U.K. FTSE 100 finishes at 21 month high

The FTSE 100 finished at 5,645, up 24 points for the day and the highest level for 21 months as commodity stocks went higher on the weak dollar and Goldman Sachs predicted strong demand for raw materials. Ben Bernanke's statement that U.S. interest rates were likely to remain low for some time, has pressurised the dollar and driven commodity prices higher as their price in set in U.S. dollars.

Markets trade at highs and Contrarian Investor UK trims holdings

The DOW Industrials are currently up over 50 points, up for a seventh straight day, and trading at a 17month high. The FTSE 100 is up also up 38 points. Stocks are on the move up again amid optimism over the Federal Reserve sticking with its low interest rate stance for the foreseeable future and as expected, the Bank of England confirming that its Monetary Policy Committee voted unanimously in favour of keeping U.K. interest rates unchanged at its meeting earlier this month. Also, the U.S. Producer Price Index declined 0.6% in February, its largest drop in seven months. Taking out food and energy costs, the index gained 0.1%.  In the U.K., the number of people claiming unemployment benefits fell unexpectedly last month with those claiming Jobseeker's Allowance dropping by 32,300 to 1.59m in February, the biggest monthly fall since 1997 and against forecasts of a rise of 8,000. The jobless rate now stands at 7.8%. However, long-term unemployment, which includes those out of work for over a year, jumped by 61,000 to 687,000.

Finally commodity stocks were on the rise, Goldman Sachs issued a research note forecasting a surge in global demand. 

Against this background of euphoria, the traditional defensives (pharmaceuticals, tobacco and utilities) are being sold off. With over a week of daily rises, the stampede into the markets doesn't seem to be abating. Contrarian Investor U.K. is using this strength to sell more positions with the final tranche of Micron Technology and the Intel position bought yesterday being closed off this afternoon. The market may have more steam in it, but I am happy to hold some cash on the sidelines for now. As well as economic concerns, the Iranian Nuclear saga looks to be coming to a head and there is risk of an escalation of tension in the Middle East if Israel adopts a hard line, perhaps even risking Military action. As oil moves over $80, any such tension in the Middle East will push oil well over $100, which will undoubtedly stifle this muted global economic recovery. Then there are all the sovereign debt problems which are not going anywhere fast. Time to take a contrarian view, and move into a defensive stance for now.

New Intel position on rumours of earnings forecast revision

A long position in Intel Corp (INTC) was initiated yesterday as the company's shares moved up nearly 4% to $22. There has been speculation that Intel is preparing to pre-announce a positive upward revision of earnings for the current quarter and forecast for the remainder of 2010 on the sustained recovery in semiconductor demand. The company's Q1 earnings were scheduled for release on April 13th.

At the Q4 results, the company forecast Q1 revenue's of $9.7 billion, with potential upside of $400 million, with gross margin of 61%, plus or minus two points. Analysts estimate earnings of 37 cents on $9.79 billion in revenue with a top range forecast of 40 cents.

Ithaca Energy position closed after today's 12% rise

After a near 17% rise in two days, the position in Ithaca Energy was closed late this afternoon. A case of day trading but "A profits, not a profit until you've banked it"!

New position in Ithaca Energy initiated on strong production outlook

Ithaca Energy Inc.(IAE) listed on the UK AIM and Canadian TSX markets, is an independent oil & gas company with exploration, development and production assets in the UK sector of the North Sea. On February 19th, the company announced that the Galaxy II heavy duty jack-up rig had spudded and commenced drilling at the Stella appraisal well location in block 30/6. Results from this well should be available by June.

Major additions to reserves were reported at the end of 2009 though additional geological and geophysical study work conducted during the second half of 2009 in the Central North Sea:

i) The evaluation of Stella (Ekofisk) and Harrier discoveries has added significant additional 2P reserves.

ii) Block 29/10b was awarded to Ithaca (now 100% equity interest) in the 25th UKCS Licensing Round. The block contains the Hurricane discovery which has been attributed Probable reserves.

iii) 2P Gross reserves for Stella (Andrew) have not changed pending the appraisal well result. Combined 2P reserves for the GSA now amount to 25.52 mmboe representing ~70% of the total 2P reserves for the Company. 

