The Contrarian Investor Times

Things are better but are we going down?

noreply@blogger.com (Anonymous) — Mon, 02 Aug 2010 02:32:00 +0000

Things have certainly got better now compared to the last time I reviewed my portfolio. Second quarter earnings results from the US are generally very good with some I am aware of beating their forecasts. Fears of the euro debt crisis have subsided for now since countries have laid out austerity plans to reduce their debts to manageable levels. Economic data from the UK and EU generally show that growth is a more likely scenario than a double dip recession. However, there is a lot of room where things can go a lot wrong if growth is not stimulated by the investment from the private sector, exports and consumer spending. The biggest recent surprise is that the US home sales data is better than expected when it actually went up instead of going expectedly down. The major things which worry the markets is the slowdown from China and uncertainty of the US economy. If China's economy is allowed to overheat, the effects would hurt all of us since the workers' wages have not kept up with property prices in high demand areas. Inflation may also go out of control which is likely to have negative effects on growth. Worse than expected US GDP data sent the markets down just before I wrote this post. The main culprit is firms increased their investment in foreign parts leading to imports exceeding exports. This should not be too bad if it contributes to future growth of the economy. EU stress test results have been generally well received though the test is not even perfect. I believe that more extreme cases should have been looked into such as the sovereign debt crisis and potential problems within the emerging economies.

My portfolio has beaten the market by a wide margin largely due to purchasing additional shares in BP after taking advantage of the market's overblown fears regarding the company's financial position due to the oil spill. The generally good news and higher oil prices have sent my shares up north. The only bad news is that FOGL did not find any oil in it's first well so the share went south in big style due to investor overreaction regarding the likelihood of finding oil in it's area of operation. However, the firm has a lot more area to explore so one should not give up hope to find any oil.

Interim results from UK banks this week may provide a boost in investor confidence provided if the economic data and other news does not indicate either uncertainty or even worse faltering growth and slide back to recession.

Please note that I am still working on the analysis of the shares mentioned in the previous post since some data cannot be fetched easily, especially the ones from the spanish banks listed on the US market. I will provide them very soon.

Are these banks suitable for contrarians?

noreply@blogger.com (Anonymous) — Wed, 21 Jul 2010 03:40:00 +0000

Using the stock screener on the Zacks Investment Research website, the following stocks within the foreign banks industry are contrarian in terms of price to earnings, price to book value, price to cash flow and dividend yield. The average values for the industry at the close of 20/7/2010 are the following; price to earnings is 10.9, price to book value is 1.22, price to cash flow is 9.95 and the dividend yield is 2.48%. These stocks are below the industry average for the former three ratios and above average for the latter. Without going into much detail in this post, these could be good stocks to buy into due to negative sentiment surrounding these stocks. These also have generally good fundamentals in general. However, more analysis is needed to make sure if this is the case. Over the next couple of weeks, I will conduct further analysis on the stocks [where sufficient information is available] to find out whether these are a good buy or not.

The financial ratios of the stocks that meet the above criteria are listed in this PDF file

The financial ratios (price to earnings, price to book value, price to cash flow and dividend yield) of the rest of the stocks in the same industry are listed in this PDF file.

Full Disclosure: No positions in the stocks mentioned at this time

Investment Idea - Archer Daniels Midland Company (ADM)

noreply@blogger.com (Anonymous) — Wed, 30 Jun 2010 04:49:00 +0000

Archer Daniels Midland Company

Ticker:: ADM

Sector: Consumer/Non-Cyclical

Listing: NYSE

Introduction

ADM is a one of the leading global processors of agricultural commodities such as oilseeds, corn, cocoa and wheat. The firm is a leading manufacturer of food and feed ingredients such as vegetable oil, corn, biodiesel, ethanol and flour. The company has a grain elevator and an extensive transportation network to procure, store, clean, and transport agricultural commodities. It also has operations in 32 countries across six continents.

Analysis

EPS has been quite low between 1998 and 2004. Afterwards, it has gone up significantly partially due to a increase in demand for bio fuels, since the governments want to reduce emissions from vehicles. Again, the recession has affected earnings in 2008 and 2009. However, the firm has not made a loss in the past ten years.

EPS growth has been a little inconsistent. However, the average growth is 20.06%.

Return on Equity (ROE) has increased generally between 1999 and 2007. The average is 9.69%. The ROE for 2009 is 12.65% which is above industry average of 8.48%. This suggests that the firm has competitive advantage over it's peers and it's extensive geographical and industrial operations reflect this.

The firm is a dividend aristocrat member (1). Dividends has increased since 1977 (2).

Dividend yield has gone up generally since 1999. There was a dip in 2006 due to increased investment on new opportunities.

Financial ratios as at the close of 22/6/2010 (3) (4):

Using the Value strategy, this stock satisfies all of the defensive criteria. This is because:

The turnover is greater than $100 million. Importantly for a manufacturer, the firm's net current assets is greater than it's non-current liabilities.
Current ratio of 2.08 provides a good margin of safety in case of all current liabilities become due.
Dividends have been paid since 1977.
EPS has been strictly positive over the past ten years, that is, no loss has been made for that period.
10 year EPS growth using 3 year averages at the beginning and exceeds 1/3. Using EPS from 1998 to 2000 and 2007 to 2009, 10 year growth is astonishing 498.63%.
P/BV is below 1.5.
Average P/E over 3 years is below 15.

Conclusion

This stock is a very good buy in the long term and in this current economic climate.

Note

I will not be responsible for any losses incurred by investors through investing in this stock. Investing in the stock market may result in not getting their initial amount back.

The above data has provided by Edgar Online, except sources 1,2 and 4.

Full disclosure: No positions in ADM.

Source:

S&P500 retrieved 12/6/2010.
Archer Daniels Midland Company - Dividend & Split History retrieved 30/6/2010.
I-Metrix - Edgar Online retrieved 23/6/2010.
Zacks Invesment Research - ADM: Archer Daniels Midland Co - Financial Overview retrieved 23/6/2010.

Euro Debt Crisis - A New Hope?

noreply@blogger.com (Anonymous) — Sat, 26 Jun 2010 02:01:00 +0000

UK's emergency budget was well received by the markets and the rating agencies. The latter have more confidence that the country will bring down it's borrowing within a reasonable time frame. Therefore, they decided to leave the country's AAA credit rating alone. However, this good news has been overshadowed by fears that the euro debt crisis may result in slower economic growth with some believing that it may lead the eurozone economy back into recession. The crisis may have an impact on the global economy which may lead to a double dip recession. This and worse than expected US home sales figures has spooked the markets sending share prices downwards. Lets hope that the G20 Summit will sort the problem out for once and all.

My portfolio went down more than the market in general, since the banks and oil companies were affected the most by the bad news. This shows that I am heavily exposed to the financial sector and that my portfolio needs rebalancing. This will take me quite a while to achieve equal exposure to each sector I choose to invest in. Taking a neutral view, the financial shares will eventually recover and I will receive dividends again. These dividends will aid my aim of portfolio rebalancing.

BP is still being affected by the oil spill and some US politicians want the company to file Chapter 11 so that the company can compensate the victims of the disaster. I believe that BP going bust is a hawkish US politician's dream because of the following:

even though the company's credit rating has been downgraded, it can still raise funds whenever it needs to
the company will still be very profitable after reduced investment and divestment of non-core assets
bankruptcy will lead to serious consequences in the economies where the firm has significant operations such as higher unemployment, slower economic growth and lower tax revenue [especially for the US regarding the latter], and
it still has the support of Goldman Sachs, important law firms and influential lobbyists, which will definitely, in my opinion, help it through the problems it faces such as Anadarko refusing to accept responsibility [it owns 25% of the site of the former Deepwater Horizon rig], publicity and legal costs.

I have published this article on Seeking Alpha. This is about my opinions on the article I have recently read on the This is Money website.

Note that I will only post portfolio reviews on the last Friday of each month because I want to dedicate more time to self development, conducting more research on potential investment gems and comment on various worthy articles I read.

