the heavy losses. Speculative, but lets see what happens!
Norseman Gold looks solid Australian gold mining play
An article in this week's Investor's Chronicle, "My top Gold picks by Jim Slater" caught my attention, in particular what Jim had to say about Norseman Gold plc. "A gold mining share that ticks all the boxes for me is Norseman Gold (NGL.). It is in Western Australia and has been mining gold for 70 years. Cash in hand is A$23m (£14m) and future production is unhedged. Chief Executive Barry Cahill is hard working, experienced and capable, and has a substantial stake in the company. There are 3 mines with narrow vein nuggety deposits that feed a mill with a present capacity of 140,000 ounces of gold a year. Another mine, North Royal, is coming on stream later this year and there is potential for more mines as and when the capacity of the mill is upgraded. This year's production has been disappointing, with the target recently reduced to 65,000 ounces. However, the company's guidance for the year commencing July 1st 2010 is unchanged at 110,000 ounces. In the following year an increase to 140,000 ounces is likely, at which level operating costs should be reduced to about A$600 per ounce. With gold at say $1100 per ounce (A$1200 £726) this would give an operating profit of A$600 per ounce - A$84 a year compared with a market capitalisation of only A$128 million. Further exploration, administration expenses and tax would reduce net profit to A$45-50m. The prospective cash flow is so strong that I would be keen to invest in the company if it made widgets."
Norseman Gold (NGL) is both a UK AIM and Australian ASX listed Australian gold production company. The Company was listed on AIM in April 2007 and on the ASX on 25 June 2009. It acquired the Norseman Gold Project in May 2007, Australia's longest continually running gold operation. The Norseman Gold Project is located in the Eastern Goldfields of Western Australia in the highly prospective Norseman-Wiluna greenstone belt, 725km east of Perth and 186km from Kalgoorlie. Gold was first found on the Norseman field in 1894 and over the last 65 years it has produced over 5.5 million oz of gold. The mine is currently producing from two high-grade narrow-vein underground mines - the Bullen and the Harlequin. Currently, it has a total resource inventory of 3.7 million oz of gold at an average grade of 5.5 g/t. The tenements cover a 1,614 sq km area centred on the Norseman Township. The landholding comprises 179 contiguous tenements consisting of 13 Exploration Licences, 106 Mining Licences, 45 Prospecting Licences, 15 Miscellaneous Licences and 29 Mining Lease Applications. Reserves from the Norseman Project were 0.4 mn oz of gold (1.4 mn tonnes at a grade of 8.9g/t of gold), an increase of 29% from a year earlier.
The company also has three development projects: OK Decline, North Royal and Crown Reef:
– OK Decline: The Group recently approved the development of OK Decline, adding a third mine to the Norseman Gold Project. The initial life of the mine is two years, based on OK Decline reserves of 57,000 oz of gold. The company initially expects to mine 5,000 ounces and 30,000 oz in 2009-10 and 2010-11, respectively, from the Star of Erin, which is one of the three mineralised structures of OK Decline.
– North Royal: The Group has initiated pit dewatering and surface diamond drilling at North Royal. . First round drilling on the southern end of the pit has returned promising results particularly around a footwall structure with follow-up extensional and infill drilling will commence this month. Mining is expected to commence by the last quarter of the 2010 calendar year.
– Crown Reef: Historically, the Crown Reef mine was a major producer within the field. However, it is currently inactive. Surface drilling operations that have recently commenced intersected a structure in the expected position in the initial drill holes with assay results currently pending.
The Company's strategy is focused on extending the mine life through the conversion of resources into reserves and identifying additional resources and obtaining additional ore for the operating mill through the development of a third and subsequent mines.
In early March the shares fell 17 percent to a six month low after the miner cuts its full-year production outlook for the year ending June 2010 to 65,000 ounces from 75,000 ounces prompting Investec Securities to reduce its price target on the stock to 52 pence from 80 pence citing increased cost per ounce on this reduced production.
Norseman Gold (NGL) is both a UK AIM and Australian ASX listed Australian gold production company. The Company was listed on AIM in April 2007 and on the ASX on 25 June 2009. It acquired the Norseman Gold Project in May 2007, Australia's longest continually running gold operation. The Norseman Gold Project is located in the Eastern Goldfields of Western Australia in the highly prospective Norseman-Wiluna greenstone belt, 725km east of Perth and 186km from Kalgoorlie. Gold was first found on the Norseman field in 1894 and over the last 65 years it has produced over 5.5 million oz of gold. The mine is currently producing from two high-grade narrow-vein underground mines - the Bullen and the Harlequin. Currently, it has a total resource inventory of 3.7 million oz of gold at an average grade of 5.5 g/t. The tenements cover a 1,614 sq km area centred on the Norseman Township. The landholding comprises 179 contiguous tenements consisting of 13 Exploration Licences, 106 Mining Licences, 45 Prospecting Licences, 15 Miscellaneous Licences and 29 Mining Lease Applications. Reserves from the Norseman Project were 0.4 mn oz of gold (1.4 mn tonnes at a grade of 8.9g/t of gold), an increase of 29% from a year earlier.
The company also has three development projects: OK Decline, North Royal and Crown Reef:
– OK Decline: The Group recently approved the development of OK Decline, adding a third mine to the Norseman Gold Project. The initial life of the mine is two years, based on OK Decline reserves of 57,000 oz of gold. The company initially expects to mine 5,000 ounces and 30,000 oz in 2009-10 and 2010-11, respectively, from the Star of Erin, which is one of the three mineralised structures of OK Decline.
– North Royal: The Group has initiated pit dewatering and surface diamond drilling at North Royal. . First round drilling on the southern end of the pit has returned promising results particularly around a footwall structure with follow-up extensional and infill drilling will commence this month. Mining is expected to commence by the last quarter of the 2010 calendar year.
– Crown Reef: Historically, the Crown Reef mine was a major producer within the field. However, it is currently inactive. Surface drilling operations that have recently commenced intersected a structure in the expected position in the initial drill holes with assay results currently pending.
The Company's strategy is focused on extending the mine life through the conversion of resources into reserves and identifying additional resources and obtaining additional ore for the operating mill through the development of a third and subsequent mines.
In early March the shares fell 17 percent to a six month low after the miner cuts its full-year production outlook for the year ending June 2010 to 65,000 ounces from 75,000 ounces prompting Investec Securities to reduce its price target on the stock to 52 pence from 80 pence citing increased cost per ounce on this reduced production.
This morning, the company announced that non-executive director David Steinepreis last week bought 56,750 shares in the company on the market for a total of A$39,965, and he now holds 4,313,857 shares in Norseman.
For the year ending June 2011, revenues are expected to be around £111 million with earnings per share (EPS) of £5.83. Putting the company of a forward p/e of 0.1 based on the current share price of 49.5p. Today I initiated a position at 47p based on an expectation of signficantly increased production in 2010/2011, very strong cash flow increases based on a reduced cost per ounce and interesting development programmes. The fact that the company has a strong balance sheet also adds to the positive story with a cash balance of £14 million.
Falkland Island Oil explorers blast down through guaranteed stops
The Falkland Island drillers (Desire Petroleum, Falkland Island and Gas, Rockhopper and Borders and Southern) are sharply down this morning on Desire's Liz news. The shares were in auction (a period of time when there is no automatic execution on an order book and where Orders that are allowed during auctions may be entered during this period) but are now in full trading. Desire is down 63% at 36p, Rochopper is down 40% at 31p, Falklands Oil and Gas is down 15% at 115p. Fortunately the decision to move into CFDs with guaranteed stops ws sensible with all stops being triggered at the open. Today just shows the potential volatility of oil explorers on a "no show". Feeling a little bruised this morning. Ouch!!
Desire Petroleum Liz field update broadly confirms Times story
Following the Times article yesterday which stated that the Liz field drilling had not encountered commercial quantities of oil, Desire Petroleum have today released an RNS (see below). The key part of the RNS "oil may be present in thin intervals but that reservoir quality is poor" indicates that the Times story was broadly correct although further testing is clearly in progress. Things aren't going to go well for the share price this morning when the market opens at 8am.
Due to recent press speculation, Desire Petroleum wishes to announce that the Liz 14/19-1 well, in the North Falkland Basin, has reached a depth of 3570 metres and logging is underway.
The primary Liz target was encountered at around 2550 metres with indications of hydrocarbons while drilling. Subsequent logging operations have shown that oil may be present in thin intervals but that reservoir quality is poor. Wireline sampling is still to be carried out. Deeper gas shows have also been encountered while drilling, particularly below 3400 metres and these have still to be evaluated by wireline logging and sampling.
Until the logging is complete and the results analysed it will not be possible to determine the significance of the hydrocarbons encountered and whether the well will need to be drilled deeper, suspended for testing or plugged and abandoned.
Operations are expected to be completed later this week when a full announcement will be made.
Sunday, March 28, 2010
Desire PR company refutes today's Times story
Posters on bulletin board iii.co.uk are posting that, Buchanan, Desire Petroleum's PR company have stated that an RNS will be issued tomorrow morning at 7am before the market opens to clarify the situation following the Times story today which said that oil had been found but not in commercial quantities. Buchanan have reportedly said that testing is ongoing and there has been no final data to confirm the commerciality of the Falklands Liz drilling prospect. Lots of rumours which hopefully will be put to bed by an official statement tomorrow.
As a follow up, Reuters have just confirmed the iii reports that an RNS will issued at 7am tomorrow - "A spokesman for Desire said on Sunday that tests were ongoing, and the company would issue a statement on Monday morning clarifying the situation to shareholders." (http://uk.reuters.com/article/idUKTRE62R0WD20100328)
As a follow up, Reuters have just confirmed the iii reports that an RNS will issued at 7am tomorrow - "A spokesman for Desire said on Sunday that tests were ongoing, and the company would issue a statement on Monday morning clarifying the situation to shareholders." (http://uk.reuters.com/article/idUKTRE62R0WD20100328)
Times publishes story that Desire Petroleum's well is non-commercial
According to today's Times , The first well drilled off the Falkland Islands in 12 years has struck oil — but not enough to be commercially viable. Furthermore, "Desire is expected to say that the well drilled at its Liz prospect was “technically successful”, meaning it found oil, but that it is “non-commercial”, meaning that there was not enough oil to justify developing the field. The company declined to comment. Sources close to the situation said it had not finished drilling, but the signs were not encouraging. A source said: “It’s not a duster [a dry well], but it’s not commercially successful.” Desire has been working on the well for the past month.
