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.

Portfolio Update January 16th 2010

INTEL (INTC) - After the market close Thursday, the chip manufacturer announced better-than-expected fourth-quarter earnings and a strong outlook for the year ahead. Despite rising after hours yesterday, they finished 3.2% down at $20.80. With a forward p/e of 13 and with the company's 2.7% dividend yield supported by $12.9 billion in cash on its balance sheet, with just $2.4 billion in debt, INTC looks strong for 2010. After selling 50% of my  stock prior to the results, bought back in yesterday. Looking for $22-23 in short term.


AMGEN (AMGN) - The stock traded in a narrow $55-57 range this week after guiding down estimates for 2010 earlier in the week. Holding on news of osteoporosis drug, Prolia in Europe.


MICRON (MU) - Have traded MU, selling several times above $10.8 and have bought back at $10.1. With memory chip prices improving, Micron is postioned well for the semiconductor recovery.


JP MORGAN (JPM) - Position sold Thursday prior to Friday results.  JPM finished down 2.26% at $43.68 as Q4 results disapointed on the top line as bad debts continue to be a concern and there was surprise that despite the repayment of TARP (toxic asset relief programme) in 2009, the dividend was not increased. Under Jamie Dimon's leadership this is one of the stronger U.S. financial instritutions and will be looking to buy in on any continued weakness.


FALKLAND OIL AND GAS (FOGL) - The share continues to sharply move up , finishing the week at 168p, a climb of over 20% as Falkland Islands hysteria begins. Some profits taken but holding on deep water rig news or agreement to share Ocean Guardian Rig with Desire Petroleum.


BORDERS AND SOUTHERN PETROLEUM (BOR) - The company holds a 100% interest in five production licences in the South Falkland Basin. In November Borders & Southern raised £113m, enough to finance the drilling of three wells. Is is likely to share a rig with fellow south basin explorer,  Falkland Oil & Gas. This is partly because Borders & Southern‘s licences are in the deep waters to the south, but also because Desire and Rockhopper have already secured their rig. Position initiated at 66p.


GW PHARMA (GWP) - Position increased. Price now 93p.  Awating news on European approval of lead product, Sativex


ITV (ITV) - Position initiated at 55p with positive momentum in media stocks and turnaround story under Archie Norman. 


NIGHTHAWK (HAWK) - Holding with drilling news from Jolly Ranch and Revere projects still expected shortly.

ITV upgraded by UBS and Product Placement

ITV up 2% this morning as UBS adds ITV to European media most preferred list .

It has been said that goverment proposals to allow U.S. style product placement in programming is good news for ITV. However, whilst certain parts of the industry (particularly ITV) are continuing to lobby hard for it, there have been some strong counter arguments against from bodies as diverse as the BMA & ISBA. IWith the ongoing concerns over alcohol consumption, and with an election due this summer in the U.K., they are unlikely to allow something that with a couple of controversial incidents, could easily be very difficult politically. The recent history of this government & Ofcom, at least when it comes to advertising, has also shown that they usually come down on the side of regulation over liberalisation. Even if the government did decide to allow it in principle, the regulatory framework may be prescriptive, which would require a further, time consuming period of consultation.

Portfolio adjustments January 15th

Yet another disappointing quarterly production update from gold miner Hambledon Mining (HMB) drove the stock down 16% yesterday. Given the huge increase in the Gold price over the last couple of years, the management have failed to keep ongoing maintenance and productivity issues in check, All patience lost with the company and position closed.

Position initiated in Borders and Southern Petroleum (BOR), another Falkland Islands Oil play given likely deep water Rig announcements from Falkland Oil and Gas (FOGL) in the short to medium term and looking cheap on relative valuation to FOGL and Desire Petroleum (DES). Position increased in FOGL following continued strength in the share price, now up over 20% since position started.

Position in JP Morgan (JPM) closed following strength pre earnings and increased in GW Pharma (GWP) on likely news flow relating to Sativex.