Full disclosure: Long BP

Will US make BP pay?

noreply@blogger.com (Anonymous) — Sat, 19 Jun 2010 01:30:00 +0000

Worries over the euro debt situation have faded away a bit but this episode is not over yet. Other EU countries could have some skeletons in the cupboard. BP's Credit rating downgrades by Fitch and Standard & Poors and solvency worries have basically sent share prices down south big time initially. Then the good news regarding new UK banking reforms and BP's suspension of dividends for the rest of this financial year and set up of $20bn (£13bn) escrow fund sent the share prices back up. Also the euro worries possibly contributed to the rise. Overall, this week has been a bit exciting in terms of volatility because generally good economic news from the UK overshadowed by worse than expected news from the US.

Regarding BP, I updated my analysis on Seeking Alpha taking into account of recent events. I still believe that the company does represent a good investment in the long term though some uncertainties still exist, namely the time required to plug the leaking well and total cost.

The FTSE All-Share rose by 1.83% while my portfolio by 1.03%. The rise in the portfolio value was limited by falls in Norman Broadbent (NBB), which is the new name for GAR, and BP. My gain now stands at 0.35% (0.56% if additional holdings in NBB had not been bought). I think my eventual future gains will take a bit more time to become a reality because BP and the banks are out of favour. Therefore their share prices will eventually return to it's historical highs and it will happen again.

Full disclosure: Long BP

Investment Idea - British Petroleum (BP.)

noreply@blogger.com (Anonymous) — Sun, 13 Jun 2010 05:06:00 +0000

British Petroleum
Ticker: BP.
Sector: Oil & Gas Producers
Listing: LSE

Introduction

BP conducts the following activities; exploration, extraction and transportation of oil & gas, refines crude oil into a wide range of products, conducts sales through forecourts, supplies fuel and generates low carbon energy in the form of non-renewables and renewables. The firm has operations in more than 80 countries across six continents.

Analysis

Over the past four years the EPS have remained flat.Rising energy prices as a result of increasing demand in part supported the near constant EPS level. BP's profits have fallen by 21.41% to $16.578 billion (EPS of 88.49c) for 2009 compared to the previous year. This is due to a fall in global demand for energy as a result of the worse economic recession since the Great Depression.

The EPS growth rate has dropped dramatically. This could be due to expansion of exploration operations away from it's core geographical areas, for example, into Russia. Also fluctuating energy prices throughout the period and the financial crisis is the cause of the drop from 2007 onwards.

ROCE has been falling over the past five years. The exploration programs in new geographic areas and development of low carbon energy could be the reasons. However, the average ROCE is 26.51% so therefore the company has the potential to deliver good and probably superior returns in the long run.

Dividends have increased since 1993 with the exception of 2005. The average increase is 15.29%. This shows that the firm does have a good track record of raising the dividend year after year most of the time. Note that the dividend has increased by 8.91% from 32.39p in 2008 to 35.28p in 2009 suggesting that the management have the confidence that results would improve in the 2010 financial year. This with the chairman's statement in the 2009 annual does have an overall optimistic tone implying that the company will do well in the current financial year. However, I must take into account of the likely effects of the Gulf of Mexico oil spill on the company's near future profits. This includes but not limited to legal, clean-up and compensation costs. It's reputation will be damaged in the short term but the extent is very hard to measure. Only time will tell.

Financial ratios as at the close of 11/6/2010 (1):

Note that for P/CF, only positive values are used to calculate the sector average.

The financial ratios of all companies in the same sector as at the close of 11/6/2010 (1):

Using the contrarian strategy, the stock satisfies most of the criteria. This is because:

The P/E, P/BV and P/CF are below sector average and within the two lowest quintiles.
The dividend yield is above sector average and within the two highest quintiles.
Dividend cover of 1.58 is below the desirable limit but above the mandatory limit. This implies that dividends could be cut or in the worse case scenario be suspended into the clean-up is complete.
The current ratio 0.72 is below the mandatory amount so it may be unable to repay all short term liabilities if they all become due simultaneously.
With P/S of 0.45, it is below sector average and very cheap compared to it's peers. With a prospective PEG of 0.32 it is very good enough for a large cap. ROCE of 17.36%,the firm does have competitive advantage over it's peers (comparing against those with positive ROCE). Net gearing of 32.28% is not too high and the firm's strong cash flow should mean it can pay off it's liabilities all in one go without major problems.
EPS growth of -21.41% is below that of FTSE100, which is about 5.1%.
Future earnings growth forecasts do lean on the very conservative side and are unlikely to go down. Taking into account of the current situation, future growth will be revised downwards by analysts. Therefore, future EPS growth might be quite low for the current financial year. Note that the images below are taken from Digital Look for comparison purposes.

Conclusion

This stock is a very good buy the long term. In the very short term, it may be a little bumpy ride if the US state gets it's own way.

Note

I will not be responsible for any losses incurred by investors through investing in this stock. Investing in the stock market may result in not getting their initial amount back.

Full disclosure: Long BP.

Source:

Digital Look retrieved 11/6/2010.

Few want to friends with BP

noreply@blogger.com (Anonymous) — Sat, 12 Jun 2010 03:55:00 +0000

Listed on the London Stock Exchange:

BP 391.90p +15.60p (+4.14%) - since purchase on 10/6/2010

BARC 290.85p +2.25p (+0.78%)

CAU 46.25p -1.75p (-3.65%)

CRWN 30.50p 0.00p (0.00%)

FPER 5.50p +0.12p (+2.23%)

FCCN 42.00p 0.00p (0.00%)

FOGL 201.50p +0.65p (+0.32%) - since purchase on 11/6/2010

GAR 3.38p 0.00p (0.00%)

JKX 240.40p +8.40p (+3.62%)

LLOY 54.33p -1.11p (-2.00%)

LLPE 59.75p 0.00p (0.00%)

MAI 153.50p -2.50p (-1.60%)

QQ. 119.80p -8.20p (-6.41%)

RBS 42.37p -1.12p (-2.58%)

UNG 2.88p +0.13p (+4.55%)

Listed on New York Stock Exchange:

C $3.88 +$0.09 (+2.37%)

The euro debt crisis never seems to go away for now since Hungary may be the next Greece. That, fears over levy on banks and BP's continuing problems sent the markets down earlier this week. Then it began to rise again due to mainly strong metal export data from China. Worse than expected US job and retail sales data interrupted the rise towards the end of the week a little bit but it was not enough to reverse the direction. Overall FTSE All-Share finished the week 0.78% up while my portfolio finished 0.68%, due to concerns of LLOY and RBS exposure to the euro debt crisis. The portfolio loss is now 3% (3.1% if BP (BP.) and Falkland Oil & Gas (FOGL) not included).

On Wednesday rumours of BP's problems regarding the oil spill resulting the company going insolvent sent it's share price down 16% to 348p before recovering most of the loss on the same day. It seems that particular noisy information have caused this massive overreaction as traders and investors sold their stakes in huge numbers. I went in the opposite direction, that is, I bought some shares in the company near it's two year low. At that point I realised that the stock may be a contrarian one since it's share price fell massively from around almost 660p. This is the preliminary analysis I have done so far on the stock as at the close of 11/6/2010:

The stock is within the lowest two quintiles for P/E, P/BV and P/CF. It is within the highest two quintiles for dividend yield. I will provide the full analysis about week from now.

I also bought shares in FOGL because there is a good probability of the firm, along with Rockhopper Exploration (RKH), finding economically viable oil north of the Falkland Islands based on very sound preliminary drilling test results.

Investment Idea - Qinetiq Group (QQ.)

noreply@blogger.com (Anonymous) — Fri, 11 Jun 2010 02:09:00 +0000

Qinetiq Group

Ticker: QQ.

Sector: Aerospace & Defence

Listing: LSE

Introduction

Qinetiq Group produces equipment for defence organisations, security agencies and intelligence services. Each product is designed to provides solutions to their clients' problems. It is also capable to produce a wide variety of equipment ranging from asset tracking to unmanned aerial vehicles. It has established presence in the UK, US, Europe and Australia.

