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.

Big day for markets with U.S. jobs data due later today

This afternoon at 1.30 pm GMT , the U.S.  Labour Department will report on the number of nonfarm payroll number during February.The consensus is for payrolls to decline by a seasonally adjusted 50,000 - 80,000, with the unemployment rate going up to 9.8% (against 9.7% in January), partly due to the bad weather in the United States during the month. Contrarian Investor is expecting a great deal of volatility in both the U.S. and U.K. markets as the numbers are announced. 

The FTSE 100 hit an 18 month high this morning of 5,557 up 30 points on the day. DOW industrials futures are currently up 18 pts at 10,464. At these levels, the markets are looking a little overheated and I am considering a short on the FTSE 100 this morning on anticipation that the non-farm payrolls will be in line or fall short.

Warren Buffett's Top Ten Quotes

1."We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."

2. "Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1"

3. "Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results."

4. "Try to buy stock in businesses that are so wonderful that an idiot can run them because sooner or later one will."

5. "Derivatives are financial weapons of mass destruction."

6. "I buy expensive suits. They just look cheap on me."

7. "When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is usually the reputation of the business that remains intact."

8. "In the business world, the rearview mirror is always clearer than the windshield."

9. "Our favourite holding period is forever"

10. "Why not invest your assets in the companies you really like? As Mae West said, "Too much of a good thing can be wonderful""

RAB cuts stake in Falkland Oil and Gas

RAB Capital has cut its stake in Falkland Oil and Gas (FOGL) with the sale of 4.35m shares, cutting its direct holding to 21.7% of the company. Including warrants and other interests, RAB’s underlying stake is 34.1% which is still a sizeable holding.

ITV results indicate worst is behind company but outlook uncertain

Pre-tax profit for the 12 months to 31 December 2009 was £25m against a £2.7bn loss in 2008 (after £2.7 billion pounds of impairment charges) on revenue down 7% to £1.87bn. Profit before tax and exceptional items dropped 4% to £108m. adjusted earnings before interest, taxes and amortization fell 4.3% to £202 million, but was ahead of the £180 million analyst consensus. The shares were recently up 3% to 57p, having risen close to 20% since the BskyB stake sale.

Television advertising revenues dropped 9% in 2009 to £1.29bn, but that was ahead of the total market which fell 11% and the first quarter of 2010 is estimated to be up 7%. Forecasts for April indicate an increase in ad revenue of 15-20%, but the group warns that in the second half, and particularly the fourth quarter, comparatives are more challenging and the wider economic outlook after the forthcoming election remains uncertain. "Whilst ITV advertising revenues are up 7% in the first quarter, this is against the unprecedented declines of the previous year and, over the medium term, we remain cautious. We recognise also that ITV still faces formidable challenges,” said interim boss John Cresswell.

Adam Crozier joins the company as chief executive on 26th April.

GW PHARMA FINALLY STARTS MOVE UP ON POTENTIAL SATIVEX NEWS

GW pharma (GWP), developer of the Sativex cannabis spray for pain and spasticity in multiple sclerosis, has finally started moving up. After a 6% rise yesterday, the stock rose 5% today.  Rumours are rife that approval for Sativex by the European regulatory body is close. Contrarian Investor UK, awaits tomorrow with interest as GWP is the portfolio's largest holding and is now showing a healthy profit. But I have no intention of selling before approval when I expect a 35%+ share price rise.

Hilary Clinton offers to help on Falklands Islands oil dispute

Hillary Clinton said on Monday that she plans to meet Argentinian President, Cristina Fernandez de Kirchner, was ready to help Argentina and Britain resolve the dispute over the Falkland Islands. Clinton said "It is our position that this is a matter to be resolved between the United Kingdom and Argentina. If we can be of any help in facilitating such an effort, we stand ready to do so."

Micron Technology snaps up 7% on SanDisk results

On Friday, SanDisk (SNDK) raised its forecast for the March quarter and made positive noises about the memory chip market in general. Today, the stock was up nearly 12% to $32.63.

This was seen as good news for sector stocks. A broker note yesterday from Lazard Capital raised revenue and profit forecasts for Micron’s second quarter which ends in February on the basis of solid NAND and DRAM chip demand. Revenue forecast was increased to $1.848 billion from $1.820 billion and EPS forecast increases 7 cents to 30 cents. For 2010, Lazard believes Micron Technology should produce revenues of $7.49 billion and EPS of $1.06 a share, from $7.42 billion and 98 cents.The stock has a $18 target, and is currently $9.7, implying a 100% upside.

Given much DRAM chip demand is created by PC sales, the outlook for stocks such as Microsoft and Hewlett Packard looks strong.