INTEL (INTC) produces a great earnings beat!

Intel (INTC) reported a fourth-quarter profit of $2.3 billion, or 40 cents a share, compared with a profit of $234 million, or 4 cents a share for the same period 2008. Revenue was $10.6 billion versus expectations of $10.2 billion, up from $8.2 billion for the same quarter a year before. Adjusted income was 55 cents a share, compared with analyst estimates of 30 cents a share

For the current quarter, Intel said it expected revenue of $9.7 billion, with an a potential upside or downside of $400 million, versus expectations of $9.3 billion, Chief Executive Paul Otellini said in a call with analysts that the outlook for semi conductors was improving and that Intel's major business units posted sequential gains in sales. Its PC client group, focused on chips and other products for desktops, notebooks, netbooks and wireless devices, reported a 10% increase. its data center group, focused on servers, work stations and storage systems, reported a 21% jump Its Netbook Atom products, rose 6%.

The results support the thesis that demand in enterprise and consumer segments is improving as economic recovery gathers pace.

Will be looking to reduce position in INTC on opening strength.

Alcoa disapointment delivers weak start to U.S. earnings season

Dow Jones Industrial component, Alcoa (AA) delivered disappointing fourth quarter 2009 results after the close on Monday, causing an 11% drop in the price to $15.52 (-$1.93) and leading the Dow industrials down 36 to 10,627. The FTSE 100 dropped 39 to 5,499. After Monday's closing bell, Alcoa reported a quarterly net loss of $277 million, or 28 cents a share, compared to a year-earlier loss of $1.2 billion or $1.49 a share, when aluminium prices collapsed.

Analysts had expected the company to earn 5 cents a share on sales of $4.9 billion. Excluding charges, Alcoa said it earned 1 cent a share worrying the markets that economic recovery may be slower than anticipated. A short term buy trade in Alcoa prior to the earnings release therefore disappointed and the position was closed at the open yesterday. 

Weakness in semiconductor stocks gave a good re-entry point for Micron (MU) and for an increase in the Intel (INTC) position with the results due Thursday.

After initially moving into positive territory, Amgen 's (AMGN) price was hit as it said 2009 earnings would come in close to the low end of its forecast, sending its shares down a most 2 percent at one point before closing the session down 1% at $56.03. Continued uncertainty about Amgen's potential block buster osteoporosis drug Prolia (denosumab) also weighed on the stock, as the company said it has not yet responded to a regulatory request for more information on the drug.

Speaking at the JP Morgan Healthcare conference on Tuesday, Chief Executive Officer Kevin Sharer said the company's full-year earnings would be close to the low end of its forecast of $4.90 to $5.05 per share. Analysts on average expected $5.04 per share. 2009 revenue would be at the midpoint of the company's projection of $14.4 billion to $14.8 billion. Analysts were looking for $14.7 billion. Sharer confirmed $4 billion in cash at the end of the 3rd quarter.

A drop in JP Morgan (JPM) to close to $43 at one point during the trading session gave a buying opportunity with results due Friday.

In the U.K., Falkland Islands oil play, Falklands Oil and Gas continued its upward move, rising 7.5 or 5% to 153p as Investec declared a 5% notifiable interest in the stock. 

Week ahead - earnings season starts with Alcoa

Earnings season in the U.S. kicks of with Alcoa(AA) on Monday, which given commodity rebound should be encouraging. On Wednesday, the Fed Beige book report will give further insights on the state of the U.S. economy. On Thursday after the close, Intel (INTC) reports and this will give a good idea of the outlook both for tech and semiconductors specifically.

In the U.K., further evidence on the health of retailers will be demonstrated by Tesco (TSCO) on Tuesday.

