Portfolio review of the week March 9th 2010

The portfolio review is a little late due to a holiday. As I noted on my previous post, Contrarian Investor UK is searching for suitable short term trading opportunities and there appear to be few obvious long only options. The volatility of the market makes me reluctant to commit to large shorts so the portfolio is on a holding pattern waiting for results from the Falkland Islands and news from GW pharma. New ideas are being assessed.

GW Pharma (GWP) - The portfolio's largest holding had a good week, with a solid move from around the 90p mark to £1.00. However, a minimum 35% upside is expected if the European approval for cannabis spray, Sativex, is announced this month. In addition to this, clinical trial results from the 336 patient phase II/III study funded by partner Otsuka are due early this year. The patients in the study have advanced cancer for which there is no curative therapy and are experiencing little relief from pain using conventional opiods. The primary goal of the study is response rate after 5 weeks. Further studies are planned to start in mid-2010 to enable the U.S. FDA registration of Sativex in 2011 and an additional European indication for cancer pain, also in 2011.

Falkland Oil drillers (Desire Petroleum DES, Falkland Oil and Gas FOGL, Borders and Southern BOR) - The potential intervention of U.S. Secretary of State, Hillary Clinton, helped to dampen sentiment in the Falkland Island Oil drillers. Following a meeting with the Argentinian President, Cristina Fernandez de Kirchner, Clinton said she encouraged the U.K. and Argentine governments to negotiate a settlement in relation to the sovereignty of the Falkland Islands. DES, FOGL and BOR are all down 20%-30% from the point when Desire's Ocean Guardian Rig began drilling in the North Falklands basin. However, news from the Ocean Guardian should be forthcoming in the next 1-2 weeks.

ITV (ITV) - ITV's 2009 results were initially positively received by the markets with a rise on the announcement to 57p. However, the shares have now drifted back to 52p with the markets expecting the return to health of the company to take some time under Norman/Crozier's leadership. ITV seem to be stuck in a trading range in the 50's and further positive news is needed to propel them through the 60p mark.

Amgen (AMGN) - The final tranche of Amgen stock was sold today at $57.6, giving a 5% gain despite the propects for Osteoporosis drug, Prolia. I am hoping for a buyback situation around $55 given the trading range of $55-58.

Micron Technology (MU) - Micron is stubbornly stuck below the $10 mark and currently trades at $9.5 despite the positive outllook for memory chips.

Anniversary of market rebound gives opportunity for reflection

The Dow Jones Industrials and the Standard & Poor's 500 both bottomed on March 9, 2009. It is incredible to think that 12 months ago, the S&P 500 stood at 672 and now is at 1,139, a 69% increase, the DOW Jones Industrials stood at 6,547 and are now at 10,550 (a 61% increase) and the FTSE 100 stood at 3,532, having increased 58% to today's 5,584. You could have picked up great stocks like Google (GOOG) for $289 (now $558), Caterpillar (CAT) for $23 (now $59), Apple (AAPL) for $83 (now $219), BP (BP.) for £4.29 (now £6.35) and HSBC (HSBA) for £3.04 (now £6.98). Despite having strong balance sheets, good profitability and great in-market positions these stocks were swept up in the negative spiral precipitated by the near collapse of the financial system, as exemplified by the demise of Lehman Brothers in September 2008. It really was the "sale of the century" for those brave enough to take a contrarian position back in the dark days of early 2009. For investors in more specialist vehicles such as commodity related stocks or emerging markets, returns in 2009 have been even more spectacular. For "value" investors, the signs of an oversold market were plain to see - forward price/earnings ration's close to the single digits for the DOW and FTSE, a yield on the FTSE of close to 5% and many quality companies close to cash value. But the fear gripping the market was such that with the exception of investors like Buffett's Berkshire Hathaway (who invested too early in cases such as Goldman Sachs despite highly favourable terms), many chose to stay on the sidelines and waited for a signal of a turn. The volatility even frightened me and despite buying heavily back in March 2009, I chose to take quick profits rather than hold with a hope of higher returns.


So now in March 2010, the investment case is less certain. It may seem a crazy thing to say, but despite all the positive signals that the U.S. economy is slowly coming out of a painful recession, the risks of buying the market are higher than back 12 months ago. Whereas at the peak of the panic, you could have bought almost anything with a reasonable balance sheet, the market is much more tricky now with the big gains in the second half of 2009. Contrarian Investor UK is inclined to stay on the side lines for a time now and let the established positions run. The risk of a correction (albeit modest) is very much concerning me. Bad news has been largely discounted by the market during 2010, but any significant set back in U.S. or European recovery may well be a catalyst for profit taking and volumes are already so low in the U.S. that it suggests that the major players are not active in the market and waiting for a better investing opportunity.