Other reserve changes have been made throughout the portfolio and are summarised below:

i) In March 2009 the Company announced the successful drilling of the Carna prospect and Proved reserves for this discovery have been ascribed to Ithaca.

ii) The Jacky field was brought on line in April 2009 and has performed well above expectation. Previous assessed Proved reserves (December 31 2008 adjusted for Dyas transaction) for Jacky before first production were 0.68 mmboe net. Ithaca net production for 2009 was 0.97 mmboe; the latest assessment confirms 1.37 mmboe of remaining Proved reserves net to Ithaca.

iii) Ithaca acquired the Beatrice field in November 2008 and has achieved steady daily production increases over the last 12 months. Further work designed to access additional reserves is planned for 2010 and this has been taken into account by Sproule. Previous assessed Proved reserves (December 31 2008 adjusted for Dyas transaction) for Beatrice were 0.84 mmboe net. 

iv) production for 2009 was 0.33 mmboe; the latest assessment confirms 1.65 mmboe of remaining Proved reserves net to Ithaca.

Wellington West Capital Markets, has said that Ithaca can be expected to generate $100-million in cash flow during 2010 from the North sea and is capable of increasing net production to 16,000 barrels of oil a day by 2013 from 4,700 barrels this year. The company has the benefit of an experienced management team who have considerable expertise in the North sea, and a strong balance sheet being debt free.

Ithaca is currently trading at 116-120p up 7% for the day, with a 52 week range of 24p-117p. Brokers are expecting pre-tax profits of £28 million this year, putting the company on a p/e of 8 for 2010. Position initiated at 114p on Monday.

Lehman Brothers & Dick Fuld - just too much greed

A couple of months ago, I read the book, Larry McDonald's "a colossal failure of common sense", which told the story of the last days of the Wall Street investment bank, Lehman Brothers. It was an enlightening insight about the greed in the board room of this financial institution and particularly the antics of Chief Executive, Dick Fuld who presided over the collapse of the 158 year old firm in September 2008 as the house of cards created by the real estate boom came to a grinding halt. In 2007, Fuld received $22m in remuneration, as the performance of the company was flattered by the growth in CDO's (collateralised debt obligations), the parcelling of debt used to reduce the risk of mortgage defaults which went badly wrong in 2008.

This weekend my interest was peeked by stories in the press about he court-appointed examiner's findings who was mandated to examine the background and causes of Lehman's failure. Anton Valukas, concluded in his 2200 page report that there were grounds for "colorable claims" against Fuld, the bank's auditor Ernst & Young and three successive chief financial officers - Chris O'Meara, Erin Callan and Ian Lowitt - for presenting a misleading picture of Lehman's finances in its accounts. A series of temporary asset sales, using an off balance sheet trick called "repo 105" were used to artificially boost Lehman's balance sheet. By the fourth quarter of 2007, it had placed $38.6 bn of assets through repo 105, in q1 2008 $49.1 bn and over $50 bn by the second quarter of 2008. According to Valukas, Fuld, O'meara, Callan and Lowitt certified misleading financial statements.

Whether Fuld and his other cronies will ever be held accountable for his ploys is uncertain but the whole sorry story highlights the unadulterated greed of many senior Wall Street bankers prior to the financial meltdown in late 2008 and early 2009. Profit growth was the priority, without any concept of risk containment and ultimately tax payers have had to step in and save the day. If the Federal Reserve had not stepped in to pump billions into the system through TARP (toxic asset relief programme) and a series of bail outs (e.g. AIG), the whole financial system may have collapsed in early 2009, with unimaginable consequences. Will the world learn from these lessons? I guess, capitalism has its pros and cons but "light touch" regulation seems to have been pressure tested and ultimately failed. That is not to say that instruments such as derivatives or short selling should be banned, but a degree of control is needed to ensure that the financial institutions of the world are not left to their own devices because next time the outcome may be very different and very destructive.