Given this news is based on unofficial sources and the company has not commented it would be surprising if an RNS is not released tomorrow morning to clarify the situation as Desire Petroleum's share price (and the other Falkland drillers) will fall substantially on these rumours given they are published in a relatively reputable source of the Times newspaper. If true, very bad news for my Falkland's oil portfolio - I guess you win some, lose some!!
Source: http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article7078788.ece)
Saturday, March 27, 2010
Portfolio review of the week March 27th 2010
The bulls seem unstoppable at the moment with solid gains around the world's stock markets for another week. The Dow Jones Industrial Average, ended up 9 points at 10,850 after being as high as 68 points higher. The index was up 1% for the week. The Dow Industrials, S&P 500 and Nasdaq Composite all ended with a fourth week of gains, the longest positive run for all three indexes since the summer of 2009. The FTSE 100 finished down 24 points at 5,703. The index was up 53 points, or nearly 1% for the week.
The market responded positively to the news that the Euro zone countries had agreed a plan to bail out Greece together with the International Monetary Fund, driving the euro to a 10 month high against the dollar. On Friday afternoon, debt rating agency, Standard & Poor, confirmed it's rating on Greece.
Gw Pharma (GWP - After last week's strong gains in GW Pharma on a positive regulatory update on Saticex and good trials results for the future U.S. application in cancer pain, the share price has dropped strongly from it's highs close to 130p to finish the week at 113p. This fall came despite Prudential increasing their holding from 10% to 12%. After selling down 3/4 of my holding close to the highs, Contrarian Investor UK bought back at lower levels. News on the completion of the national phase of the UK and Spanish applications should be available around the time of the May interims so it's a case of sitting tight for now and waiting for further news flow. Licensing deals in territories outside North America and Europe should also be announced in Q2.
Falkland Island Oil Explorers (Desire Petroleum, Falklands Oil and Gas, Borders and Southern Petroleum, Rockhopper Exploration) - As discussed on a previous post, I have sold my Desire Petroleum (DES) holding and moved into RockHopper Exploration (RKH) and increased my holding in Falkland Oil and Gas (FOGL) in order to be able to use IG Markets CFD guaranteed stops in case things don't go quite to plan next week. Protected trades, limiting any loss to 12.5%, were not possible on Desire for some time. News from the South Atlantic should be due Wednesday onwards on drilling of Desire's Liz field (but perhaps earlier but all conjecture). But it now seems plausible that Desire are testing the well because as a reminder the addendum to the Environmental Impact Statement (EIS) issued in December 2009 stated (http://www.desireplc.co.uk/pdfs/DesireFalklands_EIS_Adndm.pdf), "It is anticipated that the Ocean Guardian semi-submersible rig will be on location for between 18 and 30 days for each we and an additional 7-10 days if the well is tested. The earliest spud date for the first well is 1 February 2010. It is currently proposed to test the wells if hydrocarbons are found. During the well test up to up to 8,000stb/d of oil or 25MMscf/d of gas will be flared dependent on the reservoir fluids encountered and if the reservoir is found to be capable of delivering these rates...". Given it will be 35 days since the Liz prospect "spudded" on Monday (spud was 22nd February 2010), it is possible that Desire are testing the well and they would not be testing if there was nothing substantial in terms of an oil/gas find. On the other hand, drilling to target depth might have been delayed by unforeseen events, which of course is always possible in offshore drilling campaigns. Should be an exciting week either way - keeping my fingers crossed it's not a "duster".
ITV (ITV) - After a near 10% move upwards this week from 55p to 60p, I took the opportunity to sell off the position. There has been a significant shift upwards from the 50p level in february as Crozier/Norman have taken charge and the advertising market continues to improve.
Coal of Africa (CZA) - A steady move up in CZA to finish the week at 146p as main market listing in the UK is due in the next few weeks. After a wobble, where the share price dropped as much as 7p on rumours that the Vele mine project approval might be compromised by enviromental protestors, the stock recovered to finish broadly flat. Contrarian Investor UK is expecting a move up closer to 200p during Q2.
ARM (ARM) - Chip designer ARM holdings continued to move up to a 52 week high as tech stocks stay in demand which has squeezed the short. However, the 5% stop loss on the sell has not yet been triggered and on anticipation of a market correction this position may come back in my favour. Holding for now.
SSL International (SSL) - After a positive trading update yesterday (see previous post), SSL moved over the £8 level and triggered a stop loss on the short. This illustrates the problem with shorting shares in this short of market where momentum investors are piling in. With this sort of market, fundamental analysis of a company's value can be for nothing.
Genzyme (GENZ) - Pharmaceutical company Genzyme dropped over 14% in 2 days on concerns over an FDA sanction of a key plans. An initial position was stopped out but I bought back on Thursday night as the stock hit $51. This buy was rewarded with a bounce back on Friday as brokers started saying the FDA related fall had been overdone. Shareholder activist, Carl Icahn remains key to a rejuvenation of this company.
Friday, March 26, 2010
Genzyme position reinitiated
After falling another 7% yesterday, a position was reinitiated at the close at just over $51 in Genzyme (GENZ). A broker upgrade today following the heavy falls, has sent the stock up 3.5% to just shy of $53.
Shorts continue to be bad bet - SSL International position closed
SSL International (SSL) issued a relatively upbeat trading statement this morning. Total reported sales for the period are expected to be in the region of GBP795 million over 22% up on the same period last year. This increase includes the impact of the acquisitions in Russia and Ukraine of Beleggingsmaatschappij Lemore BV, which was consolidated from 1st June 2009, and Gainbridge Investments (Cyprus) Ltd, which was consolidated from 1st October 2009. Both acquisitions continue to perform well and sales consolidated in this year are expected to be in the region of GBP120 million. Excluding the impact of acquisitions, SSL's branded consumer sales are expected to be approximately GBP630 million. After adjusting for favourable foreign currency movements, this represents underlying growth of around 4%, driven by both Durex and Scholl. Chief Executive, Garry Watts said ""Our geographic footprint has been significantly expanded by our acquisitions of the Russian and Ukrainian businesses. Good sales growth and an ongoing focus on cost control enable us both to invest in the business and expand margins. Our balance sheet remains strong and we continue to be confident in our 50% EPS growth target over the three years to March 2012."
A short position initiated at 782p was closed this morning at 800p. Swimming against the tide on SSL with the overall strength of the market proved to be a losing trade. My other short, ARM holdings has also performed poorly with the rise in the U.S. market over the last week continuing unabated.
Thursday, March 25, 2010
Genzyme falls through stop loss
A tight stop loss on Genzyme (GENZ) at 5% was triggered at the open as the company suffered broker down grades on yesterday's FDA news. The stock is currently down 6.5% at $51.7.
Another strong day on Wall Street with jobless data
Dow Futures were recently up 59 points as the U.S. Labour Department reported that Americans filing for unemployment benefits fell 14,000 last week to 442,000 against expectations of 450,000 or so. The FTSE 100 is currently up 48 points to 4,722.
New position in Genzyme on FDA problems
Contrarian Investor UK started a new position in biotech company, Genzyme Corp. (GENZ) after a 6% decline yesterday. The stock fell back after the U.S. FDA (Food and Drug Administration) took action at its Allston production plant to make sure products are made within the required specification, following a series of manufacturing problems dating back to 2008. The FDA will issue a consent decree, which means additional plant testing at extra cost until further notice and will affect its top two selling drugs, Gaucher's disease treatment Cerezyme and Fabry disease drug Fabrazyme. A consent decree may take several years to resolve. Genzyme said the likely consent decree would have a third party inspect and review the plant's operations for "an extended period" to ensure compliance but sales of products made there would not be interrupted. The move would require Genzyme to "make payments to the government and could incur other costs."
But the reason for the purchase is simple. In February, activist Carl Icahn, announced he had nominated four directors to Genzyme's board, including himself, for election at a May 20 shareholder meeting. Icahn Capital LP more than doubled its Genzyme stake to 4.8 million shares from 1.5 million shares during the fourth quarter of 2009. The FDA action may help Icahn gain control of the board and push for a sale of the business.
But the reason for the purchase is simple. In February, activist Carl Icahn, announced he had nominated four directors to Genzyme's board, including himself, for election at a May 20 shareholder meeting. Icahn Capital LP more than doubled its Genzyme stake to 4.8 million shares from 1.5 million shares during the fourth quarter of 2009. The FDA action may help Icahn gain control of the board and push for a sale of the business.
At $55 (52 week range $47-63), GENZ has market cap of close to $15 billion and a high historical p/e of 35. Analysts were expecting earnings of $2.88 for 2010 but this is certain to be revised down. Assuming earnings of $2.5 per share, this puts the company on a forward p/e of 22 which is not outrageous given Icahn's action to oust the board. Options traders were buying the June calls at $60 heavily last night, indicating that some investors are confident of a bounce back to over $60 in the next few weeks. Though competition is increasing for Genzyme's key drugs, it may be a good takeover candidate for a larger pharmaceutical company looking to establish a presence in the specialist medicine sector. Though the company may fall further, the downside from the FDA action should not be more or less priced in and therefore from a contrarian point of view this stock ticks the right boxes.
Reconfiguration of Falkland Islands oil holdings
With the rise back above £1 for Desire Petroleum (DES) I took the opportunity to de-risk the Falklands Islands portfolio. Unfortunately IG are not accepting controlled risk Contracts for Difference (CFD) trades on Desire which makes a "duster" on the Liz prospect risky for the portfolio. However, there are still accepting controlled risk trades on the other Falklands Oil drillers and therefore I have closed the Desire position and opened a new long positions in Falkland Oil and gas (FOGL) and Rockhopper (RKH) since the downside is protected to a 12.5% loss whilst allowing me unlimited upside "hanging on the coat tails" of a Desire positive update, should it occur. The gains in the other Falkland Islands drillers may be less marked than Desire but an unprotected trade feels foolhardy given the risks.
The RNS from Desire on the results of the Liz field drilling should be due very soon since we are nearly 30 days into drilling.
The RNS from Desire on the results of the Liz field drilling should be due very soon since we are nearly 30 days into drilling.
Prudential ups stake in GW Pharma
Prudential have increased their stake in GW Pharma (GWP) from around 10% to just over 12% in the last few days which adds reassurance to the buys put in place yesterday. It now looks increasingly likely that the steep drop yesterday was market maker manipulation, triggering stop losses for private investors to fill the large Pru order. Certainly looking at the pattern of trades there was no evidence of large sells and the price was forced down to 113p at one point yesterday morning. GWP is now trading up 0.5p at 119p to buy.
