No Pain, No Gain: When great results yield lacklustre share prices

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The Independent Online is a classic illustration of the current irrationality of the stock market – the company continues to trade well, yet the shares are looking increasingly forlorn.

Last week, it said profits should meet expectations. Forecasts range up to £2.5m. But the shares hardly stifled a yawn, grudgingly adding a copper or so. It is true that profits have been on something of a plateau for the past two years. This apparent sluggishness, which can afflict any growth company, reflects a change in its retail spread and the cost of expansion.

I believe that the £2.5m estimate for the year just ended should be attainable. After all, it comes from an authoritative source: the company's stockbroker, Brewin Dolphin. The City would expect their analyst, the highly regarded Jon Lienard, to have his finger on the printing pulse.

If his forecast is correct – and we will know in June – it will mean the group has broken out of its profit straitjacket and is, despite the lacklustre economic environment, pushing ahead. In the past two years profits have stuck around the £2.3m mark.

There is no doubt is a growth company. And in happier days, its shares would command considerable attention – and a high rating. Nowadays, the stock market irreverently classifies it as an income stock, putting the shares on a copper-bottomed 7.3 per cent yield and an astonishing 8.5 per cent prospective return for this year. The shares, therefore, offer a better rate than most high-street savings accounts. It could be argued that they are an outstanding income stock. As Lienard says, high dividend yields are "unheard of in a growth company". He has a 63p target on the shares.

But does not owe its place in the No Pain, No Gain portfolio to dividend payments. Its inclusion reflects its capital appreciation potential. After all, the portfolio ignores dividends (and dealing costs) in its efforts to offer a simple, unencumbered indication of its performance.

Signs suggest that its current year will show the company continuing along the up road. The research company Hardman & Co believes that profits for the year starting this month will hit £2.8m. If this is correct, the shares are selling at an undemanding 9.8 times forecast earnings. is an on line printer. Through its outlets, it offers a range of small print services – flyers, posters, visiting cards and the like. Once an order is placed, it is beamed to a printing hub at Manchester, and when completed it is returned to the outlet, which are mainly run by franchisees.

Like so many other franchise operations, it is spreading overseas. It has opened in Eire, France, Iceland and New Zealand, and is planning an Australian operation. It says it is also exploring option in the US.

The shares are bobbing along at around 41p, after having sunk at one point to 36.25p. They have been as high as 77p, and were about 65p before the small-cap sell-off started to erode prices in the summer.

Many other groups are in the same leaky boat. Companies continue to trade well, but as investors have deserted, their shares have plunged. As a result, many are on bargain-basement ratings and are worth keeping under scrutiny.

The portfolio, which recruited at 30.5p, has sold three of its high-flyers to lock in profits. It has already returned to one of the dumped trio, and I am keeping an eye on the other two, which I feel still offer considerable potential., though in the money, never made sufficient progress to justify putting a reserve price on the shares.

I would not be surprised if the sad stock-market neglect prompts many microcaps to explore the possibility of going private. Managements must be disillusioned by the behaviour of their shares and by the poor reception that quite commendable results often receive. The buyout sums involved would be relatively small and easily attainable, even in these days of tightened credit.

Such privatisations would produce some short-term cash, although some shareholders would no doubt be out of pocket. Whatever happens, investors must not sell on the cheap: some of the prices today are simply ridiculous. When directors come carrying gifts they know they are on to a good thing – and they must be seen to pay for the privilege of annexing a company with a bright future.

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