Falkland Oil drillers in demand today on rumour mill

Desire Petroleum (DES) up 11.5% , Rockhopper (RKH) up 10.7% this morning with consistent buying and in the case of DES 4 million traded already. Could be rumours from Ocean Guardian rig or just the usual volatility of these shares. We will find out in the next week or so!

The Independent Small Talk has a small mention today:

Desire primed for Falklands oil announcement

It could all kick off in the Falkland Islands at the end of this week.

No, we're not talking about another military scrap over the islands' sovereignty, as in 1982, but according to sources, Thursday or Friday is the first time that the Aim-listed Desire Petroleum could announce that it has found oil in the territorial seas to the north of the Falklands.

The group's exploratory drilling has caused one huge diplomatic spat between Argentina, which claims ownership of the islands, and the UK. Desire has been unusually quiet about the drilling programme, largely because it wants to keep its head below the parapet. However, if the drilling has gone as well as the company dared to believe, we should all learn about it soon. Analysts expect that, realistically, it could take another couple of weeks for the group to tell the market how it has got on.

Desire is drilling in an area that other giants such as Shell tried to find oil in more than a decade ago and left empty-handed, and analysts put the group's chances of success at no more than about 20 per cent.

Earlier this month, the US Secretary of State, Hillary Clinton, called on the UK to open discussions with Argentina on the possibility of any future drilling.

Source: http://www.independent.co.uk/news/business/sharewatch/small-talk-lse-looks-to-tackle-problem-of-aim-investor-relations-1921542.html

Shorts initiated on ARM holdings and SSL International

Shorts placed this morning on ARM Holdings (ARM) at £2.25 and SSL International (SSL) at £7.75.

FIVE U.K. STOCKS WITH POTENTIAL FOR SHORTING

Contrarian Investor UK have been looking for stocks on the U.K. market which look overvalued and are candidates for a shorting strategy and here is my top 5 watch list. The FTSE All share is now up nearly 10% in the last month and 53% for the last 12 months and has tracked the move upwards on the U.S. Dow and S&P 500 (the S&P is up 10.5% in the last month). The strength in the overall market and generally bullish tone makes picking some overbought shares a tempting proposition as I feel that there is scope for a set back, albeit minor, in the next few weeks. Contrarian Investor UK uses Contracts for Difference (CFDs) through Igmarkets to enable stocks to be shorted i.e. with a hope that the price of a stock will go down in the future. However, spread betting using platforms such as IG index is also another easy potential online platform which allows buying as well as selling of individual shares and indices.

1. SSL International (SSL)
At £7.75 (52 week range £4.26- £7.89), health and personal care company, SSL trades on a price/earnings of 24 (based on earnings to year end March 2010) and a forward p/e for 2011 of 19 (based on earning of 40p per share in 2011). Garry Watts, its chief executive, has set a goal of increasing its earnings per share by 50pc over the three years to March 2012.

SSL's share price has been premium priced for years because of persistent rumours that Reckitt Benckiser will acquire the company to get its hands on its Durex and Scholl brands. But Reckitt's CEO Bart Becht is known for his prudence when its comes to acquisitions. Although Reckitt's paid a full price for both the Boots Healthcare International and Adams Therapeutics businesses, a takover of SSL for £9-10 would be difficult to justify given 1)it is unlikely that RB could accelerate the growth of SSL power brands too much faster given SSL has done a good job in delivering strong growth over the last 5 years 2) there is a portfolio of second line brands which were acquired during the 1990's particularly in Over the Counter (OTC) medicines which add significant complexity to the business and limited earnings e.g. Meltus, Cuprofen. Though these could be sold on, why pay a premium price for these brands? 3) SSL's organisation is relatively lean and therefore unlike the Boots acquisition, cost saving measures would not come as easily.