Analysis

The firm has made a pre-tax loss of £66.1 million and loss after tax of £63.3 million for the 2010 financial year ending 31/03/2010. This is because the US and UK governments delayed orders for new equipment due to their huge budget deficits resulting from the financial crisis. Once divestment, disposal, impairment, reorganisation and amortisation costs from acquisitions are added to the loss after tax, the profit after tax is £72.8 million. However, the P/E is calculated using EPS of -9.3p (using loss of £63.3 million) is -13.25. P/E after the latter items added is 11.1. However, the EPS has gone up over the past four years before that latest results.

The cases are the same for dividend per share and dividend yield respectively.

Overall turnover has increased by 4.5% compared to the previous year with Mission Solutions and Systems Engineering contributing to the increase. The turnover from these businesses increased by 22.5% and 11.8% respectively with Technology Solutions QNA suffering a decrease of 25.7%. Funded orders have gone up overall by 3% which is contributed by Mission Solutions. This business had funded orders increase by 15.3% while the latter two decreased by 6.2% and 2.6% respectively. Net debt went down by 15% due to strong cash flow from its businesses and the weakening pound (since most of the debt is in US dollars).

There has been a change of management with the new chairman and CEO with effect on 1/3/2010 and 16/11/2009 respectively. Two new non-executive independent directors joined the board on 10/4/2010 with one stepped down on 4/8/2009.

A review, which is taken from (1), of the whole firm had taken place by the new CEO which has led to the following conclusions:

QinetiQ's rapid acquisition-based growth and its efforts to find applications for its intellectual property in new industrial markets have not created value for investors to date. The decision to enter the US market was sound, but returns as yet have been lower than expected and the Group's balance sheet has become over-stretched. Internally, the organisation has become fragmented and overly complex and its processes weak. Insufficient strategic focus and transparency have led to a high level of cost and loss-making activity. These issues, combined with external market conditions - which are likely to remain difficult while the UK and US Governments develop policies to address their spending and deficit challenges - have caused the Group's performance over recent years to fall below its potential
QinetiQ predominantly comprises service businesses, positioned to advise and support customers to achieve efficiency and effectiveness in their national markets. These businesses are based on - and continue to refresh - the deep domain and technical expertise of QinetiQ's people in the aerospace, defence and security sectors, and are capable of providing relatively stable and predictable income streams
The Group also possesses a smaller proportion of product businesses with differentiated technology offerings which have been developed in-house. These activities are capable of global application, but necessarily have a less predictable pattern of revenue generation and have been managed with insufficient commercialisation or sharing of intellectual property between the UK and US businesses.

In order to strengthen its foundations and build a future path to sustainable and profitable growth, QinetiQ must now:

Set a clear direction which reduces the span of focus and matches both customer needs and core QinetiQ strength
Simplify and align structure with this direction, removing unnecessary layers
Increase transparency and control through all levels
Upgrade leadership to ensure a commercial, value-oriented mindset
Create a strong performance culture of both accountability and empowerment in its people
Establish a lower level of cost base to enable future competitiveness
Ensure a more unified approach Group-wide to exploit key opportunities
Drive for cash generation to strengthen the Group's balance sheet

The firms goals, taken from (1), are:

Moving to a new structure comprising 3 divisions: US Services, UK Services and Global Products, to ensure efficient leverage of expertise, technology, customer relationships and business development skills
Introducing standardised management reporting and regular reviews of key business drivers such as talent, innovation, cost reduction and portfolio focus
Assessing the top leaders Group-wide, setting targets for performance and behaviours which reflect Group objectives for profit and cash, and providing appropriate incentives
Installing a Group-wide performance management system and increasing communication and engagement with employees to maximise their contribution, underpinned by a tracked and measured productivity programme
Rigorously examining business processes, key supplier contracts and, in the UK, legacy employee terms and conditions, to remove structural cost from the business to ensure competitiveness and enable investment in key opportunities
Introducing a unified QinetiQ approach which leverages existing assets to capitalise on global opportunities [this refers to imposing a unified corporate culture across the firm]
Eliminating loss-making activities and driving cash generation, including tight measurement of working capital, to reduce the gearing ratio to a target of below 2x+
Suspending payment of dividends on QinetiQ's Ordinary Shares for 12 months, with the intention of paying a final dividend with respect to the financial year ending 31 March 2011.

This indicates that the new members of the management have a clear direction they want the company to take. This in turn will lead to the firm producing good returns and value for it's shareholders in the long term.

Financial ratios as at the close of 7/6/2010 (2):

The financial ratios of all companies in the same sector as at the close of 7/6/2010 (2):

Using the contrarian strategy, the stock satisfies most of the criteria. In this case I will use P/BV as the core ratio. This is because:

The P/BV and P/CF are below sector average and within the two lowest quintiles. The only exception is P/E since the firm has made a loss.
Unfortunately, the dividend yield is below sector average since the firm has decided to suspend dividend payment for one year. However, it intends to pay a final dividend at the end of the current financial year.
Dividend cover of 7.03 is greater than the desirable limit therefore the firm can sustain and increase above average yields once dividend payments resume.
The current ratio 1.36 is above the minimum amount although it is not desirable.
With P/S of 0.5, it is below sector average and very cheap compared to it's peers. With a prospective PEG of 0.8 it is good enough for a firm with market capitalisation greater than £300m even though it is above desirable limit of 0.66.
Obviously the EPS growth is below that of FTSE100, which is about 5.1%.
Future earnings growth forecasts do lean on the very conservative side and are unlikely to go down. Note that the images below are taken from Digital Look for comparison purposes.

Conclusion

This stock is a good buying the long term provided that the new members of the management perform better than expected

Note

I will not be responsible for any losses incurred by investors through investing in this stock. Investing in the stock market may result in not getting their initial amount back.

Full disclosure: Long QQ.

Source:

London Stock Exchange - Qinetiq Group plc Preliminary Results for year ended 31 March 2010 retrieved on 11/6/2010.
Digital Look retrieved 7/6/2010.

Things are a bit volatile out there

noreply@blogger.com (Anonymous) — Sat, 05 Jun 2010 01:21:00 +0000

Listed on the London Stock Exchange:

BARC 288.60p -16.50p (-5.41%)
CAU 48.00p +0.50p (+1.05%)
CRWN 30.50p 0.00p (0.00%)
FPER 5.38p +0.13p (+2.48%)
FCCN 42.00p -4.00p (-8.70%)
GAR 3.38p 0.00p (0.00%)
JKX 232.00p -2.30p (-0.98%)
LLOY 55.44p -1.18p (-2.08%)
LLPE 59.75p -0.25p (-0.43%)
MAI 156.00p -1.00p (-0.64%)
QQ. 128.00p -1.50p (-1.16%)
RBS 43.49p -3.24p (-6.93%)
UNG 2.75p +0.13p (+4.76%)

Listed on New York Stock Exchange:

C $3.79 -$0.17 (-4.29%)

This week's big things have the markets sent the markets up and down. First, BP's continuing problems regarding the oil spillage in the Gulf of Mexico after the top kill method fails to plug the leak. Second, Prudential's bid for AIG's Asian business fails after the US State refuses to lower the price. The revolt from it's shareholders is due to the price being too high in the current economic climate. The firm will have to pay massive fees to the advisers and a break fee to AIG leading to concerns to it's future. Thirdly, generally good company news from the US stock markets sent the UK markets up. Lastly, worse than expected US job figures have caused a classic overreaction through sell off of stocks. Lets hope for the best which it will come.

Can the UK withstand the assault on the pound?

noreply@blogger.com (Anonymous) — Tue, 01 Jun 2010 19:37:00 +0000

I read this interesting post regarding speculative attack on the Australian dollar on the Contrarian Investors Journal. I am just wondering if the pound sterling today can take similar punishment. As of at the end of April 2010, the UK has US$71,132 million of foreign reserves (1). The exchange rate of the pound to other currencies is a floating one, unlike before Black Wednesday when the pound is pegged to the Deutsch Mark. Before I discuss in a little bit more detail about the attack on the pound, I want to go through the following points:

The UK imports more than it exports so it is a current account deficit country. (2)
Personal debt stands at £1,460 billion, which is higher than the country's GDP. (3)
Public sector debt is at £893.4 billion (as of April 2010). That is 62.1% of the GDP.(4)
UK's GDP is £1,438.6 billion (using April 2010 figures). (5)

If the speculators collectively decide to attack the pound, what are the likely steps?

