Tech earnings results point to recovery not false dawn

Strong earnings from the large technology bell weathers in the U.S., - Microsoft (MSFT), Intel (INTC), Cisco (CSCO), Google (GOOG) and Amazon (AMZN) have so far failed to drive the bears back into hibernation.

Despite the fact that Cisco Systems posted great results for its January quarter, and provided April quarter guidance that significantly exceeded analyst expectations, the news failed to rejuvenate the U.S. NASDAQ at the back end of last week . CEO John Chambers, traditionally regarded as having a very conservative view on his markets, sounded very positive about Cisco's prospects going into 2010. He said the company was seeing a broad-based recovery across all geographies and product sectors and that it was seeing a continued improvement in business spending..  Chambers said. “Our outstanding Q2 results exceeded our expectations and we believe they provide a clear indication that we are entering the second phase of the economic recovery. During the quarter we saw dramatic across the board acceleration and sequential improvement in our business in almost all areas,”. So if Chambers is telling the markets that things are improving for Cisco, then maybe its time to take note given the company's position in so many core areas of IT spending.

Though risk aversion is increasing, the outlook for the global economy seems to be improving, particularly for the technology sector. Signficant weakness in the Nasdaq, should be seen as buying opportunity for the best in breed stocks including Microsoft, Intel and Cisco.

Portfolio Review of the week - February 6th 2010

A tough week for the Contrarian Investor UK portfolio this week as global markets fell heavily on sovereign debt concerns in countries such as Greece. The DOW Jones Industrials briefly fell as low as 9850 yesterday before staging a strong recovery in the last hour of trading to finish higher and back over the 10,000 level. Unfortunately, some long bets on the DOW were closed out at the lows , which was frustrating given the rebound. As I talk about shortly, the investment thesis for the holdings in the portfolio are robust and news flow is expected for most of the holdings in the coming weeks which should be a catalyst for share price appreciation. A sell off in the market that we have seen in the last 2 weeks is a positive development given we are now back in the “good value” zone after the rises in January looked unsustainable and stretched the prices of many stocks. The portfolio is now positioned for any change to a more positive sentiment.



Coal of Africa (CZA) – Finally the news that has been awaited for the last 4 months came through with the South African Government granting the new mining order for the Vele coking coal project. Although the share price initially responded well with a 23% one day rise to 148p, the large falls in global stock markets throughout the latter part of the week and rumours that fellow Coal stock, GCM, were selling down their holding meant that CZA finished the week at 133p, barely unchanged. Based on fundamentals CZA looks very solid – rising prices for metallurgical and thermal coal, increasing production coming on stream from Mooiplaats and now Vele, the acquisition of NuCoal brings on stream further capacity, good off take agreements with the likes of Arcellor Mittal (who own a stake in Coal of Africa). Continuing to hold.


GW Pharma (GWP) - Remarkably robust given the overall market picture, with a small fall to 87p. Sativex Cannabis spray regulatory approval in Europe in final stages. News expected in Q1 2010.


Falkland Islands Oil Shares (Falklands Oil and Gas (FOGL), Desire Petroleum (DES), Borders and Southern Petroleum (BOR) ) - A strengthening in the U.S. dollar this week due to fears about debt default in Portgual, Spain, Italy and Greece sent commodities into free fall this week with WTI Crude Oil dipping below $70 on Friday (after being above $80 in January). In addition, posturing by the Argentininian government about the ownership of the Falklands added to the general uncertainty. The Ocean Guardian Rig hired by Desire Petroleum is due to arrive in the Falklands in the next week or so with drilling due to start mid-February. News from Falklands Oil and Gas (which has a farm in deal with BHP Billiton) on a potential sharing of Ocean Guardian is expected in the next couple of weeks with further news on a deep water rig needed to drill in the deeper waters of the South Falklands basin also on the horizon. Despite heavy falls in the Falklands Islands shares this week, with the rush out of oil stocks and riskier assets, imminent news from the drilling campaign should drive prices higher.


ITV (ITV) – TV company, ITV dropped to 53p this week on the general market weakness. The outlook for TV revenues is solid in 2010 and the management team of Crozier and Norman is looking to streamline the business and review the ongoing strategy of the business. Holding.


Nighthawk Energy (HAWK) – HAWK broke through the long term resistance of 30p this week on the weakness in the oil price and now stands at lows last seen during the March 2009 lows at 27p. Despite reasonably positive news from the Jolly Ranch project last week, and confirmation that substantial news on the field would be released this week, the shares continue to take a tumble. The fundamental investment thesis for HAWK, namely the Jolly Ranch and Revere prospects is unchanged. Though Contrarian Investor UK is disappointed in the short term performance, I will continue to hold as news flow does not support this continued erosion in the share price.