SSL has been busy beefing up its East European presence and now has strong growth prospects in Russia and other markets. It increased its presence in the Russian condom market by raising its stake in its BLBV joint venture in February. The company now generates about 85pc of its revenues from outside the UK. However, there are still significant risks in these markets as economic growth is still muted. The share price does not have the benefit of a good dividend, currently SSL yields 1.3%.

Although SSL's management has been doing a lot of the rights things over the last 5 years e.g. focusing growth on brands like Durex, emerging markets expansion, the high expectations for earnings growth in 2011 and 2011 and takeover rumours which justify the premium rating can easily fall apart if there is a glitch in any of its key markets. Investor's Chronicle featured SSL as a sell this week, and I agree with their assessment.

2. Reckitt Benckiser Group (RB.)
I have covered my reservations about healthcare and household company, Reckitt on a previous Contrarian Investor UK article published on Sunday 14th February (http://contrarianinvestoruk.blogspot.com/2010/02/reckitt-benckiser-certainly-not-good.html). At £35.11 (52 week range £24.96-35.45), the p/e is relatively undemanding at 18 and has a 2.9% dividend yield but my key concern remains the earnings impact of a generic competitor to opoid abuse drug, Subuxone in the U.S.. Suboxone accounts for 18% of group operating profits and around 10 percent of group profits. In the U.S. the drug accounts for half of the pharmaceutical divisions earnings and the North American operation represents two-thirds of total pharma sales.

3. ARM Holdings (ARM)
Chip designer, ARM (ARM or NASDAQ ARMH) currently trades at £2.27 (52 week range £0.98-2.32), rising from £1.95 over the last month alone as rumours have swirled around that Qualcomm (QCOM) is considering a bid. The company trades on a demanding 2010 p/e of 32.7 and 2011 of 27.5 as the company is seen to be geared to the huge growth in smart phone demand. The Cambridge-based firm had at least one of its chips in 90pc of all smartphones sold last year.

But directors have recently been selling the stock. For example, Tudor Brown (Chief Technical Officer and one of the founders) sold over £1 million of stock on March 9th. On March 11, RBS downgraded the stock despite the positive outllook for semiconductor stocks on valuation grounds and the Qualcomm rumours seem unlikely given competition concerns and a negative reaction from mobile manufacturers. Despite the positive fundamentals of the business, the share price seems to have gone a little over board and ARM therefore represents a good short at anything close to £2.30.

4. Rightmove 
Online estate agency, Rightmove (RMV) has had a tremendous share price move, rising from a low of £2.25 in March 2009 to its current £6.58, a rise of nearly 300% and not far from its 52 week high of £6.77. A renewed positive sentiment in the U.K. housing market has helped lift the shares and driven revenues back up as properties come onto the market for sale and hence Estate agents to use Rightmove as an advertising vehicle. It trades on a forward p/e of 19.7 and yields about 2%. Underlying operating profit for the 12 months to 31 December rose 2% to £41.9m on revenue down 6% to £69.4m. Pre-tax profit fell 1% to £37.8m from £38.2m.
Revenues for the second half of 2009 were 7% higher than in the first half and, by the end of 2009, monthly revenues had moved back toward their pre-crash peak. Costs were slashed by 17% to £27.5m as the company cut 16% of its admin staff during 2009. Broker Numis has upgraded full-year 2010 profit estimate to £52m from £50m and 2011 forecasts rise to £60m from £55m. Giving a 2011 forward p/e of around 16.

Of course these earnings estimates are dependent on a continued turn around in the U.K. housing market.The number of first-time buyers who expect to enter the housing market in 2010 has declined, which is concerning. The company's Q1 2010 Consumer Confidence Survey, which measures the public's property market views, revealed that the number of projected first-time buyers for the 12 months ahead has dropped for the third consecutive quarter. Only 26% of those who expect to buy in the next 12 months will be first-time buyers, a drop from 28% in Q4 2009 and 31% in Q3 2009. 