U.S. market turns down on Euro fears
Although the FTSE 100 finished in marginally positive territory after the budget, the DOW Jones Industrials dropped 53 points to finish at 10, 836 as the Euro continued to fall heavily against the dollar.
The Euro was hurt by Fitch, the credit rating agency, which downgraded Portugal’s credit rating to AA- from AA, citing “significant budgetary underperformance in 2009” and “structural weaknesses” in its economy. German Chancellor, Angela Merkel, continues to resist pressure to offer economic aid to Greece as unsurprisngly a bail out would be politically unpopular. Germany is holding out against any deal until the Greek governnment has exhausted its options to borrow on the bond markets, or from the IMF (International Monetary Fund) and allow it to roll over its debt. The Eurozone continues to look a mess as there is no mechanism to devalue which would have been Greece's preferred option under the Drachma.
The Euro was hurt by Fitch, the credit rating agency, which downgraded Portugal’s credit rating to AA- from AA, citing “significant budgetary underperformance in 2009” and “structural weaknesses” in its economy. German Chancellor, Angela Merkel, continues to resist pressure to offer economic aid to Greece as unsurprisngly a bail out would be politically unpopular. Germany is holding out against any deal until the Greek governnment has exhausted its options to borrow on the bond markets, or from the IMF (International Monetary Fund) and allow it to roll over its debt. The Eurozone continues to look a mess as there is no mechanism to devalue which would have been Greece's preferred option under the Drachma.
It was interesting to watch Jim Cramer's Mad Money TV show (CNBC) the night before last where he said the market was going much higher and the bears had been turned into cuddly koala bears. Yet with all thus exuberance many risks exist for the global economy. The first quarter earnings season in the U.S. is due to kick off in 3 weeks time and earnings will probably do well as firms continue to drive bottom line profits through cost cutting. However, top line sales growth will be needed to continue the momentum in the second half of 2010.
Wednesday, March 24, 2010
8% fall in GW Pharma is buy back opportunity
I have just bought back the GW Pharma position sold on Monday given the current 10p drop in the share price, presumably on a market maker "tree shake" prior to the AGM.
GW Pharma falls ahead of AGM
GW Pharmaceuticals (GWP) Annual General Meeting is being held today at 11am. The shares are currently down 4p to 119p to sell after slipping significanly in the final hours of trading yesterday. I have been selling down some of my holding over the last 2 days following the news on Sativex UK/Spain registration and the Phase IIb cancer study, meaning my position has been reduced by around two-thirds. I am continuing to hold a core position and may look to top up on any weakness but given the interim results are not due until May when further may be forthcoming on the Sativex approval process in Europe, these shares may drift a little unless a major new institution comes on board. A buy back point below 120 p looks enticing.
U.K. budget today at 12.30pm and political rant
So Alistair Darling gets on his feet for the U.K. budget at 12.30 GMT, the last budget before the General Election in May or June this year. It is not expected to offer much in addition to the pre-budget statement from November but politically Darling will attempt to give the message that Labour is managing the British economy out of recession in a sustainable way, whilst the Conservatives are being too aggressive in focusing on deficit reduction too early (the U.K. deficit is around 12% of spend) . In the last few weeks, this difference between the political parties has been exploited to paint David Cameron's Conservatives as a party of cutting. Prime Minister, Gordon Brown's, message seems to be working as the latest opinion poll puts the Conservatives on only a 5 point lead over Labour which would lead to a Hung parliament at the election. Many votes don't want to hear the message of austerity - "let them cut something as long as it doesn't affect me!". This worries economists because it may mean that lack of full control in Parliament may mean that deficit reduction plans are not agreed putting the U.K.'s Triple A credit rating at threat. On the other hand, it could be argued that if a pact is made between one of the major parties and the Liberal Democrats, fiscal deficit reduction could be even more aggressive as the Lib Dems are stated that they too are aligned to cutting the deficit.
Any moves by Darling on a new tax on the banking system will be keenly watched but he has already stated that he will not move with international cooperation. In contrast, the Conservatives seem to be focused on introducing the tax with or without this international agreement. Sweden have already introduced such a tax. It would be a popular move to adopt such as tax and a vote winner.
Both major political parties in the U.K. have not strayed from the message that they will not cut front line services. But the difficulty is there to see, a large budget deficit and growing debt that needs to be dealt with. Taxing the banks and high earners is a popular move but likely to lead to a "brain drain" to more welcoming taxation environments such as Switzerland. Increasing taxation is only likely to stifle wealth creation in the longer term. Cuts in big spending departments such as social security and health seem to be the logical solution, but for both the Labour and Conservative governments this is politically unpalatable even though both leaders know it is necessary. Whether Brown and Cameron say once thing during the election and act differently once they are in No.10 Downing Street is a possibility since any risk to the AAA credit rating would be political suicide. It would be refreshing if politicians acknowledged that there is no magic bullet. The U.K. must get the budget under control without putting the economy back into the recession. Rather than increasing taxes, cuts in big ticket departments such as Health must be on the agenda. U.K. voters have to understand they can't have it both ways i.e. strong public services and low taxes. I am not aligned to either of the major parties, but I am increasingly frustrated that the reality of the situation is unwilling to be accepted by the electorate.
Any moves by Darling on a new tax on the banking system will be keenly watched but he has already stated that he will not move with international cooperation. In contrast, the Conservatives seem to be focused on introducing the tax with or without this international agreement. Sweden have already introduced such a tax. It would be a popular move to adopt such as tax and a vote winner.
Both major political parties in the U.K. have not strayed from the message that they will not cut front line services. But the difficulty is there to see, a large budget deficit and growing debt that needs to be dealt with. Taxing the banks and high earners is a popular move but likely to lead to a "brain drain" to more welcoming taxation environments such as Switzerland. Increasing taxation is only likely to stifle wealth creation in the longer term. Cuts in big spending departments such as social security and health seem to be the logical solution, but for both the Labour and Conservative governments this is politically unpalatable even though both leaders know it is necessary. Whether Brown and Cameron say once thing during the election and act differently once they are in No.10 Downing Street is a possibility since any risk to the AAA credit rating would be political suicide. It would be refreshing if politicians acknowledged that there is no magic bullet. The U.K. must get the budget under control without putting the economy back into the recession. Rather than increasing taxes, cuts in big ticket departments such as Health must be on the agenda. U.K. voters have to understand they can't have it both ways i.e. strong public services and low taxes. I am not aligned to either of the major parties, but I am increasingly frustrated that the reality of the situation is unwilling to be accepted by the electorate.
Tuesday, March 23, 2010
FTSE 100 closes at 21 month high
The FTSE 100 ended at a 21 month high of 5,673, up 29 points. The market was boosted by a strong update from Legal and General and that the inflation rate fell sharply to 3% last month giving reassurance that the Bank of England will keep interest rates at low levels for the foreseeable future. The DOW Jones Industrials are currently up 103, to 10,889 as the markets continued to react positively to Obama's Victory in the House of Representatives on healthcare reform.
Desire Petroleum finally moves up
After several days of small, but steady falls, Desire Petroleum (DES) finally looks to be moving in the right direction with the shares currently up around 5.5%. Bulletin boards like iii.co.uk have been buzzing with around 1000 posts a day and the rumour mill surrounding the potential testing of core samples have been doing the rounds. The results from Desire's Liz field are due any day which is increasing the volatility of this stock. Desire is not a stock "for widows or orphans" but the fact that it is so speculative makes the potential rewards so exciting. I have continued to hold as the share price has slipped over the last week and given the seismic data from the Desire field I am more than hopeful that the company's management will have chosen the Liz prospect for good reason i.e. that oil/gas shows are present. The Falkland Islands drillers are at the high stress end of the spectrum and this week the adrenaline will be at maximum power as it could be the make or break for the stocks even though there are other drilling prospects for Ocean Guardian to drill.
GW Pharma announces positive clinical trial data in cancer pain
GW Pharma (GWP) announced today preliminary results of a Phase IIb dose-ranging trial evaluating the efficacy and safety of Sativex in the treatment of pain in patients with advanced cancer, who experience inadequate pain control during optimized chronic opioid therapy.
This trial was performed in conjunction with GW's licensing partner for Sativex in the United States, Otsuka Pharmaceutical Co. Ltd.. In the US, cancer pain represents the initial target indication for Sativex. Key Points: - Study meets key objectives of providing data to support entry into Phase III - Sativex shows statistically significant differences from placebo in pain scores, according to both the continuous response analysis and change from baseline analysis in NRS average pain - GW and Otsuka now planning End of Phase II meeting with the FDA to gain endorsement of the proposed Phase III program
Monday, March 22, 2010
GW Pharma continues upward momentum
GW Pharma (GWP) is currently up nearly 6% without any evidence that big buys are coming through for the company. Momentum is certainly positive with the regulatory announcement last week on the progress of the European Sativex application. A move over 130p seems feasible during the week and closer to 150p on final approval in May. Of course, an institutional buy of any size would accelerate matters as trading seems to be focused on private investors for now. Perhaps those boys in the City just fall asleep when it comes to decentralised applications, mutual recognitions and the like?!
U.S. Healthcare bill passes House of Representatives
On Sunday evening President Obama scored a major personal victory, with the House of Representatives approving the Senate bill overhauling the U.S. health-care system with the aim of extending insurance coverage to about 32 million Americans. The margin of victory was narrow, with the vote in favour 219 to 212 to approve the bill. All Republicans and 34 Democrats opposing. It bans insurance company practices like denying care for pre-existing conditions, imposing lifetime caps on coverage, while providing subsidies to buy private insurance in newly-created marketplaces called “exchanges”.
This means its potentially bad news for the big pharmaceutical companies given pricing concerns for the new "exchange" insurance schemes which may create downward pressure on reimbursement prices for branded drug. On the flip side, the extra population covered by the scheme will drive additional volumes of prescriptions. Astra Zeneca (AZN) generates half its earnings in the U.S., whilst GSK, Novartis and Roche generate over a 1/3 of their earnings in the American market.
Saturday, March 20, 2010
Position in Coal of Africa initiated
Position reinitiated yesterday afternoon in Coal of Africa (CZA) on anticipation of UK full market listing in Q2 and a fall back in the share price from the previous sell level of 142p. Revenue is expected to rise dramatically as production ramps up to 15 million tonnes of coal. Prices remain firm for coking and thermal coal on rising Asian demand.