They borrow ten times the amount of the shorting position.
They short the stock market.Then they will short the pound.
In order to make it depreciate they will have to short the amount greater than the foreign reserves the UK has.

If the attack happens, the Bank of England might let the pound depreciate up to a certain extent, for example, on par with the euro. After that they will use their foreign reserves to buy the currency to support it.

What if the attack on the pound is too strong? The next move the Bank might take is to raise interest rates in order to make shorting expensive as possible for the attackers. Then the pain really starts in the UK economy. The following occurs in the likely order:

Stock markets will fall.Real estate markets will suffer even more. Note that real estate prices started to fall when the Financial Crisis started in 2007.
GDP will fall as the rest of the economy suffers as more businesses go bust so unemployment rises and the number of defaults goes up. Stagflation [combination of the two bad apples of stagnation and inflation] will occur.
Risk of the UK losing its AAA status, resulting in higher interest rates for loans. That will delay the recovery even further.

Then the attackers will make profits through shorting gold and, as the only lenders in the pound, lending to those who need to borrow.

What if the Bank manages to defeat the attackers? Well, the latter will suffer huge losses on the foreign exchange but they will still make huge profits in the lending market.

Either way, the UK economy will suffer as a result of the attack on the pound. However, the extent of the suffering depends on the actions and psychology of the market participants and the effectiveness of the Bank's and the FSA's actions to stabilise the pound and the markets respectively. I believe that the pound is less vulnerable to speculative attack compared to Black Wednesday when the UK was forced to withdraw from the Exchange Rate Mechanism when George Soros attacked the pound in a spectacular way by shorting it massively.

Source:

Bank of England UK International Reserves and Foreign Currency Liquidity Template retrieved on 1/6/2010.
The Economist (2010), Vol. 395, No. 8684, p.102.
Credit Action retrieved on 106/2010.
Office of National Statistics retrieved on 1/6/2010.
Office of National Statistics retrieved on 1/6/2010. Note that the GDP is obtained by dividing the public sector debt by the percentage of the GDP, that is, £893.4bn/0.621 = £1438.6bn.

Note: The picture is from OnlineForex.net.

China reassures the markets

noreply@blogger.com (Anonymous) — Fri, 28 May 2010 23:53:00 +0000

Listed on the London Stock Exchange:

BARC 305.10p +6.20p (+2.07%)

CAU 47.50p -0.25p (-0.52%)

CRWN 30.50p 0.00p (0.00%)

FPER 5.25p +0.25p (+5.00%)

FCCN 46.00p +0.50p (+1.10%)

GAR 3.38p +1.63p (+92.86%)

JKX 234.30p -5.60p (-2.33%)

LLOY 56.62p +0.82p (+1.47%)

LLPE 60.00p -0.75p (-1.23%)

MAI 157.00p +9.00p (+6.08%)

QQ. 129.50p +12.30p (+10.49%)

RBS 46.73p +1.48p (+3.27%)

UNG 2.62p -0.13p (-4.55%)

Listed on New York Stock Exchange:

C $3.96 +$0.21 (+5.60%)

China reassures the markets that they are not selling eurozone debt indicating that they have confidence in the eurozone economy. This sent the markets in an overoptimistic mood so the FTSE All-Share went up by 2.38% this week. My portfolio went up by 2.77% this week, narrowly beating the market, and my gain is now about 0.5%.

GAR, a recruitment consultancy for management roles, went up massively because two private equity gurus Jon Moulton and Pierce Casey decided to invest £2 million into the company. One of it's directors, Jeremy Daniels, agreed to invest a further £35,000 into the firm. The price of Norman Broadbent has been renegotiated from £5.5 million to £2.03 million because one of it's subsidiaries, BNB, went into voluntary liquidation because trading during 2009 was much worse than expected. They are due to report a loss of £3.5 million for 2009 due to adverse trading conditions relating to the brutal recession. I might invest a bit more money into this firm since the 30 existing shares will be consolidated into one new share [so that the amount invested before and after stays the same], trading conditions will definitely get better when the economic conditions improve and it is a contrarian stock in terms of P/E, PBV and P/CF as of 24/5/2010. However, the company is still heavily geared. Also, with new faces of good calibre, the firm will eventually make good profits in the future.

QQ., a defence company, made a pre-tax loss of £66.1 million due to a delay in orders. Therefore their after tax earnings went down by 30%. Dividends are suspended for a year. However, over the past four years before the latest result, profits and dividends have gone up at a generally increasing rate. Dividend yield has gone up a increasing rate as well. I will definitely invest more in the near future though I cannot say exactly when. I will have to do another detailed analysis on the company in the near future. The analysis will be available at around a few weeks from now at the very latest.

The markets will eventually rebound in the near future.

Notes: Ratio values as of 24/5/2010 for GAR and the company's sector respectively. Note that two outliers were excluded when the average P/E for the sector was calculated.

The Germans overreact

noreply@blogger.com (Anonymous) — Fri, 21 May 2010 23:23:00 +0000

Listed on London Stock Exchange:

BARC 298.90p -10.00p (-3.24%)

CAU 42.75p -2.00p (-4.02%)

CRWN 30.50p 0.00p (0.00%)

FPER 5.00p -0.13p (-2.53%)

FCCN 45.50p +4.75p (+9.64%)

GAR 1.75p 0.00p (0.00%)

JKX 239.90p -6.60p (-2.68%)

LLOY 55.80p -1.88p (-3.26%)

LLPE 60.75p +0.75p (+1.25%)

MAI 148.00p -10.50p (-6.62%)

QQ. 117.2p -7.70p (-6.16%)

RBS 45.25p -2.01p (-4.25%)

UNG 2.75p 0.00p (0.00%)

Listed on New York Stock Exchange:

C $3.75 -$0.23 (-5.78%)

The German government banned naked short selling [which is short selling but involves not even asking the holder before shorting] on eurozone sovereign bonds, credit default swaps and shares in the top ten German financial institutions. The institutions are Allianz SE, Deutsche Bank AG, Commerzbank AG, Deutsche Boerse AG, Deutsche Postbank AG, Muenchener Rueckversicherungs AG, Hannover Rueckversicherungs AG, Generali Deutschland Holding AG, MLP AG and Aareal Bank AG. This, fears over China's economy overheating and US financial reform scared the investors so much that they overreacted and sold their holdings in massive numbers causing the markets to fall by 4.08% (using FTSE All-Share index values) this week. The ban was intended to stabilise the markets and preserve confidence in the euro. My positions were affected badly that the portfolio gain from last week have reversed into loss of about 2.19%. Even JKX, which has strong fundamentals, LLOY and RBS, which have minimal exposure the to Greek debt, did not withstand the selling pressure from traders and investors blinded by panic and short term views. In my opinion, the EU must save the euro at all costs otherwise it will be politically embarrassing to the founders of the single currency. They may pump more funds into the eurozone economy and find more ways to provide stability to the markets, even if the actions are draconian.

Finally I want to make a good point. Critics might say that I should have took profits in mid April and known that the markets would get this ugly. To be honest, predicting the general direction the markets go are hard enough in the short term. It is a bit easier in the long term. To predict the exact severity of the direction is just asking for trouble in terms of losing money. It is easy for them to look back and say I should have took profits before the markets fell once they knew the full facts. The point is that relying on precise predictions regarding the severity of events will lead to trouble. Going very slightly off the point, relying on analysts' forecasts so much will lead to the same thing.

