Derek Pain: In good shape as two laggards play catch-up

No Pain, No Gain
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The Independent Online

The no pain, no gain portfolio continues to progress, thanks to a more buoyant stock market and contributions from its star performers. Nine of its 14 constituents are in the money. Of the five showing losses, I remain optimistic about four with only one share creating acute concern.

The market has made a strong start to 2013, giving rise to hopes that it is set for a good year. The world economy may be edging higher – just – but the European Union remains deep in the mire and Britain continues to struggle, with the latest blow the loss of one of the top borrowing ratings. I do not regard the removal of the AAA classification by rating agency Moody's as particularly troublesome, even if it worries the pound for a time.

In days gone by, a run on sterling would prompt the Bank of England to hoist interest rates. Such an approach seems to have been ruled out, with the Bank more likely to opt for printing yet more money in the vague hope of encouraging that elusive economic growth. It has been said the Bank's money policy offers benefits to the stock market, and any inflation from the weak pound could add further fuel to shares besides helping exports.

But higher inflation could prompt customers to tighten their belts again, a development that would hit consumer-facing constituents such as Marston's and Whitbread. Whitbread produced a trading statement this week. My policy when drawing up the portfolio's quarterly performance is to use Monday's closing prices in an endeavour to provide consistency. So any further comments on the budget hotels, pub/restaurants and coffee shops group will have to wait until next week.

Still, two portfolio constituents that are in the doghouse have produced further evidence of recovery. Animalcare has released interesting interim profits prompting stockbroker N+1 Singer (which must be the oddest name in the stockbroking community) to observe that the veterinary group had "returned to form in grand style". Revenue was up 13 per cent at £6.1m with "true" pre-tax profits at £1.3m against £1.1m. High-margin medicines were the key drivers.

My timing when buying Animalcare was appalling. The portfolio descended on the shares 17 months ago just before they suffered a setback as the group encountered a few problems. The interim figures suggest the group is making headway and Chris Glasper, an analyst at N+1, says: "We see scope for out-performance in time."

TEG, the other on the recovery track, is due to announce year's results later this month. They should be satisfactory. The group, which develops and operates organic composting and energy plants, said in a trading update that revenues and profits "have improved markedly". The cash position is strong and borrowings low.

It's a sharp contrast to last year when TEG called for £2m as there was a danger of "significant uncertainty" if new cash was not forthcoming. The money was raised from shareholders but the portfolio was unable to participate because each investment is capped at £5,000. The group seems to have made quite spectacular headway since those dark days.

As with Animalcare, the portfolio's timing was suspect. I had to watch as the new cash was raised at 3p a share with the quoted price diving to around that against the 8p purchase cost. But the group has got going since then, and I remain hopeful that when the year's figures are published the shares will top 8p. TEG has started developing a waste site at Dagenham that should provide about £16m in revenue . It will run the completed project, in which it will have a 24.5 per cent interest.

The group has also just won a six-year contract with a "major waste management company" for 15,000 tonnes of organic waste composting that should pull in £2m. Michael Fishwick, chief executive, said the deal "further underpins our growing operational business".

At the time of writing, the portfolio is showing a £107,000 profit with the value of its 14 investments approaching £99,000, and more than £8,000 in cash. But that's still a long way from its peak when, in pre-banking crisis days, its gain was close to £150,000.

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