Small is beautiful when it comes to those nascent computer stocks

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Indy Lifestyle Online
IT WAS beginning to feel as though I might have to swallow my words. The mid-week market shake-out brought shares in London to a six- month low, with the Footsie closing below 6,000. Ten per cent plus had been handed back in just a few weeks.

There was a bounce, of course. There always is. We need to look through these short-term fluctuations to try to determine what the market is really doing. So far as the big market capitalisation companies are concerned, the answer is, not a lot. By the middle of this week the FTSE 100 Index was up just 2.25 per cent since the beginning of the year. Small companies, on the other hand, were around a third higher. Not before time.

I tried to identify some value among smaller companies but other investors have been getting there already. At least, that is what the statistics suggest. But smaller company shares have under performed for a long time and we are still nowhere near the relative valuation levels enjoyed four or five years ago.

Leading indices are made up of big companies and as more money has flown into index tracking funds the smaller company sector has been overlooked. Yet it contains many of Britain's true growth companies - or more importantly, businesses set to expand in the future. How many pure technology stocks are there in the FTSE 100? Or restaurant groups? Or leisure centres and health clubs? These are all areas that look set to deliver above average returns in the years to come.

Trawling with my smaller companies team through the murky waters of these shares, I was alerted to a few they felt worthy of closer examination. Applied Holographics was one, a manufacturer of holographic products which are important these days given the need to develop higher security on such items as credit and debit cards. This company, which is still quite new, is now worth around pounds 75m and should deliver profits of pounds 2.5m during the current year. But don't buy them for a yield. These make even the paucity of dividend return on the FTSE 100 look generous.

Applied Holographics are corporate clients of ours, as are Fibrenet, which operates in the field of high-speed data networks and is forecast to make a profit next year for the first time.

Also Macro 4, delivering operating software for Mainframe installations, is almost medium-sized but it is in an industry that is growing, and it should not be overlooked.

Finally, for those who may have more than an investment interest in where they place their money, our star football analyst, Nick Batram, is backing Aston Villa which, with a market value of not much more than pounds 50m, offers investors one of the best known names in British football at a real cut price valuation.

The problem with smaller companies is that there are a lot of them and, backing individual stocks can be risky. Investment or unit trusts concentrating in this field would be a better choice for the cautious investor, but that's another story.

Brian Tora is the chairman of the Greig Middleton investment strategy committee

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