Saturday, November 25, 2006

All drugged up

Sometimes I like to investigate random companies in the FTSE All-Share index in the hope of uncovering a hidden gem.

Here is one I looked at:


Alizyme is a biotech with a couple of products in phase III trials. That is where the good news ends as AZM has no revenue (except the odd milestone payment from its partners) and a scary cash burn rate. It burnt about £8 million in the last 6 months leaving £22 million in the bank. What is even more scary is that the burn rate is set to increase as the phase III trials start in earnest.

What does this mean? More share dilution I guess. If the data on is to be believed the share count has increased from 42 million in 1999 to 165 million today. Ouch.

Another alarm bell is that R&D spending is being decreased as AZM focus on their late stage products. So if the current batch of drugs fail there won't be any more coming through.

How exactly do you value something like AZM? I guess you estimate the probability of the drugs being successful and multiply it by the potential market for drugs of that kind. Or something.

Maybe if you bought a basket of ten biotechs like AZM you might have a decent chance of one of them making the big time. But it is a specialist game and not for me.

I have said before that investing is not gambling but AZM is a gamble so I will leave it to the experts and the dice rollers.

Sunday, November 19, 2006

Commodotise my assets

There are two conflicting pieces of advice that investors are frequently given:

One is that you should invest in what you know.

The other is that you should diversify your investments.

So what is the poor investor who does not know everything to do? Maybe invest in small cap high potential companies in the fields that he knows and only invest in large caps in the fields he does not know.

I do not know much about commodities but I would like a stake in the industry so I guess I should stick to the big guns. Here are two:

Rio Tinto

RIO is an international miner of iron ore, coal, uranium, aluminium, copper and diamonds. While most of the operations are in North America and Australia it does have operations in South America, South Africa and Europe as well.

The market cap. is about £29 billion, the PE is about 9 and the dividend yield is about 2%. The PE ratio makes RIO look cheap but most brokers seem to think that commity prices will fall next year and RIO will earn less.

Have said that half the 23 brokers that follow RIO have it down as a buy.

Paul Skinner, the chairman, said in August that “Although we have seen increased volatility in financial markets, underlying demand for ourproducts remains strong, and we remain positive about the outlook for the global economyand our markets.”

So a nice picture there.

BHP Billiton

BHP Billiton (BLT) is the world's largest diversified resources company. It mines iron ore, copper, coal, nickel, uranium, aluminium and oil. It is a truly global operation with mines scattered all over the world.

The market cap. is £28 billion, the PE is about 8 and the dividend yield is just over 2%.

Of the 18 brokers that follow this stock 9 have it as a buy and none are negative about it.

The way these companies' share movements follow each other is quite amazing:

Not much to choose between them then.

So which one do I favour? Well as the share prices follow each other I would probably go for the one with the lower PE ratio and the higher yield. That would be BLT. BLT is also more diversified and has a significant petroleum business which is a high margin business.

It looks like BLT for me and I don't mean bacon, lettuce and tomato!

Friday, November 10, 2006

CSR not so funny now

A few weeks back I posted about how I had laughed at CSR's share price collapse after a revenue warning. Well on Tuesday the Q3 earnings came out and a revised downwards Q4 forecast saw their shares drop almost 20%. This time I wasn't laughing.

The question the investor community is asking is how could CSR have got their forecasts so wrong? Having already issued a profits warning only seven weeks ago they have now revised down the Q4 forecast a further 15%. And they are supposed to understand their business?

CEO John Scarisbrick is confident of significant revenue growth in 2007 but can we believe him? If he is right then these shares are an absolute bargain.

On a forward PE of about 10 with revenue growth around 30% the shares look an absolute steal but what about if the forecasts are wrong again?

I am very tempted to average down but my success rate with averaging down is about 0 so I have resisted the temptation so far. There is nothing worse that having a significant proportion of your portfolio is some loser with no upwards catalysts visible within the next six months.

If CSR falls below 600p I may bite but for now I am so glad I took some profits at 1400p. That seems like a long time ago now!

Monday, November 06, 2006

Today is bright; what about the future?

I guess everyone in Europe is familiar with the Orange slogan about the future being bright. But is it bright for Qualcomm (QCOM?)

It seems that QCOM is currently cashing in on its investment in CDMA but investors are worried about next year and what QCOM will sell in ten years times.

Next April QCOM's licensing agreement will run out. No renewal agreement has been reached yet and it looks like one is unlikely. Not receiving royalties from Nokia would reduce the quarterly EPS by 4 to 6 cents. Ouch.

The other worry is what comes after 3G? Operators and OEMs around the world are desperate for a technology that does not involve QCOM patents as QCOM has such a monopoly on CDMA. Life at the top is becoming increasingly lonely for QCOM.

Thirdly QCOM's legal bill is becoming so signficant that it is having to hold back on its share repurchases for a while. Big ouch. It looks like the lawyers will be the ones cashing in on QCOM next year, not investors.

The future feels very uncertain for QCOM at the moment. It is throwing off healthy amounts of cash at the moment but some of that is having to be reserved for legal bills. It is hard to get a clear picture of what this company could do in the next 5 years. However there are lots of very bright people at QCOM - lets hope they can navigate around some of these obstacles and give investors something to cheer about.