5. Astra Zeneca (AZN)
I have written about my negative stance on Astra Zeneca back in January (http://contrarianinvestoruk.blogspot.com/2010/01/astra-zeneca-azn-cheap-or-not.html) and my thoughts have not turned for the better after the failure of Recentin (cediranib) to reach its primary end point in the Horizon III clinical trial. Eight patents on drugs that represent 60 percent of Astra Zeneca's current sales are due to expire by 2016 and drugs like Recentin are desperately needed to fill the whole left by major patent losses on drugs such as Crestor and Pulmicort. Altough Astra trades on a forward p/e of only 7 and has a 5% dividend yield, patent expiries make earnings in 2011 and beyond hazy and the company has said as much. Heavyweight cost cutting is being done to try and stem the tide but success in the laboratory is needed and unfortunately Astra has been plagued by clinical trial failures on promising new molecules over the last 10 years. If AZN moves much beyond £30 (currently £29.22), this represents a good short opportunity and a move back towards its highs of £31 would make it an excellent shorting trade.

Portfolio review of the week March 13th 2010

GW Pharma (GWP) - Very quiet week for GW Pharma on very low trading volumes and share price holding at around £1.00. Continuing to hold sizeable position.


Falkland Islands Oil drillers (Desire Petroleum DES, Falkland Oil and Gas FOGL, Borders and Southern BOR) - The prices of the Falkland Oil explorers continued to drop this week on lack of news causing investor apathy, speculators moving their money elsewhere or  shorters in action. The investment thesis for these shares has not changed since the spudding of the first well in February. Actual results from Desire's drilling prospect on the Liz field in the North Falklands basin is keenly awaited. It is expected that Desire's Ocean Guardian Rig should have an indication of oil/gas finds in the next 1-2 weeks. These shares are a binary bet on what happens on Liz. Either Desire will go to less than 50p or we will see a move several pounds higher its that simple. CFD's with guaranteed stops have been placed on BOR and FOGL to limit any downside.


ITV (ITV) - Again little movement in ITV this week, closing at 52p on lack of any news.


Prudential (PRU) - Short term long position taken in PRU earlier in the week which was closed yesterday as the price moved over £5.50. Contrarian Investor UK likes the PRU Asian story but the surge in the markets on both sides of the Atlantic over the last couple of weeks makes me nervous and I have reluctantly decided to take profits given the move from £5.00 to £5.53 in little less than a week, after the falls from over £6 precipitated by the huge rights issue to fund the AIA acquisition (AIG's Asian unit).


Micron Technology (MU) - After a move up from around $8 to over $10 over the last 2 weeks or so on continued positive sentiment on memory chip prices and consumption levels, I have taken profits in half my position at $10.17. Micron closed last night at $9.97 and I continue to hold 1000 shares.

REUTERS - PRU INVESTORS WARM TO AIA DEAL

Raji Menon, 13:57, Thursday 11 March 2010

LONDON (Reuters) - Major shareholders in Prudential are warming to the insurer's $35.5 billion (23.6 billion pound) bid for AIG's Asian business following meetings with chief executive Tidjane Thiam, investor sources said. Thiam, who has been meeting UK investors this week to explain the merits of the blockbuster deal, appears to be winning over sceptics, they said. "We asked him to justify the deal to us and he made a pretty good fist of it," said one head of equities who met with Thiam. "Coming out of it, we were a little more positive than we thought we would be. It is a bit of an opportunity for Pru; a real catch and it will make them very strong indeed. All in all, there is an argument for (the deal)."

Another large investor who also met Thiam added: "The key message was that AIA will make a lot more money under Prudential's ownership. "The AIA business has much poorer margins than the existing Pru business so there is some credibility in that argument. Overall, we felt what they are doing does have some merit."