Amgen (AMGN) - The stock price fell from close to $60 earlier in the week to finish at $57.5 as sentiment on pharma stocks was not helped by disappointing results from Pfizer (PFE) and Astra Zeneca (AZN). News on osteoporosis drug, Prolia, is expected in Q1 or early Q2. Holding.


Intel (INTC) and Micron (MU) – Semi conductor stocks took a hammering early in the week with Micron falling close to $8 and Intel dipping below $19. Despite the short term weakness, long term fundamentals look positive for chips consumption in both the consumer and business enterprise segments.

Further falls on markets as gloom about Greek, Spanish, Portugese debt persist

The Dow Jones Industrials fell as much as 180 pts today, with the index currently down around 130 pts to 9,875. Long positions on DOW fell through stop losses at 9,850 rounding off a very poor week for Contrarian Investor. The scale of the falls have surprised me and although weakness was expected after the early January euphoria the S&P 500 falling through 1,050 in the space of a week exposed the volatility and unpredictibility of this market. Given the earnings outlook for this year, many shares seem to represent good value.

U.S. employment data casts further shadow on the market

The U.S. non-farm payrolls employment dropped by 20,000 in January, compared with an expected increase of 15,000. But the unemployment rate unexpectedly moved lower to 9.7%, compared with expectations of 10%. The Dow industrials was recently down 31 pts to 9972 after the news which highlights the fragility of the U.S. labour market and potential weakness of the economic recovery.
 On significant weakness in oil stocks, position increased in Nighthawk Energy at 27p, which fell 7% on the day. Overall the portfolio has suffered steep falls this week, particularly in speculative stocks.

Sovereign debt worries hammer stocks

Debt default worries for Greece, Portugal, and Spain sent stock markets round the world into a tail spin, with the Dow industrials down 2.61% (268 pts) to 10,002. Commodities fell heavily with oil falling 4% to $73 and gold also down 4% or $46 to $1064 as the dollar strengthened with a flight back to safe haven currencies.

After seeing Coal of Africa (CZA) gain over 20% in one day on the Vele mine approval, the stock price has given back its gains over the last 2 days and now stands barely higher at 130p, having risen to as high as 148p. Contrarian Investor was caught out on this one, and though tempted to take some profits on the Vele news, held out for a sell close to 170p. As they say, "A profit, is never a profit until you've banked it!". However, prospects for CZA look very solid with Mooiplatts ramping up production and Vele mine on start up.

A contrarian buy on the Dow Industrials initiated last night with the U.S. unemployment data due at 1.30pm UK time.

Threats from Argentina take shine off Falkland Islands Oil stocks

Fears of a possible blockade of Desire Petroleum's (DES) Ocean Guardian Rig on its route down to the Falkland Islands by Argentinian Civilian vessels sent Falkland Island oil explorers down this morning. The British Ambassador was summoned by the Argentinian Government yesterday so they could convey their opposition to drilling and which the British Government has strongly refuted and reaffirmed the U.K.'s rights over the Islands. Despite the political posturing it is unlikely that military action will be taken. However, the news yet again confirms that the Falkland Island drilling is not for widows or orphans, but that's what makes these stocks so interesting! As they say "you've got to be in it to win it!".

Doubts about Recentin and ex dividend hits Astra Zeneca

Astra Zeneca (AZN) was down over 3% this morning to £28.32 as concerns about whether its bowel cancer drug, Recentin (cediranib) in a head to head phase III clinical against Roche's Avastin would be positive when results are released in the first half of 2010 (Horizon III trial). The stock also went ex-dividend today. Recentin failed a final stage clinical in lung cancer in 2008 and focus is now on colo-rectal cancer.

Contrarian Investor believes a good entry point for AZN would be around the £25 mark.

Coal of Africa comes good with 23% one day gain due to Vele mine approval

Coal of africa (CZA) rose 23% today, with a 28p rise to 147p as confirmation came through that the key Vele mining project has been granted an unconditional mining order (NOMR).CZA currently holds an 80% interest and has an agreement in place to acquire the remaining 20%.


The company has also been granted a conditional NOMR for the Holfontein coal project near the middle of Sasol's Secunda coal production area.The Holfontein NOMR is conditional on delivery of certain documents to the DMR.


This  news fully endorses the decision to invest back in November and Contrarian Investor still sees upside in the price to around £1.80-2.00 in the short term. Holding postions for now. Great news and a significant upside to the portfolio.

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

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



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


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


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


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


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


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


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


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


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

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

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

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

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

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

Amazon and Microsoft boost sentiment a little in tech sector

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

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

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

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

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

Astra Zeneca news today supports negative view on the company

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

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


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


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


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

Nighthawk Energy Update fails to ignite share price

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

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

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

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

Coal of Africa Completes NuCoal acquisition

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

AMGEN EARNINGS NOT OUTSTANDING, PROLIA APPROVAL KEY

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

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

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

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

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

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