IMF tax and Greek debt worries

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)

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:

1. Increase oil and gas production significantly.
2. Completely overhaul the existing gas production facility in Russia and restart production by Q4 2010.
3. Enhance and develop the exploration portfolio in Eastern Europe.
4. Conduct additional exploration tests 
5. Develop the Rudenkovskoye field.
6. Build a LPG facility in Ukraine.
7. 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: 

1. The stock's P/E, P/BV and P/CF are below sector averages making them cheaper than it's peers. 
2. 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.
3. With a dividend cover of 6.71, the company can definitely sustain and increase the dividend yield for a considerable future.
4. 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.
5. 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.
6. Earnings growth is higher than that of the FTSE100 in the past year.
7. 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

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%)

Investment Strategy #3 - Zulu Principle

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.

Investment Strategy #2 - Value Investing

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:

1. The size of the company must be adequate, that is, in terms in turnover which must be at least £30m ($50m).
2. Sufficiently strong financial condition. Current ratio must be at least equal to 2.
3. Continued dividends for the at least the previous 20 years.
4. No earnings loss for the previous 10 years.
5. 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.
6. Price to book value (P/BV) must be at most 1.5.
7. Average price to earnings (P/E) must be at most 15 for the previous 3 years.

For defensive strategy: 

1. 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.
2. 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 
3. Continued dividends for the at least the previous 20 years.
4. No earnings loss for the previous 10 years.
5. 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.
6. Price to book value (P/BV) must be at most 1.5.
7. 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:

1. 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.
2. No earnings loss for the previous 5 years.
3. Some dividends paid.
4. 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: 

1. Exchange rate between the pound and the US dollar is used at the time of the publication of the source.
2. 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

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.

Opportunities during the recession?

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.