AIG shares were up nearly five percent in pre-market trade shortly after Reuters reported growing backing for the deal. Investors said Thiam told them that removing inefficiencies in AIA's operations would result in strong revenue synergies and said he reassured them on the price tag, which some have said was too high. "Pru's Asian operations are very efficient and as a result their margins are very high...AIA is not as productive. Get the two together and you can make a case for increasing that productivity and justifying what ostensibly looks like a pretty high valuation," said the head of equities.
"Pru sees some $770 million of revenue synergies coming through this increased agency productivity. This isn't a company that is going to make $500 million of new business, it can in time make $2 billion on new business and so you can justify the price."

Thiam also told investors AIA has been on his radar since September 2008, when he was Prudential's chief financial officer. "We thought this is quite important because they do know the operations better than we may have thought," added the head of equities.

However, some investors are yet to be convinced. "Tidjane is relatively unknown -- he's only been there for nine months and therefore for an unknown to be asking for this kind of money, people are reasonably sceptical," one said. "There is also a bit of worry that they may redomicile -- we may end up buying all the stock and they may take off to Hong Kong," he added.

(Editing by David Cowell)

China - is this a bubble soon to burst?

Today it was announced that Chinese inflation hit a 16 month high, meaning potentially higher interest rates. The annual rate of consumer price inflation rose to 2.7% in February, up from 1.5% in January, and ahead of analysts' expectations of 2.3%. In addition, new loans exceeded forecasts, adding to the case for the government to cut stimulus measures. The People’s Bank of China hasn’t raised benchmark interest rates since December 2007, but the central bank has ordered commercial lenders to increase their capital reserves three times since last December. However it has been pointed out that the figures should not set alarm bells ringing, as the New Year in 2009 fell in January not February, economists say the rate of increase in consumer prices in February 2010 was boosted as it is being compared with weaker spending last year.

China's exports in February were up 46% from a year ago, which was more than analysts' forecasts and the economy grew by 8.7% last year, exceeding government expectations driven partly by the Rmb4,000bn ($585bn) stimulus programme. The Shanghai Composite (SSE) is down 7% year to date to 3,052.

In addition to inflation concerns, some commentators worry about the Chinese property market increasingly looks to be entering a bubble phase. But an interesting perspective was offered by the FT.com today, "Unlike the dramatic increase in household leverage that precipitated the US subprime crisis, Chinese household debt amounts to approximately 17 per cent of gross domestic product, compared with roughly 96 per cent in the US and 62 per cent in the eurozone. Home buyers in China are required to make minimum downpayments of 30 per cent before receiving a mortgage, and at least 40 per cent for a second home.

Although price increases in the Chinese residential market appear rapid (more than 20 per cent in 2009), such headline figures cannot be viewed in isolation. Over the past five years, urban household incomes grew at a 13.2 per cent compound annual growth rate, compared with an 11.9 per cent CAGR in home prices. Pockets of overheating can be found in some regional markets. In Beijing, Shanghai, Shenzhen and Hangzhou, for instance, prices outpaced income growth by more than 5 percentage points over the same period. But, this can be seen as a symptom of new urban wealth being put to speculative use, rather than the profligate use of leverage.

The combination of excessive leverage and mortgage securitisation were at the epicentre of the US subprime crisis. Both these factors are absent in the Chinese context. The commercial property sector has inspired just as much concern, with prices rising 16 per cent in 2009, in spite of low rental yields and prime office vacancy rates as high as 21 per cent and 14 per cent in Beijing and Shanghai, respectively. Yet occupancy and rental rates have started to pick up for prime properties.

The crux of the problem with the Chinese real estate sector is that property is seen by the country's investing class as a store of value, within an economy that offers its citizens limited investment options. I share many of the concerns about flawed incentives and overheating in the property market - but even if prices were to correct, this would not trigger the type of devastation that might arise in an over-leveraged economy."

