FTSE 100 Options

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FTSE 100 Options

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Cyclical Options

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FTSE 100 Options

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Core Defensive Options

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Cyclical Options

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British American Tobacco

Politically correct investors, look away now. Cigarettes are bad for your health, but if you’re a shareholder in British American Tobacco (“BAT”), they’ve certainly not been bad for your wallet. Investing in addiction is a proven way to make money, and a good way to do this is to buy shares in tobacco companies, which boast an enviable track record as reliable performers.

A focus on cost control and the ability to raise prices even in a harsher economic environment has enabled BAT to deliver higher profits in more challenging trading conditions. It’s taking £800m out of the business between now and 2012 by streamlining back office functions, improving buying processes and shutting factories. That suggests it has even more scope to improve its already impressive 32% operating profit margin, nearly double the level of just five years ago. Furthermore, with a large proportion of earnings derived overseas, the tobacco majors are poised to reap the benefit of a weaker sterling.

Over the past five years, BAT has delivered compound growth of 15% in earnings per share and 19% in dividends per share, while rewarding shareholders with a capital return of 97% compared with 3% for the FTSE 100.

And amazingly after all that out-performance, because of the business it’s in, BAT is still cheap. It’s on a forward p/e ratio of just 12.23x, which is a lower rating than the overall market.

Even better, the prospective yield is near 5.5%.The beauty of a mature business such as BAT is that capital spending can be low, so most of the masses of cash generated can be paid straight to shareholders as dividends.

On that basis we rate the stock a strong buy

White Metals

While most investors are familiar with investing in gold and silver, there are other precious metals such as platinum and palladium that are less obvious but nevertheless just as valuable. Indeed research has shown that inclusion of these so called “white metals” can increase a portfolio’s performance whilst at the same time adding valuable diversification benefits and reducing the portfolios volatility.

BG Group

BG Group Plc, the UKs third largest energy giant after BP and Shell, is an attractive investment story on many levels.

In Brazil, it has first mover advantage in the most exciting oil discovery for over forty years, the Santos Basin, which is estimated to contain at least 50 billion barrels of oil. Economical at just $40 per barrel the fields are expected to be a dominant factor in BGs production and cash flow growth for years to come.

It has an industry-leading LNG division, which is successfully building itself a brand new, long-term contracted, southern hemisphere business. Its operations in Australia for example are part of the country’s long-term energy plans, a country set to become the “Middle East of gas”. This helps smooth the group’s revenues because demand for gas there peaks when demand in the northern hemisphere is at its lowest.

It has a first rate management team with the uncanny knack of spotting the next big thing, from Brazilian oil fields to US shale gas.

On top of that the company is a prime takeover target for a super-oil major, such as ExxonMobil, looking for a quick-fix acquisition to remedy their dwindling reserves.

In conclusion, we believe that either the market or a predator is going to wake up to the quality of BG Group’s assets. Citibank and Goldman Sachs have recently reiterated their buy recommendations with price targets of 1500p and 1460p respectively. Trading at 1168p we rate the stock a strong buy.

Silver

Increasing demand from green technologies, falling supply due to underinvestment, the “consumption” of mined silver in industrial processes and a historically massive deviation from the average gold silver ratio all point to a rising silver price from its current level of $16.30/oz.

In fact, many silver bulls are predicting the metal rising 10x between now and the end of the commodities super cycle expected to run until 2015. Considering its record high of $49.45 reached in 1980 is $100/oz today in inflation-adjusted terms, that target does not appear so fanciful as it first seems.

On top of that the mind-blowing quantitative easing programmes, loose monetary policies and record deficits resulting from government attempts to pull the world’s economy out of its worst recession since the 1930’s are by their very nature highly inflationary. This is an environment that favours precious metals as an asset class.

Technically silver is at the lower end of its rising trend channel and within touching distance of its 200 day moving average. We believe now is a great time to buy at these levels.

Whilst we still believe that gold is a core holding in every balanced portfolio, we believe that silver has even more room than gold for appreciation. So while gold’s bright prospects are in part the result of dark, economic “clouds”, don’t forget that those clouds are also likely to have a silver lining.

For investors looking for capital growth or diversification within a balanced portfolio, we recommend an allocation of 5% in ETFS Physical Silver (PHAG.L).