Portfolio review of the week March 20th 2010
After 8 days of gains in the U.S. and a strong move upwards in the U.K., it was not surprising that the S&P 500 finally moved down. I remain cautious on the market at this level and am using the strength as an opportunity to sell down some positions. My ISA is now 60% in cash, after unit trust purchases bought in November has shown near 20% gains.
GW pharma (GWP) - An exceptional week for GWP as the company announced that all aspects of safety, quality and efficacy had been resolved for the UK/Spanish licence applications for multiple sclerosis drug, Sativex. The stock moved up from around 100p to finish the week at 121p. Though tempting to take profits, there is significant news flow yet to come from the company. A milestone payment from Bayer Schering of £10 million will be triggered on the UK licence approval in May. A further milestone payment of £2.5 million will be due from Almirall (GW's European partner) on Spanish approval, due Q3 (£8 million was paid in 2009). Results from the clinical study in cancer pain have been confirmed for Spring 2010. It is likely that global distribution deals for Asia and Latam will be announced at the interims in May.
The regulatory announcement this week is a ground breaking event for GW pharma. Sativex approval in Europe is now assured. Given the company was founded in 1998 to develop Sativex, the end of a 12 year road is now in sight. Although reimbursement issues are yet to be resolved, the strength of the commercialisation partners (Bayer Schering and Almirall), will no doubt ensure that any issues are resolved.
Falkland Island Oil drillers (Desire Petroleum DES, Falkland Oil and Gas FOGL, Borders and Southern BOR) - After double digit increases in the Falkland Island oil explorers on Monday, the shares fell away during the rest of the week. News from Desire Petroleum's Liz field where the Ocean Guardian rig is drilling is expected any day. Most of my positions are held in controlled risk CFDs (contracts for difference) which limits downside on any bad news. Positive news from Liz, will drive these shares, particularly Desire petroleum, up at least 30% and possibly a lot more. Though risky, the risk/reward is enticing with the downside protected.
ITV (ITV) - ITV continued to tread water and finished the week at 54p. The only news was the size of Adam Crozier's pay and performance package which is geared to a recovery in the share price.
ARM Holdings (ARM) - A short was initiated this week and this finished on a small profit for the week. It was encouraging that despite large gains in the semiconductor stocks during the week, ARM did not participate in this rally. The rationale for the short in ARM and SSL were explained on a post during the week.
SSL International (SSL) - A short initiated at 780p was down a couple of percent, with the stock closing at 792p yesterday.
Ithaca Energy (IAE) - The North sea focused oil explorer moved up from 108p on Monday to finish the week at 134.5p, a gain of 24%. A position initiated on Tuesday was unfortunately closed too early at 124p and illustrates the caution needed when selling stocks into a positive momentum move especially when the stock is dual listed. Moves on the Canadian TSX, where commodity stocks powered up this week, drove the share price appreciation on this side of the Atlantic.
Micron Technology (MU) - Position closed at $10.14. The stock finished at $9.90 last night. Micron has rebounded strongly from around $8 in the last month and therefore an opportunity was taken to sell off on the rise.
Intel (INTC) - An overnight position was taken on Intel which generated a 3% gain. No longer holding.
GW pharma (GWP) - An exceptional week for GWP as the company announced that all aspects of safety, quality and efficacy had been resolved for the UK/Spanish licence applications for multiple sclerosis drug, Sativex. The stock moved up from around 100p to finish the week at 121p. Though tempting to take profits, there is significant news flow yet to come from the company. A milestone payment from Bayer Schering of £10 million will be triggered on the UK licence approval in May. A further milestone payment of £2.5 million will be due from Almirall (GW's European partner) on Spanish approval, due Q3 (£8 million was paid in 2009). Results from the clinical study in cancer pain have been confirmed for Spring 2010. It is likely that global distribution deals for Asia and Latam will be announced at the interims in May.
The regulatory announcement this week is a ground breaking event for GW pharma. Sativex approval in Europe is now assured. Given the company was founded in 1998 to develop Sativex, the end of a 12 year road is now in sight. Although reimbursement issues are yet to be resolved, the strength of the commercialisation partners (Bayer Schering and Almirall), will no doubt ensure that any issues are resolved.
Falkland Island Oil drillers (Desire Petroleum DES, Falkland Oil and Gas FOGL, Borders and Southern BOR) - After double digit increases in the Falkland Island oil explorers on Monday, the shares fell away during the rest of the week. News from Desire Petroleum's Liz field where the Ocean Guardian rig is drilling is expected any day. Most of my positions are held in controlled risk CFDs (contracts for difference) which limits downside on any bad news. Positive news from Liz, will drive these shares, particularly Desire petroleum, up at least 30% and possibly a lot more. Though risky, the risk/reward is enticing with the downside protected.
ITV (ITV) - ITV continued to tread water and finished the week at 54p. The only news was the size of Adam Crozier's pay and performance package which is geared to a recovery in the share price.
ARM Holdings (ARM) - A short was initiated this week and this finished on a small profit for the week. It was encouraging that despite large gains in the semiconductor stocks during the week, ARM did not participate in this rally. The rationale for the short in ARM and SSL were explained on a post during the week.
SSL International (SSL) - A short initiated at 780p was down a couple of percent, with the stock closing at 792p yesterday.
Ithaca Energy (IAE) - The North sea focused oil explorer moved up from 108p on Monday to finish the week at 134.5p, a gain of 24%. A position initiated on Tuesday was unfortunately closed too early at 124p and illustrates the caution needed when selling stocks into a positive momentum move especially when the stock is dual listed. Moves on the Canadian TSX, where commodity stocks powered up this week, drove the share price appreciation on this side of the Atlantic.
Micron Technology (MU) - Position closed at $10.14. The stock finished at $9.90 last night. Micron has rebounded strongly from around $8 in the last month and therefore an opportunity was taken to sell off on the rise.
Intel (INTC) - An overnight position was taken on Intel which generated a 3% gain. No longer holding.
Markets finally slip after 8 days of gains
After 8 days of gains in U.S. stocks, they closed lower on Friday, with worries about the state of the Greek bail out returning and a retreat in the energy and commodity sectors. The Dow Jones Industrial Average, closed down 37 at 10,742, but was up 1.1% on the week and registered its 3rd weekly gain. The FTSE 100 initially move up to 5,685, levels not seen since 2008 in afternoon dealings, but the index closed at 5,650, up only 8 as the U.S. market moved into reverse.
After an an upbeat trading update from Lloyds Banking Group (LLOY) that the company will be profitable on a combined businesses basis in 2010, its shares moved up 8% to just over 60p. The company is 41% owned by the U.K. tax payer and the price is fast approaching the 74p the government paid to bail out the bank. Royal Bank of Scotland gained nearly 6% to 44.45p (close to the 50p government investment price), and Barclays rose almost 2% to 359.6p.There are rumours that Alistair Darling, the Chancellor, will announce that the Treasury will start selling these bank assets perhaps as soon as the Budget next week.
After an an upbeat trading update from Lloyds Banking Group (LLOY) that the company will be profitable on a combined businesses basis in 2010, its shares moved up 8% to just over 60p. The company is 41% owned by the U.K. tax payer and the price is fast approaching the 74p the government paid to bail out the bank. Royal Bank of Scotland gained nearly 6% to 44.45p (close to the 50p government investment price), and Barclays rose almost 2% to 359.6p.There are rumours that Alistair Darling, the Chancellor, will announce that the Treasury will start selling these bank assets perhaps as soon as the Budget next week.
Thursday, March 18, 2010
What next for Sativex cannabis spray?
Following today's RNS and WebCast relating to GW Pharma's cannabis spray, Sativex, the following steps are anticipated. The drug has now reached day 150 of the decentralised regulatory process (DCP) without any major issues, the only outstanding minor point is the Patient Leaflet:
1. Completion of regulatory documentation for decentralised application (patient information leaflet) with UK as RMS (Reference Member State) and Spain as CMS (Concerned Member State) - April 2010?
2. Closure of decentralised phase April-May 2010?
3. Grant of national licences in UK and Spain (following agreement on local labelling and packaging)- 30 days is standard approval - June 2010
4. Launch in UK - June 2010 (Q2 - company state high confidence of Q2 launch)
5. Start of Spanish reimbursement discussions - June 2010
6. Launch in Spain - September 2010 ( 3 months consultation on pricing)
4. Launch in UK - June 2010 (Q2 - company state high confidence of Q2 launch)
5. Start of Spanish reimbursement discussions - June 2010
6. Launch in Spain - September 2010 ( 3 months consultation on pricing)
7. Start of mutual recognition process in other European markets with UK as Reference Member state - July 2010?
8. Grant of mutual recognition in other major European markets (6 month approval normal) - Q1 2011 (possibly end 2010)
In parallel reimbursement discussions will be going on. The company will have submitted a price to the UK's Department of Health and unless there have been significant disagreement, Sativex will be reimbursable on the NHS from product launch. NICE (the National Institure of Clinical Excellence) may assess the drug later and boost uptake with the PCT's (Primary Care Trusts) in England and Wales, since budget holders will have guidance on usage. In the meantime prescribers may use the drug as they wish and it will be paid by the NHS. In Scotland, the SMC (Scottish Medicines Consortium) needs to pre-approve drugs before launch, but the company should have this well in hand. In Spain, GW's partner Almirall will in discussions with the Spanish Ministry of Health after licence approval, and this is usually a 3 month process. U.K. approval will bring in £10 m from Bayer Schering , and in Spain Almirall will pay £2.5 m on pricing and regulatory approval.
Questions and answers from today's WebCast:
Q. What indication has been approved?
A. Symptomatic improvement in symptoms of MS who have failed on other anti spasticity medications.
Q. What territories are planned for Mutual Recognition?
A. GW and Almirall are putting together a list. Major commercial markets included. NICE preparation in hands of Bayer Schering, Market access team who have significant expertise.
Q. Any plans to expand label?
A. No, comfortable with indication.
Q. Is cancer pain trial on track for Spring.
A. Yes
Q. What are launch logistics?
A. Sufficient launch stock. Manufacturing licence issued in 2009. Launch batches delivered into distribution chain on approval announcement.
Q. Is there capacity to cater for global demand?
A. Yes, capacity will be ramped up using 3rd parties.
Q. What are licensing plans outside Canada, UK, Europe and U.S..
A. Ambition to use the European approval as basis for filing in other parts of world. Distribution partners being discussed e.g. Australia, Latin America, Africa.Update on rest of world at Interims in May.
