Derek Pain: I'm hungry for more, but the cupboard's bare

No Pain, No Gain

I have failed on the recruitment front. The no pain, no gain portfolio is down to a dozen constituents, against the 16 I favour. Takeovers and disillusionment have taken their toll, and my inability to alight on any newcomers this year has intensified the squeeze.

In recent months I have hunted high and low for suitable shares. With the stock market on something of a roller-coaster, any nimble-footed investor should, in theory, discover a few bargains. But small caps, once the building blocks of the portfolio, remain, with a few exceptions, totally unloved. And they are likely to stay out of favour in the months ahead. Bigger stocks are more mixed and possibly offer better prospects. But most I have examined have failed to entice me.

Indeed, a couple have suffered. Wm Morrison, the supermarket chain, has given ground since I hesitated about its inclusion, and Lamprell, the oil-exploration back-up group, has endured a horrendous time with losses unexpectedly appearing. The shares slumped from comfortably above 300p to around 75p; they are, as I write, 103p. A lucky escape, then.

I also contemplated Restaurant Group, which runs such outlets as Garfunkel's and Frankie & Benny's, but eventually dismissed the idea as it would make the portfolio's eating-out element too substantial.

It already embraces three groups with restaurant interests: Marston's, Spirit Pub Co and Whitbread. I remain convinced these three offer a rewarding future. Each is showing a profit, with Whitbread nearly doubling the portfolio's money. I see that Nomura Securities has a 2,220p target on Whitbread, against a portfolio buying price of 1,105p.

With its emphasis on outlets at busy centres such as airports and leisure parks, Restaurant Group is in a fine position to continue to prosper and would have made a splendid addition to my collection.

Smaller groups I have looked at and discarded include Noble Investments, the successful coin and stamp dealership, and the recruiter Matchtech. I looked again at a former constituent, the Prezzo restaurant chain, but reached the same conclusion that excluded the Garfunkel's group.

I have even toyed with enlisting shares on the fringe Plus market, in spite of the Rivington Street Holdings disaster. The uncertainty over the future of Plus persuaded me to hold off. With the inter-dealer broker Icap now in control and prepared to develop Plus, I may once again venture forth into an area that by its very nature is more risky than Aim, the junior stock exchange platform that has, nevertheless, managed to produced a sad procession of losers.

I do intend to expand the portfolio. It is merely taking longer than I expected. Possibly more top-flight shares will be introduced. After all, an old favourite, the caterer Compass, has performed well with Richard Cousins as chief executive. And Aviva, the insurance giant now being revamped by its chairman, John McFarlane, could prove a longer-term winner. The group still awaits a new chief executive to implement the McFarlane-inspired changes.

These are early days and there is many a slip 'twixt cup and lip, but the Compass revival under Richard Cousins is a fine example of how a once-slumbering business can be re-invigorated under new management. In addition, Aviva is blessed with a heady dividend yield which could, of course, be reduced, but not lost altogether, as reality sets in.

Still, there is little to enthuse about in the stock market. Small caps are unwanted and blue chips this year have flattered only to deceive. The Footsie is below the best level achieved last year and some distance from the 6,500-plus points hit a little before the financial crisis threatened to destroy the very fabric of our society.

There is no doubt that the world's economy – including Britain's – is struggling and the euro crisis remains a festering sore. Even so, the upper echelons of the stock market continue to provide investors with, in these low-interest-rate days, some handsome dividends.

Many shares look cheap. But there must be a chance that the important dividend influence will not survive if economic conditions and the plight of the euro continue to deteriorate. Therefore, we are in special-situations territory – and that applies to blue chips and to the mostly neglected small caps.

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