Portfolio Update Jan 9th

Coal of Africa (CZA)
Closed at 128p yesterday so showing close to a 30% profit. The Telegraph Newspaper cited takeover rumours as the driver of the increase, but the underlying fundamentals of coal demand are improving and this has increased sector prices across the board over the last 2 weeks. Demand from India and China remain particularly strong. Still awaiting news on Vele mine approval.

Have taken some profits, but still holding a substantial position.

Nighthawk Energy (HAWK)
Remains flat at 35.75p. News on drilling from Jolly Ranch and Revere expected during January. Holding.

ITV (ITV)
Position initiated in ITV at 58p. Evidence suggests significant pick up in TV revenues and positive outlook for 2010 driven by World Cup and global economic recovery which should bring back advertisers into the market.

GW Pharma (GWP)
Position moved into profit following buy at 84p. Now 90p to sell. News awaited on Sativex registration in UK and Spain. Holding.

Falkland Oil and Gas (FOGL)
Position increased with average buy price of 136p. One of Investor's Chronicle Tips of the Year for 2010 which was published yesterday which drove a significant increase in the SP to 143p. Holding.

Hambledon Mining (HMB)
Position initiated in gold miner at 7p.Q4 production and underground mine update due next week.

Amgen (AMGN)
Position increased following FDA review news on ESA's which sent share price to $55 at low. Average buy $56.7. Current price $56.8. Holding on earnings and product approval news.

Intel (INTC)
Position initiated at $20.8.

Johnson and Johnson (JNJ)
Position initiated at $63.9.

Positions closed
Desire Petroleum

FDA review triggers jittters in Amgen and J&J

Yesterday Amgen (AMGN) dropped by as much as 2%, to a low of $54.65 before rebounding and finishing the day at $56.27 (-0.92%) as the U.S. Food and Drug Administation (FDA) announced plans to consult outside experts to re-evaluate the use of Amgen’s Aranesp and Johnson u& Johnson ‘s Procrit anemia drugs when given to patients with chronic kidney disease

An article published in the New England Journal of Medicine on Wednesday, said the agency "anticipates convening a public advisory committee meeting in 2010 to re-evaluate the use of drugs known as erythropoiesis-stimulating agents (ESAs) in people with chronic kidney disease. Amgen's Aranesp and Epogen and J&J's (JNJ) Procrit are both ESA’s.

The drugs came under scrutiny two or three years ago after studies showed high doses could lead to heart complications or in very rare cases even death. An FDA spokeswoman said an "important question" for the advisory panel would be what level of haemoglobin doctors should try to achieve with the drugs . In the journal article, they said "optimal haemoglobin targets have never been established" for patients with chronic kidney disease and clinical trials had raised "major concerns regarding the use of ESAs to increase hemoglobin concentrations" in chronic kidney disease patients above levels needed to avert blood transfusions. But the studies "do not rule out the possibility, however, that modest increases in the hemoglobin level could be beneficial," they added.

Sales of ESA drugs are a significant contributor to earnings, particulary in the case of Amgen. Amgen reported third-quarter Aranesp sales of $675 million. Sales of J&J's Procrit and anemia drug Eprex were $542 million in the quarter.

Given that both Amgen and J&J have aggressively tightened the labelling of their ESA products to minimise risks which has hit earnings from their drugs signnicantly, it is likely that these products will contain to be mainstay of therapy in patients with Chronic Kidney disease given the lack of viable alternatives at the current time. Thought the FDA hearings will undoubtedly hit sentiment, especially for Amgen, it is considered unlikely that Aranesp, Epogen and Procrit will be withdrawn from the market. Additional monitoring may be requested which may further hinder sales, but forthcoming news on new products from both J&J and Amgen makes any downside likely to be covered by these new innovations.

Position increased in Amgen at $55 and position initiated in J&J at $63.

Intel (INTC) a great entry point for a quality stock

It finally looks to be the right time to buy into the Intel (INTC) story. There are several compelling reasons to go long on this one.