Q. What is situation on Spain pricing?
A. Spanish Ministry of Health and Almirall will be in negotiations. Expect 3 months, maybe more.
Q. When are milestone payments due?
A. Milestone payments on reg. and pricing approval in Spain. Licence approval UK
Q. When is Canadian spasticity indication due?
A. Canadian reg. submission for spasticity filed end 2009. H2 2010 outcome.
Q. Have you considered issue of pricing differentials in different countires?
A. Partners make decision on price. UK will be public domain once Almirall start price discussions.
Faith in GW Pharma's Sativex drug pays off!
GW Pharma (GWP) released the following RNS this morning which is outstanding news. They key sentence is "The regulatory process has now reached "Day 150" of the decentralised procedure and both the UK and Spanish regulators have concluded that there are no major quality, safety or efficacy issues remaining to be resolved." This means that the efficacy concerns that stopped the previous decentralised European application has been addressed with the regulatory authorities. The company is now at a documentation phase relating to the PIL (patient information leaflet) and packaging artwork. Fantastic news as this is Contrarian Investor UK's largest holding!
UK AND SPANISH REGULATORS CONFIRM NO MAJOR ISSUES OUTSTANDING
Regulatory Process Now at Advanced Stage. Approvals Expected Q2 2010
Porton Down, UK, 18 March 2010: GW Pharmaceuticals plc (GWP:AIM) today provides an update on the progress of its regulatory submission for Sativex Oromucosal Spray for the treatment of the symptoms of spasticity due to Multiple Sclerosis. The regulatory submission was filed in the UK and Spain under the European decentralised procedure in May 2009, with the UK acting as the Reference Member State. The regulatory process has now reached "Day 150" of the decentralised procedure
and both the UK and Spanish regulators have concluded that there are no major quality, safety or efficacy issues remaining to be resolved. Resolution is now required only of points of clarification related to finalisation of wording on the patient information leaflet. We expect this document to be reviewed by the regulators in the coming weeks. Once the regulators have agreed final wording on the patient leaflet, the decentralised procedure can close and the process will enter its final phase. This final phase, known as the national phase, takes place separately in the UK and Spain and its purpose is to finalise local wording on product packaging and related documents. GW therefore expects regulatory approval in the UK and Spain during Q2 2010. Dr Stephen Wright, GW's R&D Director, said, "This is a major milestone in the regulatory process for Sativex, and for GW's future prospects. We look forward to working with the regulators towards a successful completion of this process and to supporting our marketing partners as they prepare for product launch. This progress with Sativex also provides further validation of GW's cannabinoid platform and the significant long term promise of GW's portfolio of cannabinoid medicines."
Sativex will be marketed in the UK by Bayer Schering Pharma, and in the rest of the European Union by Almirall S.A. Upon UK regulatory approval, GW expects to receive a GBP10m milestone payment from Bayer. A further GBP2.5m milestone payment is payable by Almirall following both regulatory and pricing approval in Spain. Following approval in the UK and Spain, submissions for approval will made in additional European countries during 2010 under the mutual recognition procedure.
Wednesday, March 17, 2010
U.K. FTSE 100 finishes at 21 month high
The FTSE 100 finished at 5,645, up 24 points for the day and the highest level for 21 months as commodity stocks went higher on the weak dollar and Goldman Sachs predicted strong demand for raw materials. Ben Bernanke's statement that U.S. interest rates were likely to remain low for some time, has pressurised the dollar and driven commodity prices higher as their price in set in U.S. dollars.
Markets trade at highs and Contrarian Investor UK trims holdings
The DOW Industrials are currently up over 50 points, up for a seventh straight day, and trading at a 17month high. The FTSE 100 is up also up 38 points. Stocks are on the move up again amid optimism over the Federal Reserve sticking with its low interest rate stance for the foreseeable future and as expected, the Bank of England confirming that its Monetary Policy Committee voted unanimously in favour of keeping U.K. interest rates unchanged at its meeting earlier this month. Also, the U.S. Producer Price Index declined 0.6% in February, its largest drop in seven months. Taking out food and energy costs, the index gained 0.1%. In the U.K., the number of people claiming unemployment benefits fell unexpectedly last month with those claiming Jobseeker's Allowance dropping by 32,300 to 1.59m in February, the biggest monthly fall since 1997 and against forecasts of a rise of 8,000. The jobless rate now stands at 7.8%. However, long-term unemployment, which includes those out of work for over a year, jumped by 61,000 to 687,000.
Finally commodity stocks were on the rise, Goldman Sachs issued a research note forecasting a surge in global demand.
Finally commodity stocks were on the rise, Goldman Sachs issued a research note forecasting a surge in global demand.
Against this background of euphoria, the traditional defensives (pharmaceuticals, tobacco and utilities) are being sold off. With over a week of daily rises, the stampede into the markets doesn't seem to be abating. Contrarian Investor U.K. is using this strength to sell more positions with the final tranche of Micron Technology and the Intel position bought yesterday being closed off this afternoon. The market may have more steam in it, but I am happy to hold some cash on the sidelines for now. As well as economic concerns, the Iranian Nuclear saga looks to be coming to a head and there is risk of an escalation of tension in the Middle East if Israel adopts a hard line, perhaps even risking Military action. As oil moves over $80, any such tension in the Middle East will push oil well over $100, which will undoubtedly stifle this muted global economic recovery. Then there are all the sovereign debt problems which are not going anywhere fast. Time to take a contrarian view, and move into a defensive stance for now.
New Intel position on rumours of earnings forecast revision
A long position in Intel Corp (INTC) was initiated yesterday as the company's shares moved up nearly 4% to $22. There has been speculation that Intel is preparing to pre-announce a positive upward revision of earnings for the current quarter and forecast for the remainder of 2010 on the sustained recovery in semiconductor demand. The company's Q1 earnings were scheduled for release on April 13th.
At the Q4 results, the company forecast Q1 revenue's of $9.7 billion, with potential upside of $400 million, with gross margin of 61%, plus or minus two points. Analysts estimate earnings of 37 cents on $9.79 billion in revenue with a top range forecast of 40 cents.
At the Q4 results, the company forecast Q1 revenue's of $9.7 billion, with potential upside of $400 million, with gross margin of 61%, plus or minus two points. Analysts estimate earnings of 37 cents on $9.79 billion in revenue with a top range forecast of 40 cents.
Tuesday, March 16, 2010
Ithaca Energy position closed after today's 12% rise
After a near 17% rise in two days, the position in Ithaca Energy was closed late this afternoon. A case of day trading but "A profits, not a profit until you've banked it"!
New position in Ithaca Energy initiated on strong production outlook
Ithaca Energy Inc.(IAE) listed on the UK AIM and Canadian TSX markets, is an independent oil & gas company with exploration, development and production assets in the UK sector of the North Sea. On February 19th, the company announced that the Galaxy II heavy duty jack-up rig had spudded and commenced drilling at the Stella appraisal well location in block 30/6. Results from this well should be available by June.
Ithaca is currently trading at 116-120p up 7% for the day, with a 52 week range of 24p-117p. Brokers are expecting pre-tax profits of £28 million this year, putting the company on a p/e of 8 for 2010. Position initiated at 114p on Monday.
Major additions to reserves were reported at the end of 2009 though additional geological and geophysical study work conducted during the second half of 2009 in the Central North Sea:
i) The evaluation of Stella (Ekofisk) and Harrier discoveries has added significant additional 2P reserves.
ii) Block 29/10b was awarded to Ithaca (now 100% equity interest) in the 25th UKCS Licensing Round. The block contains the Hurricane discovery which has been attributed Probable reserves.
iii) 2P Gross reserves for Stella (Andrew) have not changed pending the appraisal well result. Combined 2P reserves for the GSA now amount to 25.52 mmboe representing ~70% of the total 2P reserves for the Company.
Other reserve changes have been made throughout the portfolio and are summarised below:
i) In March 2009 the Company announced the successful drilling of the Carna prospect and Proved reserves for this discovery have been ascribed to Ithaca.
ii) The Jacky field was brought on line in April 2009 and has performed well above expectation. Previous assessed Proved reserves (December 31 2008 adjusted for Dyas transaction) for Jacky before first production were 0.68 mmboe net. Ithaca net production for 2009 was 0.97 mmboe; the latest assessment confirms 1.37 mmboe of remaining Proved reserves net to Ithaca.
iii) Ithaca acquired the Beatrice field in November 2008 and has achieved steady daily production increases over the last 12 months. Further work designed to access additional reserves is planned for 2010 and this has been taken into account by Sproule. Previous assessed Proved reserves (December 31 2008 adjusted for Dyas transaction) for Beatrice were 0.84 mmboe net.
iv) production for 2009 was 0.33 mmboe; the latest assessment confirms 1.65 mmboe of remaining Proved reserves net to Ithaca.
Wellington West Capital Markets, has said that Ithaca can be expected to generate $100-million in cash flow during 2010 from the North sea and is capable of increasing net production to 16,000 barrels of oil a day by 2013 from 4,700 barrels this year. The company has the benefit of an experienced management team who have considerable expertise in the North sea, and a strong balance sheet being debt free.
Ithaca is currently trading at 116-120p up 7% for the day, with a 52 week range of 24p-117p. Brokers are expecting pre-tax profits of £28 million this year, putting the company on a p/e of 8 for 2010. Position initiated at 114p on Monday.
Monday, March 15, 2010
Lehman Brothers & Dick Fuld - just too much greed
A couple of months ago, I read the book, Larry McDonald's "a colossal failure of common sense", which told the story of the last days of the Wall Street investment bank, Lehman Brothers. It was an enlightening insight about the greed in the board room of this financial institution and particularly the antics of Chief Executive, Dick Fuld who presided over the collapse of the 158 year old firm in September 2008 as the house of cards created by the real estate boom came to a grinding halt. In 2007, Fuld received $22m in remuneration, as the performance of the company was flattered by the growth in CDO's (collateralised debt obligations), the parcelling of debt used to reduce the risk of mortgage defaults which went badly wrong in 2008.
This weekend my interest was peeked by stories in the press about he court-appointed examiner's findings who was mandated to examine the background and causes of Lehman's failure. Anton Valukas, concluded in his 2200 page report that there were grounds for "colorable claims" against Fuld, the bank's auditor Ernst & Young and three successive chief financial officers - Chris O'Meara, Erin Callan and Ian Lowitt - for presenting a misleading picture of Lehman's finances in its accounts. A series of temporary asset sales, using an off balance sheet trick called "repo 105" were used to artificially boost Lehman's balance sheet. By the fourth quarter of 2007, it had placed $38.6 bn of assets through repo 105, in q1 2008 $49.1 bn and over $50 bn by the second quarter of 2008. According to Valukas, Fuld, O'meara, Callan and Lowitt certified misleading financial statements.