What goes up must come down

noreply@blogger.com (Anonymous) — Sat, 15 May 2010 00:31:00 +0000

Listed on London Stock Exchange:

BARC 308.90p +25.20p (+8.88%)

CAU 49.75p +1.50p (+3.11%)

CRWN 30.50p +0.50p (+1.67%)

FPER 5.13p +0.13p (+2.60%)

FCCN 41.50p +3.75p (+9.93%)

GAR 1.75p 0.00p (0.00%)

JKX 246.50p +15.70p (+6.80%)

LLOY 57.68p +4.15p (+7.75%)

LLPE 60.00p -0.50p (-0.83%)

MAI 158.50p 0.00p (0.00%)

QQ. 124.90p +4.90p (+4.08%)

RBS 47.26p +1.76p (+3.87%)

UNG 2.75p -0.25p (-8.33%)

Listed on New York Stock Exchange:

C $3.98 -$0.02 (-0.50%)

The markets went up due to euro guarantee plan and went down again as there are concerns that the austerity measures announced by a number of euro countries may affect economic recovery in the eurozone. UK bank stocks, including the ones I have shares in, are affected quite badly due to an inquiry by the Competition Commission regarding whether retail and investment banking parts should be split up. US banks, including Citigroup, are affected by financial reform bill proposals regarding the ban of banks from proprietary trading. At least my portfolio value went up since the good news outweighed the bad. My portfolio gain now stands at about 1.75%. I think the markets may be volatile for a little bit longer. It is going to be a fun ride going up and down. I am going to stay put and plan future purchases to further diversify my portfolio.

In my opinion, history may repeat itself over again. The last time this sort of economic crisis happened was the Great Depression which followed from the 1929 crash. The second Glass-Steagall Act (more formally The Banking Act of 1933) passed to separate retail and investment banking, prevented retail banks from performing investment banking functions. This ensured that depositors funds cannot be used for speculative purposes such as trading for the bank's own account and underwriting securities the issuer has trouble selling to existing shareholders. The Act, along with other measures such as New Deal and Federal Deposit Insurance Corporation, has aided economic recovery in the US. However, other countries did not implement similar laws and their economies recovered roughly at the same time as the US. I believe that limiting the risk the bank takes on and not using depositors' funds for risky activities may be more effective than separation of retail and investment banking parts. Combining investment banking and retail banking is not a bad concept in general. What makes it bad is the people who run them badly. Greed is part of human nature and until more appropriate measures are in place, crises of epic proportions such as this will ultimately happen again.

Is Citigroup big hit or big flop?

noreply@blogger.com (Anonymous) — Fri, 14 May 2010 03:22:00 +0000

Citigroup Inc.

Ticker: C

Sector: Banks

Listing: NYSE

Introduction

Citigroup is a universal bank which is operating in more than 140 countries across five continents. The bank is split into two major groups; Citicorp and Citi Holdings. The former comprises the following businesses that form the core to their strategy of being the global bank that provides excellent services; investment banking, private equity, research and analysis, sales and trading, institutional asset management, retail and business banking. The latter comprises the following that the bank will dispose when market conditions improve; brokerage, asset management and loans, which represent higher risk of default. Special Asset Pool, also part of the latter group, consists of assets and loans that are likely to be written off due to their very high risk nature.

Analysis

The bank is currently restructuring itself due to the 2007 credit crisis which eventually turned into a global banking crisis of 2008 that resulted in the worse global recession since the Great Depression. Initially, it was too diversified trying to be the jack of all trades and master of almost none. It was basically comprised of basically separate companies in all but name. The bank got into huge trouble during the crisis and asked the US government for bailout in the form of equity stake and TARP (Troubled Asset Relief Program). The bank made a loss in 2009 due to the assets that have been written off in Citi Holdings. Securities and Banking and Transactional Services divisions have managed to increase profits quite significantly compared to 2008. This is because of the following; firstly, consolidations took within industries in general since some competitors got into trouble during the crisis. Secondly, many companies needed to raise capital via the markets. Thirdly, firms and governments needed to borrow funds from investors to shore up their finances. Profits from the Regional Consumer Banking fell compared to the same period. This is because consumers did not borrow as much before the crisis so they chose to save, some businesses went under and others could not get the required loans.

This goals for the 2010 financial year are:

Preserve high levels of capital, liquidity and reserves
Mitigating credit costs
Improve profitability and efficiency of operating businesses of Citicorp operating from their strong performances in 2009
Reduce assets in Citi Holdings even further.
Invest strategically in innovation and the Citicorp businesses that aid Citi’s future earnings potential
Improve on their already leading global position, especially in emerging markets.
Maintaining and expanding their role as a constructive organisation globally, influencing public policy debates and meeting economic and social goals. [I believe that this is important because they need to regain public trust in banks since the media in general and many politicians gave them a bad name and turned the majority of people against them.]

The Executive Management's statement, from the latest annual report, is quite optimistic. However, the bank does state that there are some uncertainties in terms of new legislation and macroeconomic outlook.

In the first quarter, the bank had a much better time. Overall, they made a good profit, which the Securities and Banking division have done extremely well. Losses from defaults have gone down and the balance sheet has been strengthened further. The bank has exited from TARP and the US state is going to sell it's stakes in an economically rational manner, because the government knows the bank can stand survive on it's own. The management is very optimistic in the long term. However, there is a tone of uncertainty in the short term due to the uncertain macroeconomic factors.

Financial ratios as at the close of 6/5/2010:

The financial ratios of other companies in the same sector can be viewed here. (1)

Using the contrarian strategy, the stock does only satisfies some of the criteria. However, I am prepared to use P/BV as the core ratio in this case. This is because:

Only P/BV is below sector average, making it cheaper compared to it's peers. The stock does not qualify in terms of other contrarian ratios. As mentioned earlier, the bank made a small loss due to the worst crisis in recent history. Also P/CF is negative.
Dividend yield is way below sector average.
With a whopping dividend cover of -76, the bank cannot afford to greatly increase and sustain it in the short term.
Current ratio does not apply to banks in general so that is why I did not include it. More importantly, the total assets has to be greater than total liabilities which is true in this case.
The P/S ratio is below sector average, making it cheap compared to it's peers.
The bank's earnings are below that of S&P 500, which is $50.97 (2) for the latter. Earnings are not likely to plummet in the near future since the bank has made a profit in the first quarter.

Conclusion

Based on all of the information I have researched, I believe that the stock is a good buy in the long term, based on the P/BV and P/S ratios and it will earn a good profit this financial year. This is because the bank will make a spectacular come back and dividends will be possibly paid in near future.

Note

I will not be responsible for any losses incurred by investors through investing in this stock. Investing in the stock market may result in not getting their initial amount back.

Source:

ADVFN retrieved on 6/5/2010.
Standard & Poors retrieved on 14/5/2010.

Up and away as EU agrees plan

noreply@blogger.com (Anonymous) — Tue, 11 May 2010 02:41:00 +0000

Things have got better for now. EU has finally agreed a €750 guarantee plan, to stop the Greek crisis spread to the weaker euro economies, which calmed the markets for now. All of the bank stocks I own have shot up massively, swinging my portfolio from a small loss of about 2.7% to a profit of approximately 7.2%. Others have gone up as well contributing to the rise in the portfolio value.

In the short term, the market has been oversold (see graph) so it may rise a little bit for now. However, due to the uncertainty of who may be in power in Westminster the markets may be a bit volatile in the very short term.

In the longer term, the market may fall a bit before it stabilises since it has been overbought for the past month from March to April (see graph). Looking at the long term, say five year span, the trend will definitely be up but it may be a long a bumpy road ahead. To come out as a winner, you have to pick the right stocks using the strategies I have mentioned earlier in the blog.