Prudential added to portfolio following announcement of Asian deal

On March 1st, U.K. listed life insurer Prudential (PRU) announced an ambitious plan to acquire AIA, the Asian assets of troubled U.S. life insurer AIG for £23.5 billion ($35.5 billion). The deal dwarfs the company's market capitalisation of £13.6 billion ($20.4 billion). AIA is a significant player in the fast growing Asian insurance market, having a 19% share in China. The acquisition will make the combined company the no.1 player in China, Vietnam, Hong Kong, Singapore, Indonesia, South Korea, The Philipines and Thailand and over 85% of profits will come from the region (46% currently). To fund the acquisition, a £13.4 billion ($20 billion) rights issue was announced, the largest ever in the U.K.. Prudential will also issue $5bn of senior debt, while AIG will receive $5.5bn in new Pru shares plus $3bn of convertible shares and $2bn of preferred shares. The rights issue is fully underwritten and a number of Asian sovereign wealth funds are lined up to share a share. PRU's share's fell 20% on the day of the announcement and now trade at £5.38. Tidjane Thiam, the Pru's chief executive also said the deal will generate $340m in savings once the offices have been rationalised The company has also accelerated plans for a dual listing of the shares in Hong Kong in April.

In effect a reverse takeover of AIA, the deal is a high risk strategy for Prudential but given the maturity of the U.K. life insurance business, an acceleration of the company's presence in the fast growing Asian region seems strategically sound. The added bonus of cost cutting potential is also supportive. Though the deal is not cheap at 1.6 times embedded value (UK insurers trade at one times embedded value), the future growth potential of the Asian region is significant and way ahead of Europe. Though UK brokers were largely unimpressed and hedge funds were said to be shorting heavily on the announcement, Asian buyers drove Pru back from its lows last week. Existing institutional investors have been making negative noises about the priority that Thiam is placing on new Sovereign wealth investors and lack of information before the rights issue prospectus, but given the importance of the new Asian Investors this seems sensible. I have opened a position today at £5.36 given the potential of the Hong Kong listing and over negative reaction to the acquisition. It is frustrating to have missed the £5.00 low, but a move over £5.50 seems likely as the investor road show continues.

Horizon III clinicial trial failure puts further pressure on future AstraZeneca earnings

AstraZeneca (AZN) had yet another piece of bad news on Monday from its R&D pipeline with the news that cancer drug, Recentin (cediranib), failed to meet the primary endpoint in the Horizon III study. The company was evaluating the effectiveness of Recentin in a phase II/III study compared with Roche’s Avastin (bevacizumab), both in combination with chemotherapy in patients with first-line metastatic colorectal cancer (mCRC). As reported in a previous Contrarian Investor UK article, Horizon III was identifed as a high-risk study for Astra. The company also reiterated its financial guidance for 2010 and announced further cost cutting measures including site closures. The company guided for 2010 earnings of £3.80 ($5.75) to £4.10 ($6.15) , lower than the £4.20 ($6.32) reported in 2009 and putting the company on a forward price/earnings (p/e) of just over 7. With the loss of patent proection on cancer drug, Arimidex, and asthma drug, Pulmicort, in the US, the company expects a mid single-digit decline in revenue in 2010.

The pressure for Astra Zeneca to deliver on its R&D pipeline is signficant given the large number of patent expiries over the next 3-4 years. The failure of Horizon III puts the risks ahead for Astra into perspective and although the company trades on an undemanding forward p/e of 7 (compared to sector peers of 10 or so), the picture into 2011 and beyond is hazy. Although the company is focused on earnings growth through cost cutting, the scale of the patent expiries ahead means this will not be enough to sustain earnings per share. Astra has been plagued by bad luck in clinical trials, they need this luck to change quickly before Contrarian Investor UK advises this stock above other more diversified pharma stocks.

