No Pain, No Gain: It may be time to weed out the underperformers

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The Independent Online

The long wait is over. Last week, patient shareholders in Merrydown, the cider and adult soft-drink maker, banked its cheques, following the £36.7m takeover bid from the unquoted SHS drinks group. It was revealed as long ago as November that bid talks were under way, although SHS may not have appeared on the scene until much later.

So another early recruit to the No Pain, No Gain portfolio has departed. Merrydown arrived in 1999, a few months after Allied Domecq, another constituent familiar with takeover fire. I picked up Merrydown shares at 35.5p; the exit price was 170p.

Since its creation just after the end of the Second World War, Merrydown has experienced volatile times. It was started by three former prisoners of war, who put to use talents they had acquired in producing wine behind barbed wire.

By 1998, the group seemed destined for the corporate graveyard. Then new management arrived, helped along by a rescue rights issue. The emphasis was switched from alcoholic drinks to the Shloer adult soft drink. The 170p price, which compares with a low of about 25p in recent years, is testimony to the success of the Shloer adventure.

I'm in no rush to replace Merrydown. Indeed, I may weed out some underperformers before increasing the strength of the portfolio. My last two recruits, Georgica and Goals Soccer Centres, have yet to cover themselves in glory, and some of the old-timers are looking rather jaded. I am growing increasingly restless about Avon Rubber and MacLellan.

Avon, which produced disappointing figures on Thursday, has so far failed to reap the rewards I anticipated from its gas-mask operations. And MacLellan, which turned down a takeover bid earlier this year, has not achieved the sort of progress I envisaged.

They are very different companies. Both are well run: I have no complaints against the managements. Timing is essential in the investment game. I clearly overpaid. The question is whether it is worthwhile hanging on. I doubt it. But finding suitable replacements is not easy.

I look at many shares. Most, I feel, are unsuitable and I am forced to discard them. Sometimes, when I start to examine a share, the price runs away and gets too far ahead of the game. Chorion, the intellectual property group with such names as Noddy and Agatha Christie on its books, is an example.

I notice that the shares have drifted lower lately. They may soon slip into my buying range. Chorion is a splendid company and I would welcome its entry into the portfolio.

With Merrydown's departure, the Prezzo restaurant chain has the distinction of being the portfolio's most successful investment. I'd suggest that any investor who followed me into the shares should consider realising at least some of their profit. The portfolio is not in the top-slicing game. It will, therefore, stick with its original £5,000 investment. Maintaining the complete £5,000 stake helps to provide the transparency an investment exercise needs. Of course, there is nothing to stop the entire Prezzo holding being sold, but I am not contemplating such action.

The company remains hungry for expansion. Last year, it doubled its number of outlets to 48 and has since topped the 50 mark. Cash for future expansion should not be a problem. Last summer, it raised £9.3m through a share placing which, together with its growing cash flow, should be enough to keep it on a roll.

However, a share split could indicate it intends to use equity to fund some of its growth. There is, too, a maiden dividend. Prezzo has enjoyed a remarkable run. Since the portfolio descended on the shares, they have climbed from 69p to 230p. Such heady progress is not surprising, as profits soared from £470,000 to £4.1m last year. This year, the stock market expects about £6.6m - which puts the shares on a fancy rating of 28 times prospective earnings. The company appears confident, but it could find its progress is impaired if consumers rein in their spending.

At the other extreme, it will soon be crunch time for my disaster share, Profile Media. Unless it can agree an extension, a £3m loan from Barclays Bank must be settled by the end of the month. The group is known to be considering assets sales, and it will presumably tap shareholders for more cash.

Since my last review, the portfolio has made little progress. But, I suppose, in these uncertain times that is not a bad result, with the overall profit still hovering around the £69,000 level. As I've said before, the Profile shareholding has been fully written down to reflect the current share price.

cash@independent.co.uk

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