Warren Buffet's Berkshire Hathaway shows strong growth in 2009 but behind market

This weekend Berkshire Hathaway Inc. (NYSE: BRK-B, BRK-A) sent out its annual shareholder letter. The company said its annual shareholder value rose by 19.8% and book value per share rose to $84,487.00 (though this was behind the 25% rebound in the S&P 500 in 2009). It was the strongest gain since 2003 with net earnings rising 61% last year to $5,193 per share. Total Common Stocks Carried at Market are listed as $34,646 billion cost basis and $59,034 billion in market value. In 2005, Berkshire’s book value rose 6.4 per cent, against 4.9 per cent for the S&P; in 2006 it was 18.4 per cent versus 15.8 per cent; in 2007 11 per cent against 5.5 per cent; and in 2008 -9.6 per cent versus -37 per cent. Today the B shares were down 1% to $79.3.

Berkshire’s Warren Buffett was less cautious than in the past and broadly optimistic about the future - “We entered 2008 with $44.3 billion of cash-equivalents, and we have since retained operating earnings of $17 billion. Nevertheless, at year-end 2009, our cash was down to $30.6 billion (with $8 billion earmarked for the BNSF acquisition). We’ve put a lot of money to work during the chaos of the last two years. It’s been an ideal period for investors: A climate of fear is their best friend. Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance. In the end, what counts in investing is what you pay for a business – through the purchase of a small piece of it in the stock market – and what that business earns in the succeeding decade or two.” Berkshire holds a strong porfolio of companies and has had a consistent and exceptional track record. However, the persistent threat of the retirement of the "sage of Omaha" Warren Buffett is now a real possibility at 80 years of age. Following the strong rise in the company's shares when Berkshire entered the S&P 500 following a stock split in February, Berkshire does not look cheap based on earnings expectations for 2010. As Buffett would say himself, "don't buy when everyone else is buying" and therefore BRK may be an ideal candidate for an entry point on any uncertainty about the future leadership of the company i.e. sell on current strength.

Buffet’s advice for investment success is (courtesy of Marketwatch.com) :
Stay liquid. "We will never become dependent on the kindness of strangers," he wrote. "We will always arrange our affairs so that any requirements for cash we may conceivably have will be dwarfed by our own liquidity. Moreover, that liquidity will be constantly refreshed by a gusher of earnings from our many and diverse businesses."
Buy when everyone else is selling. "We've put a lot of money to work during the chaos of the last two years. It's been an ideal period for investors: A climate of fear is their best friend ... Big opportunities come infrequently. When it's raining gold, reach for a bucket, not a thimble."
Don't buy when everyone else is buying. "Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance," Mr. Buffett wrote. The obvious corollary is to be patient. You can only buy when everyone else is selling if you have held your fire when everyone was buying.
Value, value, value. "In the end, what counts in investing is what you pay for a business-through the purchase of a small piece of it in the stock market-and what that business earns in the succeeding decade or two."
Don't get suckered by big growth stories. Mr. Buffett reminded investors that he and Berkshire Vice Chairman Charlie Munger "avoid businesses whose futures we can't evaluate, no matter how exciting their products may be.". Most investors who bet on the auto industry in 1910, planes in 1930 or TV makers in 1950 ended up losing their shirts, even though the products really did change the world. "Dramatic growth" doesn't always lead to high profit margins and returns on capital. China, anyone?
Understand what you own. "Investors who buy and sell based upon media or analyst commentary are not for us," Mr. Buffett wrote.
Defense beats offense. "Though we have lagged the S&P in some years that were positive for the market, we have consistently done better than the S&P in the eleven years during which it delivered negative results. In other words, our defense has been better than our offense, and that's likely to continue." All timely advice from Mr. Buffett for turbulent times.

Micron Technology benefits from potential legal case settlement and rising chip prices

According to court papers released last week, the major manufacturers of DRAM memory chips have reached a settlement in principle in an antitrust case that has been in federal appeals court since 2008. Companies including Micron Technologly (MU) are defendants in the case brought by the state of California and others. No details of the financial terms of the settlement were in the court papers.  "The parties have informed the Court that they have reached an agreement in principle to the terms of a settlement in this and related actions and are currently negotiating a final settlement agreement," said a U.S. Ninth Circuit Court of Appeals order filed Feb. 17. Micron was recently up to $9.50, nearly 5% as chip price sentiment continues to improve. The Semiconductor Industry Association [SIA] said Monday that worldwide chip sales in January rose to $22.5 billion, a 47.2% increase from the same month a year ago. Chip sales were also up 0.3% from December.

