Weak dollar roughens Gem's outlook

By Graeme Dickson
Updated: 13:28 EDT, 3 November 2010

Over the last week the FTSE 100 has risen 111 points - almost two per cent.

It means that the index has held solid in the 5600-5800 range for four weeks now.

On the US front over the last week, initial jobless claims figures showed 434,000 claims for the week, much less than the 458,000 expected. Further fuel for the stock market bulls came from the Institute of Supply Management, whose Manufacturing Index rose to 56.9 - much better than consensus forecasts. Added to that, manufacturing data from China also encouraged investors.

Stocks rose yesterday ahead of the US mid-term elections, despite a 0.25 per cent interest hike both in Australia and India, while the Federal Reserve policymakers decide later today (Wednesday) what date they get together to discuss further quantitative easing measures.

As per the trend over the last month, the FTSE 100 should hold 5600 as long as commodities don't plunge, while 5400 should provide stronger support. On the upside 5800-5825 should act as resistance, while through here 6000 is the next obvious level to test.

Big mover of the week: how you can profit

Diamonds are forever: But can it last for Gem?

The best performing FTSE 350 constituent last week was Gem Diamonds (GEMD), the African diamond miner. Its stock rose 22.5 per cent to 228.5p after the company issued a positive trading update regarding sale prices of its diamonds, which in some cases, are up in excess of 100 per cent above the lows of 2009.

The company was also pleased to announce the successful launch of a marketing campaign last month generating further sales. However, Gem admitted that the weakness of the dollar against the rand is negatively impacting on mining costs, so its trading statement wasn't entirely rosy.

The stock trades on 26 times current earnings, which is expected to fall to 14 times for 2012. It has $78.5 million (£49 million) cash in the bank and zero debt. That's on a £315 million market cap company.

Technically the stock looks like it could move towards 280-300p (it closed at 228.5p yesterday) but given the weak dollar and the fairly pricey rating on the stock, I'm not sure if I would join the herd.

Keep an eye on...

Clothing chain Primark owner and food manufacturer AB Foods (ABF) is scheduled to issue its preliminary results next Tuesday 9 November.

The company, which has been a favourite for the City and shoppers alike throughout the credit crisis to date, recently warned that the spike in cotton prices and the hike in VAT in January (already implemented in Spain where it has several outlets) may affect its profit margins next year for the cheap clothes it sells at the highly popular Primark chain.

However, given that around a quarter of its revenues come from its agricultural business, its business diversification could help placate any erosion of its Primark margins.

The company has already stated that there will be a substantial rise in earnings in its second half of its financial year, with profits at Primark set to show an increase on last year, too. Judging by the recent performance of its sugar rival Tate & Lyle (TATE), the rising price of sugar should also be good for its sugar business. Meanwhile Premier Foods' infamous mouse in the bread Hovis mishap should be AB Foods' gain, with its Kingsmill bread profiting.

Clothing rival, Next (NXT), warned this morning that cotton prices will be crucial in determining the price of its clothes, which it is almost forced to do in order to maintain its margins, so this might have a dampening effect on AB Foods' share price over the next few days.

However with earnings expected to grow by 30 per cent to 70.2p next week, the price to earnings ratio will be 15. In two years time, this is expected to drop to 12.5 times earnings. If the company can carry out its operational excellence and deliver on strategy, then perhaps the current dip is a good buying opportunity.

Highlights from the FTSE 350 universe last week:

• On Thursday, wind turbine gearbox manufacturer Hansen Transmissions (HSN) rallied 8.43 per cent to 45p after it issued its second quarter and half year report.

• Temporary power solutions company Aggreko (AGK) slipped 4.2 per cent to 1592p on the announcement of its third quarter results despite the company suggesting it will beat full year expectations.

• Unilever (ULVR) was unchanged at 1792p on Thursday, despite reports implying that US rival Proctor & Gamble were backing down from a price war, allowing the food and household goods manufacturer to restore margin levels to a more normalised level.

• Jardine Lloyd Thompson (JLT) rose 1.4 per cent to 587p on reports there was a predator lurking in the background waiting to pounce with a 720p a share bid.

• On Friday Oil services group Hunting (HTG) jumped 6.9 per cent to 644.5p after an interim management statement said that strong trading conditions continued and that it will beat market views.

• Copy-cat drugs manufacturer Hikma (HIK) jumped 6.7 per cent to 786p after it announced the acquisition of Baxter's US generic drugs business.

• Government outsourcing contractor Serco (SRP) fell 4.4 per cent on Monday to 587p after it reversed its decision to request from its suppliers a 2.5 per cent rebate due to government spending cuts.

• Oil and gas explorer and producer Melrose Resources (MRS) slumped 16.8 per cent after it announced that one of its strategic partners had pulled out of a farm-in deal for a Romanian oil/gas field.

• Lipstick and make-up chemicals manufacturer Croda International (CRDA) marked time up 1p at 1439p on Monday, despite rumours of a 1900p bid from either Dow Chemicals or BASF.

• On Tuesday environmental and property consultancy RPS Group (RPS) jumped 7.5 per cent to 221p after it received two broker upgrades.

• Tullow Oil (TLW) gained 4.1 per cent to 1219p after the price of crude oil rallied.

• PartyGaming (PRTY) slipped 5.35 per cent to 239p after a downgrade from Davy stockbrokers.