1. Product launches
Intel is getting into high gear with their Core processor family early on the new year, as they are set to release 6 new desktop processors and 11 mobile processor in January. There will also be 3 new chipsets for desktop PCs and 4 oriented towards mobility.Of most relevance, all processors in the series feature a built-in GPU - for the first time ever it is possible to purchase a CPU that features a built-in GPU that is entirely separate from the chipset. This is known as a General-Purpose computation on Graphics Processing Units (GPGPU) and refers to the technique of using a GPU, which typically handles computation only for computer graphics, to perform computation in applications traditionally handled by the CPU. They also have improved efficiency, allowing them to use less power and generate less heat than existing processors, such as those based on other architectures. It is claimed that the chips provide close to double the processing and graphics performance than their comparable predecessors. The new chips are manufactured using the 32-nanometer process, which makes them smaller and more power-efficient than earlier chips. Based on the Westmere architecture, the transistors are a step away from chips manufactured using the 45-nanometer process.

Compared to previous chips, the new processors speed up high-end tasks like graphics display. Related tasks would run close to two times faster than previous chips. Intel has also integrated graphics chips into the new processor package, which could make the chips capable of playing Blu-ray movies or high-definition games.

2. Good valuation

Although Intel is trading on a historical P/E of 49 which looks expensive, earnings are expected to recover signficantly in 2010. Analysts expect earnings to be in the $1.5 range, and this can be expected to increase as economic prospects around the semiconductor market improve. Therefore earnings of $1.5-1.7 in 2010 seem reasonable giving a forward p/e of 11.2-13.5. This compares favourably with others in the sector such as Advanced Micro Devices (AMD) (estimated loss in 2010) or National Semiconductor (NSM) (forward p/e of 21.4 based on $0.7 earnings).

3. Strong fundamentals for enterprise and Consumer chip segments in 2010

As discussed on a previous posting relating to Micron, the fundamentals for PC demand and semiconductors is signifcantly improving in 2010 driven by economic recovery, low inventories, rising prices and the launch of Windows 7.

At just over $20 (52 week range $12.05-21.27), Intel has some very positive attributes. Although the FTC (Federal Trade Commission) in the U.S. announced an investigation into the company's actions in early December and issues with the EU Trade Commission remain, this is expected to impact earnings only marginally if at all. Buy initiated at $20.8

ITV looks good play on advertising recovery

ITV revenues look to be strong in January (up 6.5% versus 3% for the total TV market) as revenues from advertisers floods in (source Aegis group),

With Archie Norman taking the helm at the company and a strong rebound in media expenditure looking likely, and Goldman Sachs adding ITV to its conviction buy list with a 70p target,  now seems to be a good time to invest in ITV.

Position initiated at 58p.

Update on portfolio - January 5th 2010

Nighthawk Energy (HAWK)
Average buy price 35p. Currently 35.75p to sell. Hold with news from Revere and Jolly Ranch project imminent.

Coal of Africa (CZA)
Average buy price 99p. Currently 115p to sell. Rising South African Coal prices driven by strong Indian Subcontinent demand have moved the share price up from the £1 level. Further news on Vele project and move from AIM to main market are catalyts for further share price appreciation. Holding.

Desire Petroleum (DES)
Buy at 85p. Sold at 108p. Placing and open offer deadline extended to January 11th. Open offer at 70p means that shares may well be sold on receipt which may depress share price during mid January. Watching for possible re-entry.

Falkland Oil and Gas (FOGL)
Buy at 132p. Holding at 128p.

JP Morgan Emerging and Templeton Emerging.
Short positions closed at loss due to continued strength in Emerging markets stocks.

Micron Technology (MU)
Buy at $10.3 closed at $11. Share on watch for repurchase.

Amgen
Average buy at $57.5. Currently at $57.8. Holding due to imminent drug approval news.

GW Pharma (GWP)
Buy at 84.5. Currently 88p to sell. Holding with European Medicines Review agency due end January. Approval of Sativex lead drug likely Q1 2010.