Relevant articles of interest:

Contrarian Investment Strategy

Value Investing

The Zulu Principle

Hung parliament - Uncertain future?

noreply@blogger.com (Anonymous) — Fri, 07 May 2010 23:24:00 +0000

Listed on the London Stock Exchange:

BARC 283.70p -54.55p (-16.13%)

CAU 48.25p 2.25p (-4.46%)

CRWN 30.00p 0.00p (0.00%)

FPER 5.00p 0.00p (0.00%)

FCCN 37.75p -1.25p (-3.21%)

GAR 1.75p 0.00p (0.00%)

ICA 89.5% 0.00p (0.00%)

JKX 230.80p -31.20p (-11.91%)

LLOY 53.53p -12.60p (-19.05%)

LLPE 60.50p -0.25p (-0.41%)

MAI 158.50p +0.50p (+0.32%)

QQ. 120.00p -7.50p (-5.88%)

RBS 45.50p -8.85p (-16.28%)

UNG 3.00p 0.25p (-7.69%)

Listed on the New York Stock Exchange:

C $4.00 -$0.16 (-3.85%) - since purchase on 5/5/2010

In turbulent times like these, I am glad that I take the long term view when investing in the stock market. Maybe I should master the short term strategies so that I can hedge my portfolio against bad events so that I can increase my overall gains. To do this I need to learn technical analysis and have the appropriate tools.

Goldman Sachs is hit by another bad event, which the shareholders filed lawsuits for negligence. They are not having a good time at the moment due to the SEC accusations of fraud in the market place and the last thing they need is this. Icelandic eruption disrupts flights in Ireland and Scotland affected some airlines. UK gets a hung parliament which made investors nervous. These and other less important events have been overshadowed by the Greek debt crisis. The financial markets are still reacting badly to the Greek debt crisis because it may spread to other weaker EU economies; Spain, Portugal, Ireland and possibly the UK. The EU has broken all of its rules to shore up the euro.

Things have got very ugly in one week since I posted my last post. The Greek crisis and hung parliament in the UK sent the FTSE100 went down by almost 8% this week. My portfolio gains have been virtually wiped out for now. My portfolio loss is about -2.7% (-2.3% excluding C). I think the investors are seriously overreacting to whole situation. Even the good first quarters for LLOY and RBS cannot halt the decline. The EU are likely to rescue the euro for political reasons and the hung parliament is just a blip for the London markets if the Tories and Lib Dems form a government. I believe that the Conservative-Lib Dem coalition is more beneficial to the UK economy hence my portfolio may benefit from this. I have bought C based on my own analysis, which I will post at the latest by next Friday. I think the banks may fall a bit further before it get better due to the Greek crisis. No good news may halt the decline. I wonder what the next trading week brings in store for me.

Greek debt worries part III - Bail out!

noreply@blogger.com (Anonymous) — Mon, 03 May 2010 05:10:00 +0000

Greece has finally been bailed out by the EU and the IMF. They will provide €110bn to shore up the ailing economy in return for €30bn worth of austerity cuts and tax rises over three years. The EU will provide the majority of the funds, €80bn, and the IMF will come up with the remainder. The move is unpopular in Germany because it will have to provide most of the funds, since the economy is the strongest in the euro zone. The markets should clam down a bit when they open on Tuesday. If the EU stopped messing out long ago then the markets may have never spooked in the first place. Oh well, these things will always happen again and again. The UK may head that way if they keep on dithering.

The US stated that BP would have to cover the costs of the oil spill which started to occur last week when the oil rig collapsed during the fire. The latter said that they are doing everything they can to prevent an environmental disaster in the Gulf. I think that would send the shares down even further because the potentially high cost of the event in terms of this financial year profits.

Greek debt worries part II, UK general elections and a note on Citigroup (C)

noreply@blogger.com (Anonymous) — Sat, 01 May 2010 00:35:00 +0000

BARC 338.25p 24.05p (-6.64%)

CAU 50.50p -0.00p (0.00%)

CRWN 30.00p 0.00p (0.00%)

FPER 5.00p 0.00p (0.00%)

FCCN 39.00p -2.00p (-4.88%)

GAR 1.75p 0.00p (0.00%)

ICA 89.5% 0.00p (0.00%)

JKX 262.00p -8.00p (-2.96%)

LLOY 66.13p -2.35p (-3.43%)

LLPE 60.75p +1.25p (+2.10%)

MAI 158.00p +6.00p (+3.95%)

QQ. 127.50p -6.00p (-4.49%)

RBS 54.35p -1.45p (-2.60%)

UNG 3.25p 0.00p (0.00%)

The Greek debt crisis is still having an extraordinary effect on the markets this week. Standard & Poor's downgraded Greece's sovereign debt rating to junk status because of the increased likelihood of default on their huge debt. This will make it harder the them to service their huge deficit. Spain and Portugal were next to have their ratings downgraded for similar reasons. However, their situation is much better. BARC holds about €15bn of Greek debt, which probably explains the reason that it's shares went down quite a distance more than other banks. The other reasons are that the first quarter profits from BarCap is less than analysts expected and the it is less impressive than it's peers. LLOY and RBS had hardly any exposure to the debt, which is a good thing. The UK banks' exposure is nothing compared to France and Germany's exposure. If Greece does default then it would be a disaster to the eurozone economies in general, which may make the markets nervous wordwide. However, this presents a good buying opportunity for the contrarian investor [like other crises in general] if one know what companies to look for. The eurozone members would have to bail the Greeks out for economic and political reasons, with the latter more important.

Will the UK get a hung parliament? Who knows? I believe that the Tories have a massive advantage over Labour and the Lib Dems for a number of reasons, such as their experience in tackling the last recession in the 80's and the tendency of voters to pick them as their first choice over the Lib Dems in many constituencies [even though they are not the first choice in terms of voter number nationwide - this is why the latter want the election rules changed]. More importantly, if the next government cannot get the reforms through in order to reduce the budget deficit then the UK may be in big trouble. They may have their sovereign debt rating downgraded causing a potential panic in the markets. They may even end up in the same league as the Ireland, Portugal and Spain.

I notice that Citigroup (C) has done well in the first quarter and many sources such as this say it is a good time to buy the stock. While I personally have no problem with that in general, I want to provide a more detailed research whether the stock is really a good buy or not. While it is not a true contrarian stock at the moment, except in P/BV terms, it may be a good buy in many respects. Looking at the general good first quarter profits the banks enjoyed so far, I know the reasons that investors want to buy into Citigroup. My portfolio gain is now about 15% now and this may get worse before it gets better. I better sit tight and don't panic like sheep.

IMF tax and Greek debt worries

noreply@blogger.com (Anonymous) — Sat, 24 Apr 2010 03:20:00 +0000

BARC 362.30p -11.05p (-2.96%)

CAU 50.50p -0.75p (-1.46%)

CRWN 30.00p 0.00p (0.00%)

FPER 5.00p 0.00p (0.00%)

FCCN 41.00p +3.78p (-3.53%)

GAR 1.75p +0.38p (+27.27%)

ICA 89.5% 0.00p (0.00%)

JKX 270.00p 0.00p (0.00%) - change since purchase on 23/4/2010

LLOY 68.48p +3.78p (+5.84%)

LLPE 59.50p +0.25p (+0.42%)

MAI 152.00p 0.00p (0.00%)

QQ. 133.50p -2.00p (-1.48%)

RBS 55.80p +7.50p (+15.53%)

UNG 3.25p 0.00p (0.00%)

The markets have experienced shockwaves this week - twice. Firstly, the IMF plans to impose a tax on the financial services industry did not go down well. Industry gurus note that this will damage the industry through lower profits and potentially higher costs passed on to the consumer. Since remuneration may be taxed, the quality of talent may fall. This is because persons of outstanding calibre may have no motivation to work for a sector which the pay does not match their attributes and talent. Secondly, Greece's budget deficit got worse by 1% the of 13.6% of GDP. This made the markets nervous until the Greek government asked the EU and the IMF to trigger the rescue package to help the country to tackle the deficit. Other important news is that the UK economic growth slowed to 0.2% in the first quarter.

However, my portfolio has generally performed well despite the turbulence. RBS done well due to rating upgrade from BarCap, rasing it target price from 35p to 70p. LLOY moved in sympathy. Gains for RBS and LLOY are now a massive 76.2% and modest 21.7% respectively. I bought JKX because it is a contrarian stock and it has excellent prospects. My portfolio gain is now about 17.7%.

