All good things must come to an end

Internet fever has come to an end leaving many investors with dot.com scars on their portfolios. Now we must learn the lessons

Here's a prediction: Private investors who make better than a 20 per cent return during this first year of the new millennium will do extremely well. And if they do hit this relatively conservative target, it will be because they took major profits during the first quarter.

Here's a prediction: Private investors who make better than a 20 per cent return during this first year of the new millennium will do extremely well. And if they do hit this relatively conservative target, it will be because they took major profits during the first quarter.

Reality has returned to the stockmarket after a frenzied few months that began in the autumn of last year. Internet fever, which gripped us all and made paper millionaires out of fresh-faced young things whose skill was knowing which buttons to press, has subsided. Many investors have been left with dot.com scars on their portfolios but hopefully it will remind them that sweet dreams can be painful when you wake up.

Please don't think I am complaining. Far from it, I had a wonderful time during those balmy months. This business of buying shares was easy. I listened, learned, bought, sold, ignored my principles of safety first and embraced the new technology. I made excellent profits and had my first-ever tenbagger - a share that made more than ten times my original investment - when I bought Money Channel at 44p and then sold at £4.80.

But all good things must come to an end. So now's the time to shake ourselves up, dust ourselves off, and start all over again.

However, in doing so we must remember the lessons learned. Don't believe all the hype, look for realism and understand exactly what you are buying. Be satisfied when you see a reasonable profit and take it. And this advice applies not only to internet and other technology stocks, it should be the basis of every share decision you make.

So, let us go back to basics and examine one of the methods for share selection that has been forgotten in the rush to follow the new age stockmarket travellers. It's a way to identify high quality growth stocks that are probably undervalued at the moment by the market as a whole. And, as is so often the case, I am indebted to my friend Jim Slater, who developed the formula some years ago.

It involves a series of criteria which are applied to each one of the 1,900-plus shares quoted on the London Stock Exchange.

Criteria applied to shares on the LSE are as follows:

A PEG factor of less than 0.7. To calculate the PEG figure you take the day's share price - I worked on Tuesday's prices for my calculations - and divide it by the current earnings-per-share (EPS). That's the PE ratio. You then divide that figure by the estimated growth rate in EPS.

An EPS growth rate greater than 20 per cent.

A cashflow-per-share at least 1.3 times greater than the EPS.

Positive relative strength over one year.

Positive market trend.

A net gearing of less than 50 per cent.

Return on capital employed greater than 20 per cent.

Sorry if all that sounds like jargon but if you e-mail me - see address at the end of my column - I will be pleased to send you an explanation of any phrases you don't understand. Suffice to say that the criteria are extremely demanding.

Only four companies passed on all counts and they are all quoted on AIM (the Alternative Investment Market).

ASK Central is the pizza restaurant business I recommended in this column a few weeks ago. It operates mainly in the South of England.

Inter Link Foods is a cake and pastry making company based in Blackburn, Lancashire. The directors have been buying significant amounts of shares recently.

Solid State Supplies is a high-tech business, which distributes semi-conductors. Its customers are all based in the UK and Ireland.

Metnor Group earns its money by hot dip galvanising steel products to protect them against corrosion. In June the company announced new contracts worth £12m. At the same time it confirmed the profit figures would be "at least in line" with stockbroker forecasts.

I am not advocating that you buy these shares based simply on the criteria I have used. But it does enable you to focus on a group of minnow shares that have the potential to grow and a recent history of good performance. Now you should find out more about what they actually do. Look at the companies' websites, ring them up and get the last annual reports. Sample the pizzas and the cakes, talk to the customers who are in the market for semi-conductors or want to protect their steel products against corrosion.

You need to get a feel for the company whose shares you are buying and that will only happen if you do at least some of the research for yourself.

What do the following items have in common? Three pashminas, a verdigris bird bath, a salt cellar with a blue fish on top and a wellington boot scraper. Answer: They were the total haul of my visit, at the weekend, to the House & Garden Fair, which was held at Olympia. As I collapsed in my train seat under the weight of these indispensable items - the boot scraper measures an unbelievable 4ft x 3ft - I reflected whether I had learned anything investment-wise that would help me pay for them.

The most impressive part of the fair was, to my mind, the four room settings depicting breakfast, lunch, tea and dinner. The rooms had been produced by Marks & Spencer designers and were eye-catching, original and sprinkled with bright ideas.

On the train journey I opened a magazine and saw a double page advertisement, which said simply: "Wilt? Won't. Because of the special care we take selecting and transporting flowers, we expect them to last. So if they wilt within five days, we guarantee you a full refund. For the freshest, widest range pick Marks & Spencer."

Why women love flowers is a mystery to me and, I suspect, to most men but the fact is that they do. Say it with flowers and you are safe but equally there's nothing worse than seeing the bunch you bought from that chap in the lay-by hanging their heads in shame within 24 hours. So there's likely to be a St Michael label on the next bunch Mrs B receives.

These innovative marketing ideas and designer flair, combined with a summer sale that has genuine bargains rather than bought-in "special offers", mean that wooing new customers is back on the priority list. On the finance front, there was news last week that the judge had not allowed a major part of supplier William Baird's compensation claim to go to trial, which must be a relief to the retailing giant.

Despite the fact that the share price has been plumbing new depths recently, I get the feeling that M & S is at last getting its act back together. Maybe now is the time to view it as a genuine recovery opportunity.

terry.bond@hemscott.net

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

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