2012 Hotlist Results – Week 24

Week 24 of 2012.

A good week for markets as brave investors looked to pick up bargains ahead of the crucial greek vote on Sunday. A risky business but calculated. It’s worth noting that the markets were heading towards a similar make or break decision by the greeks last Autumn when agreeing Austerity plans. Once agreed, the market tip toed its way forwards to end the year with less uncertainty. 2012 started with unprecedented buying and the 4 month rally was breath taking. But then Greek woes returned after an uncertain election result and the market promptly sold off. The casualties of the ‘flight away from risk’ was namely Spain who immediately struggled to raise funds for their banks at manageable rates. The banking system was locked up again and everything was grinding to a halt.

Greece is clearly not the only country in trouble in the eurozone – but it’s clear that they are the first domino threatening to fall. The market knows that if Greece exits, the knock on effect is ‘uncertain’. Which domino’s topple next is the problem and how many. So it is no surprise that the markets have returned to their ‘risk off’ senses. With US elections around the corner (Nov 2012) Obama and co will be keen to see progress such as job growth and strong green shoots of recovery. This is hard to imagine with europe’s haphazard political and economical game of hokey pokey (put the left foot in then the right foot in and shake it all about…).

Next week, the FED Reserve have minutes to reveal, the BoE apparently have cash cued up for the banks to help grease (greece) the wheels. China is on the verge of adding some stimulus but yet to commit. The firepower is there to get the recovery back on its feet. But neither party seems willing to commit their hand until the Eurozone defines their own course of action. The new French president has put forward a new plan and post the Greek elections one would expect some haggling over more realistic austerity measures assuming the leading party can form a government.

There’s clearly plenty left to do before these issues will go away. But with almost 4 years passing since the Lehman’s crisis occurred – the markets are slowly shaking their way through it. It’s hard to imagine what ‘investing’ will be like without sovereign debt or defunct eurozone countries. You never know, the market might even go back to looking at fundamentals and corporate earnings. The latter will be due to kick off again soon which is always healthy in terms of focussing investors minds on the true business performance of their chosen investments.

The DOW closed the week 24 at 12767. That’s a massive 652pts higher than week 22.  The FTSE 100 finished the week at 5479 up 219pts from week 22.

A virtual portfolio has been set up using the 2011 final trading day close figures as a starting point and £1000 has been invested in each stock. This does not include buying fees or stamp duty and is purely intended to be used as a benchmark or summary for each week. 2 newspaper top tens for 2012 have been included to help monitor/compare against.

Week 24 stock picks summary:

As the main indices rise ahead of a hopeful beneficial pro bail out election result for Greece, Equities still trade like they are infected with some virus. That virus appears to be ‘risk’. It’s an odd scenario as in the background lies some very strong firepower with China, US and BoE/ECB all firmly hinting that they will bolster/inject QE3 to get the world economy moving again. As many will know, Equities are often the fast to react to ugly news and slow to react to the good news when it arrives. Like a large snowball on top of a hill, it seems easier to roll it down than push it back up. Market forces are at the best of times – unpredictable. But there were new signs of ‘true’ value breaking through in the E&P sector again via M&A. Cove is still in a bidding war and the price just keeps getting higher as they continually progress their operations while their suitors slug it out. An approach for Nautical Petroleum from Cairn saw the sp zip up over 50% in one day. With Ithaca (another norther sea player) recently seeing similar interest but deciding to go it alone – it’s not hard to see that it’s a buyers market. The reason for this is simple. Equity valuations are cheap and oil prices are still near their highest levels in over 4 years. It’s fast becoming cheaper to buy the reserves and upside exploration via acquisitions/takeovers than seek new acreage, licences and explore them.

Yet for some reason the equity market and E&P sector seems trapped indecisively between discounting sp’s due to wider market issues yet having to acknowledge that the lower the sp’s go the more likely the acquisitions. Goldman Sach’s issued a buy note on several AIM listed explorers on Friday citing that the upside upon exploration success was now extremely compelling against discounted sp’s. And they are not wrong. CHAR (Chariot O&G) – one of their picks is trading at just over 80p. They are due to drill a high impact well in the next 4 to 8 weeks (subject to rig availability) and if successful Goldman’s believes it could be worth £17 per share.

The current CHAR sp reflects the markets reaction to the last drill which was not a success. The sp had risen to 190p+ ahead of the result reflecting investors ‘risk on’ attitude. It’s always possible that CHAR’s sp could drop further below 80p upon a second duster, but at present it’s not hard to see Goldman’s view. The downside from 80p looks minor against the upside potential of 1700p. For a risk on investor – the next drill looks a great bet. And that’s all it is – ‘a bet’.

CHAR is not the only stock that has massive upside upon exploration success. Borders and Southern is another. MXP another. But all are treated differently by the market which seems odd. The latter is close to revealing results on the massive 467mmboe NUR-1 target (100% interest to MXP) yet the market is reluctant to follow Goldman’s mantra and invest in the upside potential of such stocks. The irony is… MXP actually have cash flow and production to underpin their market cap – whereas stocks like BOR and CHAR do not.

Then there’s stocks like GKP which have billions of barrels of oil under the belts yet the market chooses to price them at well below the average price $pb. In the juxtaposition are stocks like Ophir and Providence Resources. Both have made great progress in 2012 upon discoveries yet the market seems more than happy to price them higher with very little discount.

It’s hard to fathom out but that’s the state of the markets at present – divorce of any common sense or valuation basis.

The Independent stock pick list continues to rule the roost with a strong performance to date. The Hotlist retains the positive side for the year and nabs second place from the Tempus Times. The more conservative B-list struggles and is still in the red. Plenty of time left in the year for many changes but thus far – the independent’s 2012 list is proving a solid pick and a tough one to beat.

Current standings

1. The Independent 2012 +23.30%
2. The 2012 Hotlist +1.76%
3. Tempus Times 2012 +0.73%
4. The ‘B’ List 2012 -3.92%

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