Investment Idea - JKX Oil & Gas (JKX)

noreply@blogger.com (Anonymous) — Sat, 24 Apr 2010 00:55:00 +0000

JKX Oil & Gas

Ticker: JKX

Sector: Oil & gas producers

Listing: LSE

Introduction

JKX Oil & Gas produces oil and gas in Ukraine and Russia. It holds oil and gas exploration licences in Ukraine, Bulgaria, Hungary, Georgia and Slovakia (not both in all of them).

Analysis

Production has increased slightly in 2009 and the firm has sizeable reserves in Ukraine and Russia as indicated in the preliminary results. Production facilities in Ukraine have been enhanced and the existing production facility is being overhauled, which will enable them to transport gas within Russia to other markets. The gas drilling test results in Russia and Bulgaria are promising and further tests are conducted to find whether the deposits are economically viable or not. Initial tests are still being conducted in Slovakia to find any potentially economically viable oil and gas deposits. In Georgia, the firm's partner Anadarko Petroleum Corporation discontinued exploration of oil and gas deposits after failing to find additional partners. Negotiations are taking place between the firm and the Georgian authorities to find an agreement on the exploration programme which would be financially attractive to both parties. After successful tests in Hungary, gas production has initiated. Further oil and gas exploration tests are being conducted after promising results at other deposits in the country. This upcoming financial year's objectives are:

Increase oil and gas production significantly.
Completely overhaul the existing gas production facility in Russia and restart production by Q4 2010.
Enhance and develop the exploration portfolio in Eastern Europe.
Conduct additional exploration tests
Develop the Rudenkovskoye field.
Build a LPG facility in Ukraine.
Double gas reserves and production in Hungary.

The Chairman's and CEO's statements are optimistic suggesting that the above objectives will be achieved in during this financial year.

From looking at the latest results, I believe that the company can realise the full potential of it's assets in Ukraine,, Russia and Hungary. This could contribute in future earnings growth in the short to medium term. If the exploration tests in Bulgaria, Georgia and Slovakia are promising then these deposits may help the firm to diversify it production base in case of very unlikely political and economic problems that could emerge in some countries which it operates. This may also contribute to earning growth in the long term.

Financial ratios as of at the close of 22/4/2010:

All companies in the oil & gas producers sector:

Using the contrarian strategy, this stock fits in all of the criteria except the lowest two quintiles for P/BV and P/CF and dividend yield, which is below average. However, I am flexible since I use P/E as the core ratio. This is because:

The stock's P/E, P/BV and P/CF are below sector averages making them cheaper than it's peers.
Although the dividend yield is a little below average compared to it's peers, it has increased in the last four out of five years except for 2008, due to the worst recession in living memory. However, there number of companies which pay out dividends on LSE are very small.
With a dividend cover of 6.71, the company can definitely sustain and increase the dividend yield for a considerable future.
With a respectable current ratio of 2.39, it can still keep going after paying off all debts due within a year. The company is in good financial health.
Other ratios mentioned earlier are favourable, especially P/S below the sector average and the company is still growing, indicated by it's PEG of 0.87 and prospective PEG of 0.74. High ROCE indicates it has competitive advantage in exploring and developing oil and gas fields in the former Soviet Union and Warsaw Pact countries. This suggests that the firm has established itself in this niche market. Low borrowings and cash reserves are large enough to sustain ongoing operations and makes it easier for the firm to achieve growth.
Earnings growth is higher than that of the FTSE100 in the past year.
Forecasts indicate that the earnings are likely to increase in the near future. It is conservative compared to it's peers.

Conclusion

Based on all of the information I have researched, I believe that the stock is a very good buy if one wants to invest in the oil and gas producer sector.

Note

I will not be responsible for any losses incurred by investors through investing in this stock. Investing in the stock market may result in not getting their initial amount back.

Full disclosure: None in JKX but intend to go long in the near future.

Not much change for FTSE and brief history of portfolio

noreply@blogger.com (Anonymous) — Sat, 17 Apr 2010 04:40:00 +0000

FTSE 100 5743.96 -27.02 (-0.47%)

FTSE All-Share 2,961.63 -11.48 (-0.39%)

Gold $1,151.50 6 +$3.50 (+0.30%)

Silver $18.35 +$0.37 (+2.06%)

Brent Crude $85.84 +$1.23 (+1.45%)

Krugerrand $1,188.00 -$12.20 (-1.02%)

Palladium $532.00 +$29.00 (+5.77%)

Platinum $1,708.00 +$1.00 (+0.06%)

BARC 373.35p +16.85p (+4.73%)

CAU 51.25p +1.25p (+2.50%)

CRWN 30.00p 0.00p (0.00%)

FPER 5.00p +0.25p (+5.26%)

FCCN 42.50p +0.50p (+1.19%)

GAR 1.38p 0.00p (0.00%)

ICA 89.50p 0.00p (0.00%)

LLOY 64.70p +0.61p (+0.95%)

LLPE 59.25p +0.50p (+0.85%)

MAI 152.00p +2.00p (+1.33%)

QQ. 135.50p +1.20p (+0.89%)

RBS 48.30p +3.60p (+8.05%)

UNG 3.25p +0.13p (+4.00%)

The banks have done well due to US banks achieving excellent profits in general and brokers raising their ratings. Performance dampened a bit due to US issued a record fine to Goldman Sachs for mis-selling complex products. Others done well probably due to good performance of the stock market as a whole and improving economic conditions. However, an upcoming general election may produce a hung parliament which could potentially delay the recovery possibly for a year or two due to huge policy differences between the main parties. I made a quite impressive capital gain on paper of about 15% on my portfolio after two years of pouring substantial amount of money in relation to valuation in early 2007.

The next potential bubble is probably in precious metals (see prices at the top). I am certainly not following the sheep on that one.

The companies I have invested in are listed on the London Stock Exchange. LLPE is the 6.475% preference share of LLOY. I first started investing when I was 18, I made some mistakes on the way. I speculated in GAR. I used CRWN, FPER and ICA to gain additional exposure to unlisted companies and other sectors respectively. I used the Contrarian Investment Strategy for CAU, FCCN and UNG. The latter two turned out a bit badly but still solvent. LLPE was given for free when LLOY bought HBOS, which the predecessor of LLPE was given when Halifax mutualised. CAU is doing quite well. Made small capital gain so far on paper. Used Zulu Principle for the first time for MAI, which is performing quite well. QQ. is not doing well at the moment but I know it will recover eventually. After a few years, I only invested a small amount of money in the stock market.

When the credit crisis of 2007-08 first started, I brought forward my investment plans and invested a small sum in BARC. This turned out to be a small mistake as the stock markets tumbled as investors were running away from it like sheep. However, I did not follow them as I do not follow the herd. Into 2008 the markets got worse so I looked at the banks because they were out of favour for a good reason - they did not know who had toxic assets. After Lehman Brothers and some other banks went bankrupt and some got nationalised, I started to drip feed in BARC, LLOY and RBS. The average purchase prices for latter two are very near their lowest points within the last 3 years. For BARC, average is around 265.00p. I relaxed the Contrarian strategy a bit in terms of financial ratios. As the UK economy got a little better, I invested more money in CAU and FCCN.

Investment Strategy #3 - Zulu Principle

noreply@blogger.com (Anonymous) — Sat, 17 Apr 2010 02:30:00 +0000

The Zulu Principle is about dedicating a disproportionate amount of effort to become an expert within a narrow subject though learning. From Slater (2008), this name is applied to the investment strategy because the Jim Slater’s wife read an Reader’s Digest article on the Zulu people and subsequently she had more knowledge than him within a few minutes. He thought that if she carried on studying on the same subject and lived in a Zulu village from a fixed period of time she would become a leading expert. The investor can be very successful by applying the same principle to the stock market. One can become an expert in blue chips, growth companies, turnarounds and/or cyclical companies.

