No Pain, No Gain: 'Merrydown investors could enjoy a double celebration'

Merrydown has had a colourful career since it was created just after World War Two by three former prisoners of war. On at least one occasion it seemed destined for the corporate graveyard, but at the eleventh hour managed the sort of escape its founders would have appreciated.

These days it is riding high. No thanks to cider, for years its leading product. Soft drinks, to be precise adult soft drinks, are providing the Merrydown sparkle. The Shlöer range now represents the biggest slice of group turnover. In the six months ended September Merrydown enjoyed a 29 per cent sales increase - only partly, the company maintains, due to the long, hot summer.

With cider sales achieving a rare gain, Merrydown produced its best interims for years. It normally suffers a half-time loss, with sales over the Christmas period making the vital contribution to the year's figures. This time round it cut the half-time loss from £428,000 to £75,000. The stockbroker Teather & Greenwood is seeking 12-month profits of £1.6m. Last year's figure was £1.4m.

I suspect, unless the group plans a costly advertising blitz, that T&G is being a shade cautious. Merrydown is clearly on a roll. Shlöer is continuing to outperform in an admittedly niche market, and there seems every chance the brand's momentum will increase in the second six months. Also, there is just a chance of a cider sales bubble. The cider market, as problems at the nation's biggest cider maker, HP Bulmer, demonstrate, is in the doldrums and Merrydown's operations, although profitable, have done little more than tick over for a long while. In addition the drive to develop Shlöer has drained group resources.

But perhaps, just perhaps, the tide is turning. Cider's modest sales advance could of course be a direct, and short-lived, result of our sun-drenched summer, when the nation's thirst for long drinks was almost insatiable. But the increase could indicate that the worst of the slump is over - and demand could be strengthening. If Merrydown should fizz on two drink fronts then shareholders could enjoy a double celebration.

The shares are 81.5p compared with my 35.5p buying price for the no pain, no gain portfolio. I am not yet anxious to take profits. Indeed I believe, with the group's excellent management still keen to develop the Shlöer brand, that the shares may have further to go. There is also the possibility of a takeover marauder appearing that may think Merrydown lacks the muscle to exploit Shlöer. In many ways, I would be sorry to see a predator swallow the group, but as the brand continues to make headway I can think of several candidates who may like to join the party.

Although Merrydown's shares on a number of occasions fell worryingly below my buying price, they never created anything approaching the anxiety I have felt over my one remaining basket case - Profile Media. It, too, has avoided the accountants in black but its recovery is still, as far as the stock market is concerned, barely perceptible. It has reorganised and appears to be making headway, but it still faces a long, hard slog.

Playing among smallcaps is not only fun - it can produce excellent rewards. Witness Merrydown. But on the other hand the chance of encountering unmitigated disasters looms large - some might say too large. Profile Media is not the only tiddler where I have come a cropper. Even so, it represents the portfolio's worst investment. I have agonised about selling but, as I have explained in the past, I feel the shares are actually past their sell-by date. I should, of course, have sold long ago. Now that I have lost so much of my investment that selling is no longer worth the effort.

I must admit I am mildly encouraged by its recovery programme - hope springs eternal, I suppose. Profile has closed businesses and sold two for £15.4m; a deal has been struck with holders of its convertible unsecured loan stock; a debt for equity swap has been agreed; and a placing and open offer is planned. The chairman, John Webber, says Profile will be in a "very strong" position to take advantage of the expected advertising upturn, when its revamp is complete. I hope he is right. The shares are around 1.75p against my 38.5p buying price.

Finally Wyatt, probably the portfolio's most speculative investment. It lost £225,000 in its last financial year but the chairman, Bob Holt, who created the highly successful Mears support services group, seems confident it is on the right track. The shares are 32.5p against a 27.5p buying price.