Whether Fuld and his other cronies will ever be held accountable for his ploys is uncertain but the whole sorry story highlights the unadulterated greed of many senior Wall Street bankers prior to the financial meltdown in late 2008 and early 2009. Profit growth was the priority, without any concept of risk containment and ultimately tax payers have had to step in and save the day. If the Federal Reserve had not stepped in to pump billions into the system through TARP (toxic asset relief programme) and a series of bail outs (e.g. AIG), the whole financial system may have collapsed in early 2009, with unimaginable consequences. Will the world learn from these lessons? I guess, capitalism has its pros and cons but "light touch" regulation seems to have been pressure tested and ultimately failed. That is not to say that instruments such as derivatives or short selling should be banned, but a degree of control is needed to ensure that the financial institutions of the world are not left to their own devices because next time the outcome may be very different and very destructive.
This weekend my interest was peeked by stories in the press about he court-appointed examiner's findings who was mandated to examine the background and causes of Lehman's failure. Anton Valukas, concluded in his 2200 page report that there were grounds for "colorable claims" against Fuld, the bank's auditor Ernst & Young and three successive chief financial officers - Chris O'Meara, Erin Callan and Ian Lowitt - for presenting a misleading picture of Lehman's finances in its accounts. A series of temporary asset sales, using an off balance sheet trick called "repo 105" were used to artificially boost Lehman's balance sheet. By the fourth quarter of 2007, it had placed $38.6 bn of assets through repo 105, in q1 2008 $49.1 bn and over $50 bn by the second quarter of 2008. According to Valukas, Fuld, O'meara, Callan and Lowitt certified misleading financial statements.
Whether Fuld and his other cronies will ever be held accountable for his ploys is uncertain but the whole sorry story highlights the unadulterated greed of many senior Wall Street bankers prior to the financial meltdown in late 2008 and early 2009. Profit growth was the priority, without any concept of risk containment and ultimately tax payers have had to step in and save the day. If the Federal Reserve had not stepped in to pump billions into the system through TARP (toxic asset relief programme) and a series of bail outs (e.g. AIG), the whole financial system may have collapsed in early 2009, with unimaginable consequences. Will the world learn from these lessons? I guess, capitalism has its pros and cons but "light touch" regulation seems to have been pressure tested and ultimately failed. That is not to say that instruments such as derivatives or short selling should be banned, but a degree of control is needed to ensure that the financial institutions of the world are not left to their own devices because next time the outcome may be very different and very destructive.
Falkland Oil drillers in demand today on rumour mill
Desire Petroleum (DES) up 11.5% , Rockhopper (RKH) up 10.7% this morning with consistent buying and in the case of DES 4 million traded already. Could be rumours from Ocean Guardian rig or just the usual volatility of these shares. We will find out in the next week or so!
The Independent Small Talk has a small mention today:
The Independent Small Talk has a small mention today:
Desire primed for Falklands oil announcement
It could all kick off in the Falkland Islands at the end of this week.
No, we're not talking about another military scrap over the islands' sovereignty, as in 1982, but according to sources, Thursday or Friday is the first time that the Aim-listed Desire Petroleum could announce that it has found oil in the territorial seas to the north of the Falklands.
The group's exploratory drilling has caused one huge diplomatic spat between Argentina, which claims ownership of the islands, and the UK. Desire has been unusually quiet about the drilling programme, largely because it wants to keep its head below the parapet. However, if the drilling has gone as well as the company dared to believe, we should all learn about it soon. Analysts expect that, realistically, it could take another couple of weeks for the group to tell the market how it has got on.
Desire is drilling in an area that other giants such as Shell tried to find oil in more than a decade ago and left empty-handed, and analysts put the group's chances of success at no more than about 20 per cent.
Earlier this month, the US Secretary of State, Hillary Clinton, called on the UK to open discussions with Argentina on the possibility of any future drilling.
Source: http://www.independent.co.uk/news/business/sharewatch/small-talk-lse-looks-to-tackle-problem-of-aim-investor-relations-1921542.html
Shorts initiated on ARM holdings and SSL International
Shorts placed this morning on ARM Holdings (ARM) at £2.25 and SSL International (SSL) at £7.75.
Sunday, March 14, 2010
FIVE U.K. STOCKS WITH POTENTIAL FOR SHORTING
Contrarian Investor UK have been looking for stocks on the U.K. market which look overvalued and are candidates for a shorting strategy and here is my top 5 watch list. The FTSE All share is now up nearly 10% in the last month and 53% for the last 12 months and has tracked the move upwards on the U.S. Dow and S&P 500 (the S&P is up 10.5% in the last month). The strength in the overall market and generally bullish tone makes picking some overbought shares a tempting proposition as I feel that there is scope for a set back, albeit minor, in the next few weeks. Contrarian Investor UK uses Contracts for Difference (CFDs) through Igmarkets to enable stocks to be shorted i.e. with a hope that the price of a stock will go down in the future. However, spread betting using platforms such as IG index is also another easy potential online platform which allows buying as well as selling of individual shares and indices.
1. SSL International (SSL)
At £7.75 (52 week range £4.26- £7.89), health and personal care company, SSL trades on a price/earnings of 24 (based on earnings to year end March 2010) and a forward p/e for 2011 of 19 (based on earning of 40p per share in 2011). Garry Watts, its chief executive, has set a goal of increasing its earnings per share by 50pc over the three years to March 2012.
SSL's share price has been premium priced for years because of persistent rumours that Reckitt Benckiser will acquire the company to get its hands on its Durex and Scholl brands. But Reckitt's CEO Bart Becht is known for his prudence when its comes to acquisitions. Although Reckitt's paid a full price for both the Boots Healthcare International and Adams Therapeutics businesses, a takover of SSL for £9-10 would be difficult to justify given 1)it is unlikely that RB could accelerate the growth of SSL power brands too much faster given SSL has done a good job in delivering strong growth over the last 5 years 2) there is a portfolio of second line brands which were acquired during the 1990's particularly in Over the Counter (OTC) medicines which add significant complexity to the business and limited earnings e.g. Meltus, Cuprofen. Though these could be sold on, why pay a premium price for these brands? 3) SSL's organisation is relatively lean and therefore unlike the Boots acquisition, cost saving measures would not come as easily.
SSL has been busy beefing up its East European presence and now has strong growth prospects in Russia and other markets. It increased its presence in the Russian condom market by raising its stake in its BLBV joint venture in February. The company now generates about 85pc of its revenues from outside the UK. However, there are still significant risks in these markets as economic growth is still muted. The share price does not have the benefit of a good dividend, currently SSL yields 1.3%.
Although SSL's management has been doing a lot of the rights things over the last 5 years e.g. focusing growth on brands like Durex, emerging markets expansion, the high expectations for earnings growth in 2011 and 2011 and takeover rumours which justify the premium rating can easily fall apart if there is a glitch in any of its key markets. Investor's Chronicle featured SSL as a sell this week, and I agree with their assessment.
2. Reckitt Benckiser Group (RB.)
I have covered my reservations about healthcare and household company, Reckitt on a previous Contrarian Investor UK article published on Sunday 14th February (http://contrarianinvestoruk.blogspot.com/2010/02/reckitt-benckiser-certainly-not-good.html). At £35.11 (52 week range £24.96-35.45), the p/e is relatively undemanding at 18 and has a 2.9% dividend yield but my key concern remains the earnings impact of a generic competitor to opoid abuse drug, Subuxone in the U.S.. Suboxone accounts for 18% of group operating profits and around 10 percent of group profits. In the U.S. the drug accounts for half of the pharmaceutical divisions earnings and the North American operation represents two-thirds of total pharma sales.
3. ARM Holdings (ARM)
Chip designer, ARM (ARM or NASDAQ ARMH) currently trades at £2.27 (52 week range £0.98-2.32), rising from £1.95 over the last month alone as rumours have swirled around that Qualcomm (QCOM) is considering a bid. The company trades on a demanding 2010 p/e of 32.7 and 2011 of 27.5 as the company is seen to be geared to the huge growth in smart phone demand. The Cambridge-based firm had at least one of its chips in 90pc of all smartphones sold last year.
1. SSL International (SSL)
At £7.75 (52 week range £4.26- £7.89), health and personal care company, SSL trades on a price/earnings of 24 (based on earnings to year end March 2010) and a forward p/e for 2011 of 19 (based on earning of 40p per share in 2011). Garry Watts, its chief executive, has set a goal of increasing its earnings per share by 50pc over the three years to March 2012.
SSL's share price has been premium priced for years because of persistent rumours that Reckitt Benckiser will acquire the company to get its hands on its Durex and Scholl brands. But Reckitt's CEO Bart Becht is known for his prudence when its comes to acquisitions. Although Reckitt's paid a full price for both the Boots Healthcare International and Adams Therapeutics businesses, a takover of SSL for £9-10 would be difficult to justify given 1)it is unlikely that RB could accelerate the growth of SSL power brands too much faster given SSL has done a good job in delivering strong growth over the last 5 years 2) there is a portfolio of second line brands which were acquired during the 1990's particularly in Over the Counter (OTC) medicines which add significant complexity to the business and limited earnings e.g. Meltus, Cuprofen. Though these could be sold on, why pay a premium price for these brands? 3) SSL's organisation is relatively lean and therefore unlike the Boots acquisition, cost saving measures would not come as easily.
SSL has been busy beefing up its East European presence and now has strong growth prospects in Russia and other markets. It increased its presence in the Russian condom market by raising its stake in its BLBV joint venture in February. The company now generates about 85pc of its revenues from outside the UK. However, there are still significant risks in these markets as economic growth is still muted. The share price does not have the benefit of a good dividend, currently SSL yields 1.3%.
Although SSL's management has been doing a lot of the rights things over the last 5 years e.g. focusing growth on brands like Durex, emerging markets expansion, the high expectations for earnings growth in 2011 and 2011 and takeover rumours which justify the premium rating can easily fall apart if there is a glitch in any of its key markets. Investor's Chronicle featured SSL as a sell this week, and I agree with their assessment.
