Astra Zeneca news today supports negative view on the company

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

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


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


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


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

Nighthawk Energy Update fails to ignite share price

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

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

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

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

Coal of Africa Completes NuCoal acquisition

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

AMGEN EARNINGS NOT OUTSTANDING, PROLIA APPROVAL KEY

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

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

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

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

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

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

Amgen posts Q4 2009 Earnings on Monday

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

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

Planned stock sales by Google founders may further depress price

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

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

Buy or sell of position to be reviewed Monday.

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

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

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

Portfolio Update January 23rd 2010

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

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

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

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

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

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

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

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

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

Google earnings underwhelm market despite strong growth

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

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

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

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

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

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

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

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

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

Cadbury - Buffett expresses doubts on takeover price

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

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

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

Falkland Islands Oil companies show share price correction

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

As it stands today, the market capitalisations are:

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

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

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

ASTRA ZENECA (AZN) - cheap or not?

BACKGROUND

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


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


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


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

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

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


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


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

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

POTENTIAL POSITIVE DRIVERS

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


New products

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

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

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

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

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


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


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


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


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

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


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

Earnings in full flow this week

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


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

EDUCATION SEGMENT - Contrarian Investor's Guide to stock picking

DECIDE YOUR INVESTMENT STYLE
Investors make money in several ways:

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

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

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

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

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

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

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

5. Contrarian investing

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

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

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


CHECK OUT THE FUNDAMENTALS

First of all ask yourself a few questions.

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

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

                                                                Latest p/e            Forecast p/e

Glaxo Smithkline (GSK)                            11.9                10.4

Astra Zeneca (AZN)                                    9.6                 7.8

Shire (SHP)                                                  61.9              21.0

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

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

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

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

               

2.   WHAT IS THE INVESTMENT THESIS?

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

3.    WHAT IS THE NEWS FLOW?

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

4.    WHAT IS THE MOMENTUM OF THIS STOCK?

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

5.    WHAT IS THE OVERALL MARKET SENTIMENT LOOKING LIKE?

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

Examples of Sector rotation:

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

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

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

6.    DO YOU GO LONG OR SHORT?

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

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


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