10th anniversary of internet bubble - "dot.com boom and bust"

Yet another anniversary today and its the tenth anniversary of the bursting of the internet technology bubble in March 2000 -  the "dot.com boom and bust". Today the technology heavy U.S. index, the NASDAQ,  stands at 2,341, down 53.6% or 2708 points from its peak of 5,100 achieved in March 2000 . Between January 1998 and March 10th 2000, the Nasdaq increased by over 200%.

For many private investors, the Internet bubble of 2000 was the first time they began trading stocks and for many it was a painful experience as they bought into companies with stratospheric valuations based on promises of future earnings, and watched prices plummet from March 2000 onwards. The rush into tech and internet stocks turned into a stampede as IPO's (Initial Public Offering) of new companies doubled and tripled overnight. The internet was seen as the only place to be. Share prices of traditional companies such as utilities, bricks and mortar retailers and even Buffett's Berkshire Hathaway collapsed as investors sold their"safe and boring" stocks to get into the internet revolution. Internet bulletin boards were awash with posters, "pumping and dumping" stocks with gullible amateur investors.

The classic example of Internet boom and bust was Boo.com, a U.K. listed company founded by Swedes Ernst Malmsten, Kajsa Leander and Patrik Hedelin in 1999, selling fashion items over the internet. The company spent $135 million of venture capital in just 18 months, and it was placed into receivership on 18 May 2000 and liquidated. The story of Boo.com's failure is captured in the fascinating book, "Boo Hoo: A Dot Com Story" by Ernst Malmsten, Erik Portanger, Charles Drazin. Despite only a few hundred thousand pounds in revenues the company had a staff of over 400, spent lavishly on champagne parties and first class travel round the world. Boo.com represented the new age of internet company, ones with lavish spending and no thought to cost control as the revenues would one day come. In the case of Boo these revenues just didn't come in fast enough as funding for these ventures dried up as the Dot.com bubble burst.

Another example of the tech bubble at its worst and an expensive lesson for many investors was a company founded in the U.K. in 1988 as Bookham Technology. It became the first company in the world to make optical components that can be integrated into a silicon chip. It floated in July 2000 at £10 and in August 2000 its shares hit an eye-watering £53! it was promoted to the FTSE 100 of the U.K.'s leading companies in 2000. By the end of 2000, its shares had fallen 99% to less than 50p a share and in 2004 it moved its listing to the U.S. on Nasdaq. A classic case of investors not understanding a business model and hype overtaking any sort of reality in terms of revenue projections.

In January 2000, AOL Time Warner was created when AOL purchased Time Warner for $164 billion. The shareholders of AOL owned 55% of the new company while Time Warner shareholders owned only 45%. In 2002, the company was forced to report a loss of $99 billion due to the goodwill write-off related to AOL, at the time, the largest loss ever reported by a company. In 2003, the company dropped the "AOL" from its name, and removed Steve Case as executive chairman. In May 2009 Time Warner announced that it would spin off AOL as a separate independent company, with the change occurring on December 9, 2009.

Finally, it would not be right to write an article on dot.com hype without including lastminute.com. Online travel agent, lastminute.com was founded by Martha Lane Fox and Brent Hoberman in 1998 that became an icon of the UK internet boom and bust. It, floated at the end of the dot com bubble in March 2000 and its share price peaked at over £5, valuing the company at close to £2.5 billion . By the end of 2000 its shares were trading at around 80p. It was purchased by U.S. company, Travelocity in July 2005 for £577 million.

The dangers of "momentum investing" where investors buy into stocks purely on historical changes in a stock price is exemplified by the dot.com crash. Some investors profited from the herd mentality of the crowd but many "lost their shirts". Buying a company's share purely on share price movement is very high risk and although momentum should influence an investment decision, the classic value parameters should always be assessed i.e. comparative future price/earnings, balance sheet, news flow  as discussed in a previous Contrarian Investor UK education segment (http://contrarianinvestoruk.blogspot.com/2010/01/contrarian-investors-guide-to-stock.html).