2. Reckitt Benckiser Group (RB.)
I have covered my reservations about healthcare and household company, Reckitt on a previous Contrarian Investor UK article published on Sunday 14th February (http://contrarianinvestoruk.blogspot.com/2010/02/reckitt-benckiser-certainly-not-good.html). At £35.11 (52 week range £24.96-35.45), the p/e is relatively undemanding at 18 and has a 2.9% dividend yield but my key concern remains the earnings impact of a generic competitor to opoid abuse drug, Subuxone in the U.S.. Suboxone accounts for 18% of group operating profits and around 10 percent of group profits. In the U.S. the drug accounts for half of the pharmaceutical divisions earnings and the North American operation represents two-thirds of total pharma sales.
3. ARM Holdings (ARM)
Chip designer, ARM (ARM or NASDAQ ARMH) currently trades at £2.27 (52 week range £0.98-2.32), rising from £1.95 over the last month alone as rumours have swirled around that Qualcomm (QCOM) is considering a bid. The company trades on a demanding 2010 p/e of 32.7 and 2011 of 27.5 as the company is seen to be geared to the huge growth in smart phone demand. The Cambridge-based firm had at least one of its chips in 90pc of all smartphones sold last year.
But directors have recently been selling the stock. For example, Tudor Brown (Chief Technical Officer and one of the founders) sold over £1 million of stock on March 9th. On March 11, RBS downgraded the stock despite the positive outllook for semiconductor stocks on valuation grounds and the Qualcomm rumours seem unlikely given competition concerns and a negative reaction from mobile manufacturers. Despite the positive fundamentals of the business, the share price seems to have gone a little over board and ARM therefore represents a good short at anything close to £2.30.
4. Rightmove
Online estate agency, Rightmove (RMV) has had a tremendous share price move, rising from a low of £2.25 in March 2009 to its current £6.58, a rise of nearly 300% and not far from its 52 week high of £6.77. A renewed positive sentiment in the U.K. housing market has helped lift the shares and driven revenues back up as properties come onto the market for sale and hence Estate agents to use Rightmove as an advertising vehicle. It trades on a forward p/e of 19.7 and yields about 2%. Underlying operating profit for the 12 months to 31 December rose 2% to £41.9m on revenue down 6% to £69.4m. Pre-tax profit fell 1% to £37.8m from £38.2m.
Revenues for the second half of 2009 were 7% higher than in the first half and, by the end of 2009, monthly revenues had moved back toward their pre-crash peak. Costs were slashed by 17% to £27.5m as the company cut 16% of its admin staff during 2009. Broker Numis has upgraded full-year 2010 profit estimate to £52m from £50m and 2011 forecasts rise to £60m from £55m. Giving a 2011 forward p/e of around 16.
Of course these earnings estimates are dependent on a continued turn around in the U.K. housing market.The number of first-time buyers who expect to enter the housing market in 2010 has declined, which is concerning. The company's Q1 2010 Consumer Confidence Survey, which measures the public's property market views, revealed that the number of projected first-time buyers for the 12 months ahead has dropped for the third consecutive quarter. Only 26% of those who expect to buy in the next 12 months will be first-time buyers, a drop from 28% in Q4 2009 and 31% in Q3 2009.
4. Rightmove
Online estate agency, Rightmove (RMV) has had a tremendous share price move, rising from a low of £2.25 in March 2009 to its current £6.58, a rise of nearly 300% and not far from its 52 week high of £6.77. A renewed positive sentiment in the U.K. housing market has helped lift the shares and driven revenues back up as properties come onto the market for sale and hence Estate agents to use Rightmove as an advertising vehicle. It trades on a forward p/e of 19.7 and yields about 2%. Underlying operating profit for the 12 months to 31 December rose 2% to £41.9m on revenue down 6% to £69.4m. Pre-tax profit fell 1% to £37.8m from £38.2m.
Revenues for the second half of 2009 were 7% higher than in the first half and, by the end of 2009, monthly revenues had moved back toward their pre-crash peak. Costs were slashed by 17% to £27.5m as the company cut 16% of its admin staff during 2009. Broker Numis has upgraded full-year 2010 profit estimate to £52m from £50m and 2011 forecasts rise to £60m from £55m. Giving a 2011 forward p/e of around 16.
Of course these earnings estimates are dependent on a continued turn around in the U.K. housing market.The number of first-time buyers who expect to enter the housing market in 2010 has declined, which is concerning. The company's Q1 2010 Consumer Confidence Survey, which measures the public's property market views, revealed that the number of projected first-time buyers for the 12 months ahead has dropped for the third consecutive quarter. Only 26% of those who expect to buy in the next 12 months will be first-time buyers, a drop from 28% in Q4 2009 and 31% in Q3 2009.
5. Astra Zeneca (AZN)
I have written about my negative stance on Astra Zeneca back in January (http://contrarianinvestoruk.blogspot.com/2010/01/astra-zeneca-azn-cheap-or-not.html) and my thoughts have not turned for the better after the failure of Recentin (cediranib) to reach its primary end point in the Horizon III clinical trial. Eight patents on drugs that represent 60 percent of Astra Zeneca's current sales are due to expire by 2016 and drugs like Recentin are desperately needed to fill the whole left by major patent losses on drugs such as Crestor and Pulmicort. Altough Astra trades on a forward p/e of only 7 and has a 5% dividend yield, patent expiries make earnings in 2011 and beyond hazy and the company has said as much. Heavyweight cost cutting is being done to try and stem the tide but success in the laboratory is needed and unfortunately Astra has been plagued by clinical trial failures on promising new molecules over the last 10 years. If AZN moves much beyond £30 (currently £29.22), this represents a good short opportunity and a move back towards its highs of £31 would make it an excellent shorting trade.
I have written about my negative stance on Astra Zeneca back in January (http://contrarianinvestoruk.blogspot.com/2010/01/astra-zeneca-azn-cheap-or-not.html) and my thoughts have not turned for the better after the failure of Recentin (cediranib) to reach its primary end point in the Horizon III clinical trial. Eight patents on drugs that represent 60 percent of Astra Zeneca's current sales are due to expire by 2016 and drugs like Recentin are desperately needed to fill the whole left by major patent losses on drugs such as Crestor and Pulmicort. Altough Astra trades on a forward p/e of only 7 and has a 5% dividend yield, patent expiries make earnings in 2011 and beyond hazy and the company has said as much. Heavyweight cost cutting is being done to try and stem the tide but success in the laboratory is needed and unfortunately Astra has been plagued by clinical trial failures on promising new molecules over the last 10 years. If AZN moves much beyond £30 (currently £29.22), this represents a good short opportunity and a move back towards its highs of £31 would make it an excellent shorting trade.
Saturday, March 13, 2010
Portfolio review of the week March 13th 2010
GW Pharma (GWP) - Very quiet week for GW Pharma on very low trading volumes and share price holding at around £1.00. Continuing to hold sizeable position.
Falkland Islands Oil drillers (Desire Petroleum DES, Falkland Oil and Gas FOGL, Borders and Southern BOR) - The prices of the Falkland Oil explorers continued to drop this week on lack of news causing investor apathy, speculators moving their money elsewhere or shorters in action. The investment thesis for these shares has not changed since the spudding of the first well in February. Actual results from Desire's drilling prospect on the Liz field in the North Falklands basin is keenly awaited. It is expected that Desire's Ocean Guardian Rig should have an indication of oil/gas finds in the next 1-2 weeks. These shares are a binary bet on what happens on Liz. Either Desire will go to less than 50p or we will see a move several pounds higher its that simple. CFD's with guaranteed stops have been placed on BOR and FOGL to limit any downside.
ITV (ITV) - Again little movement in ITV this week, closing at 52p on lack of any news.
Prudential (PRU) - Short term long position taken in PRU earlier in the week which was closed yesterday as the price moved over £5.50. Contrarian Investor UK likes the PRU Asian story but the surge in the markets on both sides of the Atlantic over the last couple of weeks makes me nervous and I have reluctantly decided to take profits given the move from £5.00 to £5.53 in little less than a week, after the falls from over £6 precipitated by the huge rights issue to fund the AIA acquisition (AIG's Asian unit).
Micron Technology (MU) - After a move up from around $8 to over $10 over the last 2 weeks or so on continued positive sentiment on memory chip prices and consumption levels, I have taken profits in half my position at $10.17. Micron closed last night at $9.97 and I continue to hold 1000 shares.
Falkland Islands Oil drillers (Desire Petroleum DES, Falkland Oil and Gas FOGL, Borders and Southern BOR) - The prices of the Falkland Oil explorers continued to drop this week on lack of news causing investor apathy, speculators moving their money elsewhere or shorters in action. The investment thesis for these shares has not changed since the spudding of the first well in February. Actual results from Desire's drilling prospect on the Liz field in the North Falklands basin is keenly awaited. It is expected that Desire's Ocean Guardian Rig should have an indication of oil/gas finds in the next 1-2 weeks. These shares are a binary bet on what happens on Liz. Either Desire will go to less than 50p or we will see a move several pounds higher its that simple. CFD's with guaranteed stops have been placed on BOR and FOGL to limit any downside.
ITV (ITV) - Again little movement in ITV this week, closing at 52p on lack of any news.
Prudential (PRU) - Short term long position taken in PRU earlier in the week which was closed yesterday as the price moved over £5.50. Contrarian Investor UK likes the PRU Asian story but the surge in the markets on both sides of the Atlantic over the last couple of weeks makes me nervous and I have reluctantly decided to take profits given the move from £5.00 to £5.53 in little less than a week, after the falls from over £6 precipitated by the huge rights issue to fund the AIA acquisition (AIG's Asian unit).
Micron Technology (MU) - After a move up from around $8 to over $10 over the last 2 weeks or so on continued positive sentiment on memory chip prices and consumption levels, I have taken profits in half my position at $10.17. Micron closed last night at $9.97 and I continue to hold 1000 shares.
Thursday, March 11, 2010
REUTERS - PRU INVESTORS WARM TO AIA DEAL
Raji Menon, 13:57, Thursday 11 March 2010
LONDON (Reuters) - Major shareholders in Prudential are warming to the insurer's $35.5 billion (23.6 billion pound) bid for AIG's Asian business following meetings with chief executive Tidjane Thiam, investor sources said. Thiam, who has been meeting UK investors this week to explain the merits of the blockbuster deal, appears to be winning over sceptics, they said. "We asked him to justify the deal to us and he made a pretty good fist of it," said one head of equities who met with Thiam. "Coming out of it, we were a little more positive than we thought we would be. It is a bit of an opportunity for Pru; a real catch and it will make them very strong indeed. All in all, there is an argument for (the deal)."