The strategy I use is based on Slater (1998) and Slater (2008):

Buying

Mandatory:

A positive growth rate of at least 15%, 12% for large companies, in EPS in at least four of the last five years. Shorter record will suffice if there has been a sharp acceleration in EPS growth from an easily identifiable and sustainable source.
Prospective PEG less than 1 for large companies and less than 0.75 for smaller companies. Preferably PEG below 0.66.
Optimistic chairman’s statement. If usually cautious, accept a mildly positive forecast.
Strong liquidity, low borrowings and high cash flow. Ideal company is one with high net cash flow, substantial cash balances and no debt. For latter two, net gearing at most 50% and quick ratio at least 1 (preferably at least 1.5).
Strong competitive advantage. Evidence is shown in the form of high ROCE.

Highly desirable:

Something new. Necessary when earnings record is shorter than usual.
Market capitalisation up to £300m.
High relative strength. Price within 15% of its high.

Desirable:

A dividend yield. Low yield is fine as long there is growth in line with earnings.
A reasonable asset position. P/BV of around 1 or below.
Substantial management shareholding but not controlling. No substantial selling.

Selling

Only sell when the situation changes to the extent that the company no longer satisfies the above criteria and when PEG reaches 1.2. Examples of situation changes are profit warnings, pessimistic statements, loss of competitive advantage, creative accounting and so on.

Notes

Something new:

Something new is highly desirable, not mandatory.
New management, products or technology, new acquisition, new event in industry as a whole.
New management is the most effective.
New products, events and acquisitions have to be sufficient importance to firm in question to increase future earnings substantially.
Distinction should be made between gimmicky one-off products and others that are likely to be long lasting.
New events, such as collapse of a competitor - short term. New legislation - long term.
Added advantage of something new is that it provides a ready-made story for the stock. Most important when fundamentals are poor.
When reading about a new major development, I think the likely effect it may have on existing portfolio and future selections.
Something new - superb confirmation when all other criteria are satisfied.

Competitive advantage:

Competitive advantage underpins future earnings estimate and increases reliability of profit forecasts.
Forms of competitive advantage in order of invulnerability to competition: brand names, patents and copyrights, government legislation creating franchises, established position in niche market and dominance in industry.
Leading firms more likely to possess excellent brand names, patents and copyrights. Smaller firms tend to have products with this kind of potential and/or established position in niche business.
Avoid those that are too dependent upon one main supplier or customer, and firms in industry with intense competition. Also beware of products that might be easily substituted.
Dislike firms in general engineering and electrical business, textiles, building and contracting and motor industry. Prefer businesses in health and household products, food retailing and manufacture, and brewers and distillers.
A cross check on competitive advantage is profit margins. As percentage of turnover, at least 7.5% and preferably 10% to 20%.
Most reliable evidence of a firm with strong competitive advantage is ability of management to employ capital at a well above average rate of return, ROCE. 20% per year for industrials.
If identified a firm with strong business franchise, ROCE above average, earnings record first class, growth prospects reliable and shares should have high relative strength in the stock market.

I am strict regarding mandatory criteria and flexible on others.

Source:

Slater, J. (1998). Beyond the Zulu Principle: Extraordinary Profits from Growth Shares (1st ed.). London: Orion Business.

Slater, J. (2008). The Zulu Principle: Making Extraordinary Profits from Ordinary Shares (Revised 1st ed.). Petersfield, UK: Harriman House.

Investment Strategy #2 - Value Investing

noreply@blogger.com (Anonymous) — Wed, 14 Apr 2010 23:12:00 +0000

Value investing involves investing in companies that are worth less than their intrinsic value. This involves buying companies which provide a good margin of safety.

The strategy I have used during my dissertation is based on Graham, Zweig & Buffett (2003).

Buying

In general:

The size of the company must be adequate, that is, in terms in turnover which must be at least £30m ($50m).
Sufficiently strong financial condition. Current ratio must be at least equal to 2.
Continued dividends for the at least the previous 20 years.
No earnings loss for the previous 10 years.
10 year earnings per share (EPS) growth must be at least 1/3 using 3 year averages at the beginning and end of the 10 year period.
Price to book value (P/BV) must be at most 1.5.
Average price to earnings (P/E) must be at most 15 for the previous 3 years.

For defensive strategy:

As in general, the size of the company must be adequate. However, turnover which must be at least £70m ($100m) for manufacturers and at least £30m ($50m) for utilities.
Net current assets must be at least twice the amount of current liabilities (Current ratio of at least equal to 2). For manufacturers, long term debt (those due in more than 1 year) should be less than net current assets. For utilities, debt should less than twice net asset
Continued dividends for the at least the previous 20 years.
No earnings loss for the previous 10 years.
10 year earnings per share (EPS) growth must be at least 1/3 using 3 year averages at the beginning and end of the 10 year period.
Price to book value (P/BV) must be at most 1.5.
Average price to earnings (P/E) must be at most 15 for the previous 3 years.

For enterprising strategy, as in general but with the following:

Current assets at least 1.5 times current liabilities (Current ratio of 1.5). For manufacturers, debt must be at most 110% of net current assets. Replaces criteria 2.
No earnings loss for the previous 5 years.
Some dividends paid.
Market capitalisation less than 120% of net tangible assets.

Selling

Only sell when the situation changes to the extent that the company no longer satisfies the above criteria. I am usually flexible depending on a company's situation.

Notes:

Exchange rate between the pound and the US dollar is used at the time of the publication of the source.
For periods less than stated periods above, use 5 year periods instead. This is because some sources only show data for the previous 5 years.

Source: Graham, B., Zweig, J., & Buffett, W. E. (2003). The Intelligent Investor: The Definitive Book on Value Investing (Revised ed.). New York: Harper Business Essentials.

Investment Strategy #1 - Contrarian Investment Strategy

noreply@blogger.com (Anonymous) — Mon, 12 Apr 2010 15:27:00 +0000

This strategy involves selecting stocks that are out of favour of the market but are fundamentally sound. That is, strong businesses, which have low risk of going under, that no one wants to buy due to widespread pessimism. These strategies exploit investors’ psychology, which they are prone to overreact to good and bad events. This is caused by limited attention to the whole situation of the event, herd behaviour, overconfidence, over-pessimism and noisy information. This in turn causes companies to be out of favour and undervalued by the market, which is shown through price to earnings (P/E), price to book value (P/BV), price to cash flow (P/CF) and dividend yield. Some parts overlaps Value Investing, which I will cover later on, because contrarian investors look at below market averages for the first three and above market averages for the latter.

The strategy I use is based on Dreman (1998):

Buying

Mandatory:

Lowest possible P/E, P/BV and P/CF for a stock, while using the P/E as a core ratio. These ratios have to be below market value for the industry or index. The companies have to lie within the two lowest quintiles (lowest 40% of companies based on the ratios mentioned).
Dividend yield should be highest possible, which has to be above market yield. Companies have to lie within two highest quintiles.
Dividend yield which is above average which the company can sustain and increase. Dividend cover of 2 or more is desirable. The value must be more than 1.5.
Current assets should be twice the amount of current liabilities is desirable, that is current ratio of 2:1. This value varies from industry to industry. Minimum ratio is 1:1.

Optional:

Many favourable financial ratios as possible such as high return on capital employed (ROCE), return on assets (ROA), price/earnings to growth (PEG) below 1 and low Price to Sales (P/S).
Earnings growth should be higher than the FTSE 100 (S&P500 or any other relevant index according to the company's stock exchange listing) growth in the previous year and the likelihood that it will not plummet in the near future.
Earnings should always lean on the conservative side.

Selling

Sell a stock when it’s P/E, P/BV, P/CF or dividend yield approaches that of the overall market, regardless of how favourable prospects may appear. Replace it with another contrarian stock.

Source: Dreman, D. (1998). Contrarian Investment Strategies: The Next Generation. New York: Simon & Schuster.

Opportunities during the recession?

noreply@blogger.com (Anonymous) — Sat, 10 Apr 2010 14:37:00 +0000

I believe that there are still a lot of investment opportunities during this brutal recession, if you know what you are looking for. Over the next series of posts, I will outline the general investment strategies, outline the shares I have invested in and give opinions regarding the investment opportunities. My experiences during this recession and beyond will be mentioned as well.

However, to protect my privacy, I will not say how much I have invested in the stock market.