GW's Cannabis-based drugs keep us in the race for stock gains
The Independent came up with a 'Special Situations' portfolio for its share tips for the year. James Moore looks at how they're doing six months in
Saturday 19 June 2010
We are just over six months into the year so now would seem to be a good time to look at how The Independent's "Special Situations" portfolio, recommended at the beginning of the year, is doing.
The FTSE 100 began 2010 at 5412.9, but it's been anything but a smooth ride since then as the initial optimism over the economy generated by the recession's end was rapidly overshadowed by the escalating sovereign debt crisis here and, especially, in Europe. Yesterday the FTSE 100 closed at 5250.8. That's a decline of about 3 per cent and means that £10,000 invested at the start of the year would now be worth £9,700.
And it could get worse. The fiscal austerity measures planned in Britain and across Europe may yet send many economies into the much feared "double dip" recession. Stock markets are certainly nervous that this is exactly what will happen, and those predicting the end of the euro are no longer outliers. Just imagine the stock market chaos that would cause.
We said at the start of the year that we would take a "special situations" approach to our share tips. With all the uncertainty out there, we felt the only way to make money in these sort of markets was to look for particular "special" situations – companies we felt were recovery plays, or which had particularly interesting products, or whose prospects appeared to us to be rather better than the market had realised at the time.
Playing it safe, in our view, meant you might lose less money than the market, but you'd still lose.
So how has this theory worked in practice? Well, not too well – at least so far. As things stand, the majority of our picks are firmly in the red and some of them will need to run very fast in the second half of the year just to catch up.
But first to the high point, quite literally in the case of GW Pharmaceuticals, which produces pain relief drugs from the cannabis plant. Its performance has been thoroughly groovy because those drugs keep picking up approvals from regulatory authorities around the world. The shares are up by a stunning 62.1 per cent since the start of the year but we still feel there will be more to come from the operation, which should continue to fly for the rest of the year and gained yet another approval yesterday.
Another winner for us has been N Brown, the clothes retailer that caters for people with, well, fuller figures – "plus-sized" would be the PC term for the garments it sells. After a record year for sales and profits, with a growing market, low costs and a planned entry into the US, the only thing plus-sized about N Brown is the returns it has provided to investors. The retailer also recently bought Figleaves, which sells lingerie online, and is up by a healthy 6.81 per cent since the start of 2010.
The third of our stars is the small-but-perfectly-formed Nanoco. It is the first company to commercially produce "quantum" dots – tiny particles of semi-conductor material that can be used in a huge range of devices, including light bulbs and televisions. There's been a steady trickle of deals signed with Japanese companies, and we feel that there could be more to come. Even a takeover isn't beyond the bounds of possibility. This is still one to watch.
Heritage Oil is in the process of disposing of its interests in two Ugandan oil fields to Tullow for up to $1.5bn. The shares have come off a bit recently amid a disagreement over tax with the Ugandan authorities. But we still think the deal will be done because all sides want it. Heritage has also not been helped by the negativity towards oil stocks generally because of the BP affair, but is still up 2.06 per cent.
That's four in positive territory, out of 10 selected. Not happy reading. Before we get to the real nasties, however, one of our "safer" bets has at least beaten the market (just), if only by falling less. We felt Anglo American was undervalued compared to its competitors and, after seeing off a bid from rival Xstrata, we believed that if the current management failed to pep things up, someone else would. It continues to have its problems and has been suffering from a hit to the sector from Australia's tough new mining tax that others may replicate. Prices of commodities have also eased a bit. The shares are down 2.4 per cent, but that's a bit better than the FTSE.
Also slightly better than the market is Avanti Communications, the satellite broadband group, which is showing a fall of 2.1 per cent so far. We still hope that it could do well. We're a bit more worried about the London Stock Exchange, which is still involved in a vicious fight for market share with a host of rivals that don't have to deal with the LSE's tough regulatory burden. There have been signs of life recently, but the exchange is something of a geared play on the market and, as such, will need the FTSE to pick up some if it is to reverse its 11.6 per cent fall during the year to date.
Pace, however, down 26.7 per cent, has been a stinker. The company has become the world's biggest maker of set-top boxes, but sentiment has been knocked by investor fears that internet-based TV, such as the recently launched Google TV, could encourage households to bypass boxes in favour of online video services. Even so, Pace is forecast to ship 21 million boxes this year and should hold its position. The shares can recover.
We're a bit more worried about Taylor Wimpey. In January, we picked it as the best of the housebuilders but sentiment has gone into a sharp reverse. Yesterday's better-than-expected figures on mortgage lending didn't do enough to flush out the bears and this tip could be a bad one – it's down 20.4 per cent.
But neither of these two are as bad as JJB Sports. We knew this was a big risk given its problems. However, we felt that with all the football- related paraphernalia flying off the shelves (which have been restocked after a refinancing deal), a tentative recovery would gather strength. Unfortunately, mistakes made with that restocking, and some poor trading statements, have suggested there's a lot more work to do. Even recent takeover speculation has failed to give the shares a lift.
Which leaves a notional £10,000 in our portfolio worth £9,661. So we've underperformed the stock market, but only just. And there's another six months to go – plenty of time for these situations to become special.
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