Another large investor who also met Thiam added: "The key message was that AIA will make a lot more money under Prudential's ownership. "The AIA business has much poorer margins than the existing Pru business so there is some credibility in that argument. Overall, we felt what they are doing does have some merit."
LONDON (Reuters) - Major shareholders in Prudential are warming to the insurer's $35.5 billion (23.6 billion pound) bid for AIG's Asian business following meetings with chief executive Tidjane Thiam, investor sources said. Thiam, who has been meeting UK investors this week to explain the merits of the blockbuster deal, appears to be winning over sceptics, they said. "We asked him to justify the deal to us and he made a pretty good fist of it," said one head of equities who met with Thiam. "Coming out of it, we were a little more positive than we thought we would be. It is a bit of an opportunity for Pru; a real catch and it will make them very strong indeed. All in all, there is an argument for (the deal)."
Another large investor who also met Thiam added: "The key message was that AIA will make a lot more money under Prudential's ownership. "The AIA business has much poorer margins than the existing Pru business so there is some credibility in that argument. Overall, we felt what they are doing does have some merit."
AIG shares were up nearly five percent in pre-market trade shortly after Reuters reported growing backing for the deal. Investors said Thiam told them that removing inefficiencies in AIA's operations would result in strong revenue synergies and said he reassured them on the price tag, which some have said was too high. "Pru's Asian operations are very efficient and as a result their margins are very high...AIA is not as productive. Get the two together and you can make a case for increasing that productivity and justifying what ostensibly looks like a pretty high valuation," said the head of equities.
"Pru sees some $770 million of revenue synergies coming through this increased agency productivity. This isn't a company that is going to make $500 million of new business, it can in time make $2 billion on new business and so you can justify the price."
Thiam also told investors AIA has been on his radar since September 2008, when he was Prudential's chief financial officer. "We thought this is quite important because they do know the operations better than we may have thought," added the head of equities.
However, some investors are yet to be convinced. "Tidjane is relatively unknown -- he's only been there for nine months and therefore for an unknown to be asking for this kind of money, people are reasonably sceptical," one said. "There is also a bit of worry that they may redomicile -- we may end up buying all the stock and they may take off to Hong Kong," he added.
(Editing by David Cowell)
"Pru sees some $770 million of revenue synergies coming through this increased agency productivity. This isn't a company that is going to make $500 million of new business, it can in time make $2 billion on new business and so you can justify the price."
Thiam also told investors AIA has been on his radar since September 2008, when he was Prudential's chief financial officer. "We thought this is quite important because they do know the operations better than we may have thought," added the head of equities.
However, some investors are yet to be convinced. "Tidjane is relatively unknown -- he's only been there for nine months and therefore for an unknown to be asking for this kind of money, people are reasonably sceptical," one said. "There is also a bit of worry that they may redomicile -- we may end up buying all the stock and they may take off to Hong Kong," he added.
(Editing by David Cowell)
China - is this a bubble soon to burst?
Today it was announced that Chinese inflation hit a 16 month high, meaning potentially higher interest rates. The annual rate of consumer price inflation rose to 2.7% in February, up from 1.5% in January, and ahead of analysts' expectations of 2.3%. In addition, new loans exceeded forecasts, adding to the case for the government to cut stimulus measures. The People’s Bank of China hasn’t raised benchmark interest rates since December 2007, but the central bank has ordered commercial lenders to increase their capital reserves three times since last December. However it has been pointed out that the figures should not set alarm bells ringing, as the New Year in 2009 fell in January not February, economists say the rate of increase in consumer prices in February 2010 was boosted as it is being compared with weaker spending last year.
China's exports in February were up 46% from a year ago, which was more than analysts' forecasts and the economy grew by 8.7% last year, exceeding government expectations driven partly by the Rmb4,000bn ($585bn) stimulus programme. The Shanghai Composite (SSE) is down 7% year to date to 3,052.
In addition to inflation concerns, some commentators worry about the Chinese property market increasingly looks to be entering a bubble phase. But an interesting perspective was offered by the FT.com today, "Unlike the dramatic increase in household leverage that precipitated the US subprime crisis, Chinese household debt amounts to approximately 17 per cent of gross domestic product, compared with roughly 96 per cent in the US and 62 per cent in the eurozone. Home buyers in China are required to make minimum downpayments of 30 per cent before receiving a mortgage, and at least 40 per cent for a second home.
Although price increases in the Chinese residential market appear rapid (more than 20 per cent in 2009), such headline figures cannot be viewed in isolation. Over the past five years, urban household incomes grew at a 13.2 per cent compound annual growth rate, compared with an 11.9 per cent CAGR in home prices. Pockets of overheating can be found in some regional markets. In Beijing, Shanghai, Shenzhen and Hangzhou, for instance, prices outpaced income growth by more than 5 percentage points over the same period. But, this can be seen as a symptom of new urban wealth being put to speculative use, rather than the profligate use of leverage.
The combination of excessive leverage and mortgage securitisation were at the epicentre of the US subprime crisis. Both these factors are absent in the Chinese context. The commercial property sector has inspired just as much concern, with prices rising 16 per cent in 2009, in spite of low rental yields and prime office vacancy rates as high as 21 per cent and 14 per cent in Beijing and Shanghai, respectively. Yet occupancy and rental rates have started to pick up for prime properties.
The crux of the problem with the Chinese real estate sector is that property is seen by the country's investing class as a store of value, within an economy that offers its citizens limited investment options. I share many of the concerns about flawed incentives and overheating in the property market - but even if prices were to correct, this would not trigger the type of devastation that might arise in an over-leveraged economy."
China's exports in February were up 46% from a year ago, which was more than analysts' forecasts and the economy grew by 8.7% last year, exceeding government expectations driven partly by the Rmb4,000bn ($585bn) stimulus programme. The Shanghai Composite (SSE) is down 7% year to date to 3,052.
In addition to inflation concerns, some commentators worry about the Chinese property market increasingly looks to be entering a bubble phase. But an interesting perspective was offered by the FT.com today, "Unlike the dramatic increase in household leverage that precipitated the US subprime crisis, Chinese household debt amounts to approximately 17 per cent of gross domestic product, compared with roughly 96 per cent in the US and 62 per cent in the eurozone. Home buyers in China are required to make minimum downpayments of 30 per cent before receiving a mortgage, and at least 40 per cent for a second home.
Although price increases in the Chinese residential market appear rapid (more than 20 per cent in 2009), such headline figures cannot be viewed in isolation. Over the past five years, urban household incomes grew at a 13.2 per cent compound annual growth rate, compared with an 11.9 per cent CAGR in home prices. Pockets of overheating can be found in some regional markets. In Beijing, Shanghai, Shenzhen and Hangzhou, for instance, prices outpaced income growth by more than 5 percentage points over the same period. But, this can be seen as a symptom of new urban wealth being put to speculative use, rather than the profligate use of leverage.
The combination of excessive leverage and mortgage securitisation were at the epicentre of the US subprime crisis. Both these factors are absent in the Chinese context. The commercial property sector has inspired just as much concern, with prices rising 16 per cent in 2009, in spite of low rental yields and prime office vacancy rates as high as 21 per cent and 14 per cent in Beijing and Shanghai, respectively. Yet occupancy and rental rates have started to pick up for prime properties.
The crux of the problem with the Chinese real estate sector is that property is seen by the country's investing class as a store of value, within an economy that offers its citizens limited investment options. I share many of the concerns about flawed incentives and overheating in the property market - but even if prices were to correct, this would not trigger the type of devastation that might arise in an over-leveraged economy."
Prudential added to portfolio following announcement of Asian deal
On March 1st, U.K. listed life insurer Prudential (PRU) announced an ambitious plan to acquire AIA, the Asian assets of troubled U.S. life insurer AIG for £23.5 billion ($35.5 billion). The deal dwarfs the company's market capitalisation of £13.6 billion ($20.4 billion). AIA is a significant player in the fast growing Asian insurance market, having a 19% share in China. The acquisition will make the combined company the no.1 player in China, Vietnam, Hong Kong, Singapore, Indonesia, South Korea, The Philipines and Thailand and over 85% of profits will come from the region (46% currently). To fund the acquisition, a £13.4 billion ($20 billion) rights issue was announced, the largest ever in the U.K.. Prudential will also issue $5bn of senior debt, while AIG will receive $5.5bn in new Pru shares plus $3bn of convertible shares and $2bn of preferred shares. The rights issue is fully underwritten and a number of Asian sovereign wealth funds are lined up to share a share. PRU's share's fell 20% on the day of the announcement and now trade at £5.38. Tidjane Thiam, the Pru's chief executive also said the deal will generate $340m in savings once the offices have been rationalised The company has also accelerated plans for a dual listing of the shares in Hong Kong in April.
In effect a reverse takeover of AIA, the deal is a high risk strategy for Prudential but given the maturity of the U.K. life insurance business, an acceleration of the company's presence in the fast growing Asian region seems strategically sound. The added bonus of cost cutting potential is also supportive. Though the deal is not cheap at 1.6 times embedded value (UK insurers trade at one times embedded value), the future growth potential of the Asian region is significant and way ahead of Europe. Though UK brokers were largely unimpressed and hedge funds were said to be shorting heavily on the announcement, Asian buyers drove Pru back from its lows last week. Existing institutional investors have been making negative noises about the priority that Thiam is placing on new Sovereign wealth investors and lack of information before the rights issue prospectus, but given the importance of the new Asian Investors this seems sensible. I have opened a position today at £5.36 given the potential of the Hong Kong listing and over negative reaction to the acquisition. It is frustrating to have missed the £5.00 low, but a move over £5.50 seems likely as the investor road show continues.
In effect a reverse takeover of AIA, the deal is a high risk strategy for Prudential but given the maturity of the U.K. life insurance business, an acceleration of the company's presence in the fast growing Asian region seems strategically sound. The added bonus of cost cutting potential is also supportive. Though the deal is not cheap at 1.6 times embedded value (UK insurers trade at one times embedded value), the future growth potential of the Asian region is significant and way ahead of Europe. Though UK brokers were largely unimpressed and hedge funds were said to be shorting heavily on the announcement, Asian buyers drove Pru back from its lows last week. Existing institutional investors have been making negative noises about the priority that Thiam is placing on new Sovereign wealth investors and lack of information before the rights issue prospectus, but given the importance of the new Asian Investors this seems sensible. I have opened a position today at £5.36 given the potential of the Hong Kong listing and over negative reaction to the acquisition. It is frustrating to have missed the £5.00 low, but a move over £5.50 seems likely as the investor road show continues.
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