Positive start to March on both sides of the Atlantic

The FTSE 100 is currently up 28 points to 5,838 with DOW Futures up 35 to 10,361. Gains in the FTSE were pruned, after Prudential’s announcement that it was going ahead with the purchase of AIG’s Asian business for £23 billion ($35.5) sent the insurer down 11% to £5.34 (when the shares came back from suspension at 10.30, they were down 14%). The acquisition will be funded by a $20bn rights issue, the largest ever seen in the UK. Prudential will also issue $5bn of senior debt, while AIG will receive $5.5bn in new Prudential shares plus $3bn of convertible shares and $2bn of preferred shares. AIG is 80% owned by the US government, which will mean the US taxpayer owning a stake in the UK’s largest insurer.



The news of a possible €25-30 billion bail-out of Greece by Germany and France was circulating this morning. Greek debt would be purchased in the form of bonds, through their respective state owned banks. But the Greek government will need to commit to at least €4bn worth of cuts in public spending which given union opposition may be difficult to execute.


The British Pound has continued to fall heavily against the U.S dollar and Euro today after a weekend opinion poll put Labour only 2 points behind the Conservatives and there were fears that the Prudential deal with AIG would mean it would need to sell the Pound Sterling to buy U.S. dollars . The pound/dollar hit £1.49, a 2% fall on the day. Currency investors are increasing worried that the increasing likelihood of a “hung” parliament will delay any moves to reduce the size of the U.K. budget deficit.

SUNDAY INDEPENDENT - Falklands offer to split oil profits

Britain will take up to half the revenues if drilling programme is successful

By Brian Brady, Sunday, 28 February 2010, Independent

Britain and the Falkland Islands have made a deal to split any proceeds from the controversial oil drilling programme in the South Atlantic.

UK ministers have revealed that the Executive Council in Port Stanley had "offered to share some of any future hydrocarbons-related revenues", which could be worth billions of pounds. If a 30-day drilling programme begun by a British firm last week strikes oil, the yield from corporation taxes and royalties in the fields north of the islands alone could be more than £100bn.

A Foreign Office source said the Government had already begun negotiations over the eventual share-out, and had reached an "understanding" that could see the Treasury taking up to half the profits. Officials have pointed to Britain's multimillion-pound programme of support to the islands over almost three decades since the war following Argentina's invasion in 1982.

Argentina, which disputes the British claim to the Falklands, last week asked the United Nations Secretary General, Ban Ki-moon, to bring the UK into talks over the islands' sovereignty. The Foreign Secretary, David Miliband, said British oil exploration in the area was "completely in accordance with international law".

Ministers have been cautious about who would benefit from the bonanza since the potential reserves were first highlighted almost 20 years ago. The Falklands Executive Council offered in 1994 to share any proceeds as a contribution towards the defence of the islands. The islands' ruling executive council later warned that the spectacle of the Treasury taking oil revenue would be "a propaganda gift to the Argentines, who would say it proved that Britain had an exploitative, colonial attitude to the Falklands".

The Liberal Democrat MP Bob Russell said: "They have been sustained since before the Falklands war to the tune of hundreds of millions of pounds from the taxpayer. It is only right that, if they are going to become instant millionaires, they should share that with the UK and with neighbouring British territories such as St Helena and Ascension Island."

Portfolio Update - February 28th 2010

A relatively benign week on the markets but a good month for equities in general. The FTSE 100 rose 76 points to 5,354 on Friday, whilst U.S. stocks finished modestly higher (DOW JONES Industrials 10,325 +4 points) to have their best month since November (DOW +2.6%, NASDAQ +4.2%, S&P 500 +1.5%, FTSE 100 +2.6% for the month)

On Friday, the U.S. Commerce Department reported that GDP grew at a 5.9% the fourth quarter of 2009, the fastest rate since the third quarter of 2003 confirming the the American economy is solidly moving out of recession. This compared with the U.K.’s revised GDP of 0.3%.

The portfolio was hit hard this week by the disappointing news from Nighthawk Energy (HAWK), highlighting the risks and rewards of investing in small cap stocks. Contrarian Investor UK is currently assessing some new ideas for the portfolio with a view to rebalancing to a more diversified portfolio.

Nighthawk Energy (HAWK) – On Tuesday, Nighthawk finally issued a more comprehensive report on the Jolly Ranch shale oil and gas play in the U.S.. The results were poor, with the field still producing little more than 150 barrels per day (BPD) despite promises as the Annual General Meeting (AGM) that production would be closer to 800-1000 by quarter one 2010. The horizontal drilling technique used on some of the wells to extract oil seems to have been relatively unsuccessful meaning that HAWK is looking at the economics of the field based on standard vertical drilling. The company had $18 million of cash and liquid assets left after the fund raising in 2009. Contrarian Investor UK sold his position on the news at 27p, with the stock finishing the week at 25p. A 30% loss was painful given the commitment in time to this company but I am concerned that the “proving up” of the Jolly shale oil field will take the company into late 2010 where cash resources will become stretched and a further fund raising will be necessary. It is also somewhat concerning that private partner Running Foxes, who currently fund 50% of the drilling work, may not have an appetite for continued high investment in Jolly. Although HAWK may decide to sell its Revere or Cisco Springs fields, this stock is now looking very high risk and I disappointed in the results from Jolly Ranch after the strong convictions expressed at the AGM by MD David Bramhill and Steve Tedesco (from partner Running Foxes). At 25p, HAWK may still produce a return for buyers at this level but although it may go to 40p, sub 20p may also be just round the corner for this company which seems to thrive on shareholder disappointment.

