FTSE 100 Options

Please find the FTSE 100 options we are recommending this month.

Core Defensive – Pharmaceuticals

With the market at its current level and entering the traditional lacklustre summer months, we are relatively cautious on shares in the short-term and are favouring defensive stocks in general given that:
1) their current outperformance is relatively modest;
2) seasonal trends come into play (defensive stocks tend to outperform in the summer months);
3) defensives remain under-owned;
4) long-term earnings expectations for defensives are at a record low relative to cyclicals;
5) defensives trade at long-term valuation lows versus cyclicals on a variety of valuation metrics;
6) macro newsflow is likely to weigh on risk appetite.
With this in mind, we are advising investors to add some exposure to pharmaceuticals. Post poor long-term performance, the sector offers good value and any USD strength associated with the end of QE2 should offer support.
Our pick of the UK sector is Astrazeneca (see research note attached), trading on a low 2011E p/e multiple of 6.9x and yielding 5.26%. We see Astrazeneca as having a better chance of outperforming expectations than sector peer GlaxoSmithKline where the return to sustainable growth looks factored into the City’s forecasts and the 40% 2012e p/e premium to Astrazeneca.
For those invested in GlaxoSmithKline, we would take advantage of Glaxo’s recent strong performance and use this as an opportunity to switch into a higher yielding and better performing stock. For option traders the Astrazeneca September 2800 puts look good value at 48p (note the stock will go XD in August by a similar amount).

Nationwide 7.971% (callable 13/03/15) PIB

Please read our note on an A- rated Permanent Interest Bearing Security (“PIB”) with a yield to call of 6.74% along with a guide to the PIBS market. Issued by Nationwide, the UK’s largest building society with assets of circa £200bn, we recommend this to investors with a medium attitude to risk who are looking for a healthy diversifier to their portfolio

Cyclical Options

Please find the cyclical options we are recommending this month.

FTSE 100 Options

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Asian Citrus

Please read our complementary research on AIM listed Asian Citrus. Legendary investor Warren Buffett stresses the need to invest in simple businesses and it doesn’t come any simpler than growing oranges. Asian Citrus won “International Company of the Year” at the 2009 AIM awards by ticking all the right boxes with strong management, no debt, market-leading positions in two growing areas and a good distribution chain. Two directors of the company recently acquired a total of 522,000 shares at an average price of 72.801p, illustrating their confidence in the company.
Despite the risks of investing in a Chinese agricultural business (such as the weather and geopolitics), we believe this is an old economy stock in a growing sector, trading at an attractive price for the more adventurous investor.

The Daylight Saving Anomaly

It may sound far stretched, but it is possible to make money from stock markets around the time of daylight changes. In the paper “Losing Sleep in the Market: The Daylight Saving Anomaly” by Kamstra, Kramer and Levi (2000), the stock market was found to produce larger falls the day after the daylight saving weekend than other weekends of the year. Their study found that between 1967 and 1998 in the US the mean negative return on the first trading day following spring daylight saving weekends (in March) is between 2 to 5 times greater than that following an ordinary weekend.
Stock market speculators would be wise not to sleep on this one. Sell the market short at close of business on the Friday (via selling a FTSE 100 CFD or Future at £10 a point) and be ready to close the position at an opportune time on the Monday.

Core Defensive Options

Please find the core defensive options we are recommending this quarter.

FTSE 100 Options

Please find the FTSE 100 options we are recommending this month.

Rockhopper Exploration

Rockhopper Exploration (“RKH”) is an AIM listed company involved in the exploration of oil & gas in the Falkland Islands. The company has licences to explore in the North Falklands Basin where it has discovered oil at its 100% owned Sea Lion prospect.

Goldman Sachs has just released a 640p PT valuing the Sea Lions P50 reserves (assuming volumes of 205m barrels and a 60% chance of success) at 360p per share, a 50% premium to the current share price. Thus, on top of this discount to NAV, the risked exploration portion of the portfolio is effectively in the share price for “free”. With potentially substantial exploration/appraisal activities, M&A attractions and the market not fully appreciating the value accretion of pushing Sea Lion to commerciality, Goldman’s view the risk/reward as attractive and have the stock on their Pan-Europe Conviction Buy List.