Falkland Oil drillers (Desire Petroleum, Falkland Oil and Gas, Borders and Southern) – The Falkland Oil explorers all slipped this week, as the Argentinean government continued to apply political pressure through the Rio Summit and U.N. for the British government to stop further drilling around the Islands. This political pressure has been to date unsuccessful but added to the relative risks of these shares. I continue to hold DES, FOGL and BOR on expectation of results from the Ocean Guardian rig in March despite all the volatility in these companies.

ITV (ITV) – ITV continues it’s move back up and finished at 54p, following a positive outlook from Scottish Television company STV (which was formerly known as SMG). STV chief executive, Rob Woodward, forecast that the national TV ad market was likely to be up between 4 and 8% year on year in April.

GW Pharma (GWP) – Approval for cannabis spray, Sativex, is still expected in Q1 and this remains Contrarian Investor U.K’s largest holding.

Amgen (AMGN) - A quiet week for Amgen with the stock finishing at $56. Further news on osteoporosis drug, Prolia, still awaited in quarter one 2010.

Micron Technology (MU) – The stock moved back over the $9 mark as the outlook for DRAM memory chips continue to improve in the the second half of 2010. 

Political heat rises as Falkland Oil drilling finally starts

Desire Petroleum’s Ocean Guardian Rig finally started drilling in the North Falklands basin last Monday and it only served to bolster Argentinian efforts further to use political pressure to try and disrupt the drilling campaign, but these efforts are considered by many commentators as being unlikely to succeed.

After the disastrous war with the U.K. over the sovereignty of the Falkland Island (Malvinas) in 1982 started by Argentinian president, General Galtieri, things have been relatively quiet in the South Atlantic for the last 28 years. The islands were discovered by the British in 1592, permanently occupied in 1833 and for the last 100 years Argentina has contested ownership of the Islands with the British.

Argentina’s President Cristina Fernández de Kirchner’s has undertaken an anti-corporate campaign of significant proportions, with her latest move being to try to collect more than $6.5 billion in currency reserves to pay down debt and breath live into the flagging economy, after a move to privatise private pensions in 2008. An unpopular fight with farmers over export taxes has made her and her party postions weak in elections due in 2011. Desire Petroleum’s move to drill in the Falklands has been met with much vitriole. The first step was discourage ships sailing to the Falklands by requiring them to get permits if they pass through Argentinean waters - the Falkland Oil drillers have said this will have little impact on the drilling campaign. The Argentine foreign minister, Jorge Taiana, met with Ban Ki-moon, the U.N. secretary general, last week to pressurise the U.N. to agree with the assertion that Britain should be forced to acknowledge sovereignty claims. Taiana also argued that the U.K. does not have the right to exploit resources in the Falklands without first obtaining approval from Argentina.

At the Rio, Latin America summit this week, Hugo Chávez pledged his country's military support for a Falklands war. However, a military move against the U.K. would be suicidal from a political and economic perspective and it would be surprising if the Argentine government is even close to considering this despite the rhetoric in Rio.

If Desire do strike any significant oil during March, then the heat coming from Argentina can only get worse, even if military action is highly unlikely after the disastrous 1982 attack on the Islands. For De Kirchner’s government, added pressure on the U.N. and other organisations about sovereignity is highly popular in her country and it would be a tough sell indeed to her electorate if Desire or any other of the Falklands drillers (Rockhopper Exploration, Falklands Oil and Gas, or Borders and Southern ) “strike it rich” and Argentina was seen to be doing nothing as the U.K. collected the wealth from this "Argentine asset of right". Next year's Presidential election makes the Falklands an easy diversion to the country's own economic problems, just as Galtieri used the Islands back in the 1980's to cover similar but much more serious issues.

For shareholders such as myself, the politics have made it a nervous week on the markets for the Falklands Oil drillers. Despite the Ocean Guardian Rig spud on Monday, share prices have moved down as political risk has clouded the opportunity and talk of a military strike on the rig by Argentinian jet fighters has made investors question the risk/reward of the Falklands drillers. I for one took the opportunity to increase my holding in Desire Petroleum as the rumours rose later in the week. There is significant risk of course, but it is more of a no oil show than a pre-emptive attack by the Argentinian Navy.