Shares :Rich return in poor market

THE UK stock market indices are close to their low point for the year. Against this background, it is a relief to find that the overwhelming majority of my selections since June, especially among smaller companies, have performed well. This is aga inst the general trend in the stock market, where the number of shares falling each day has been much greater than the number rising.

A number of shares have been real star performers. Hawtal Whiting, which provides design services to the car industry, has seen its share price rocket from 128p when I wrote about it in June to 223p, after peaking at 305p. The company continued investingand maintained its capability during a tough recession and now is reaping the benefits with sharply rising profits.

Full-year profits for 1994, expected to be reported in June, should show an increase from under £1m to £3m or better, dropping the price-earnings ratio to around 13, which still looks reasonable value. Other special situation stocks to do well include the uniforms and textile specialist Wensum, from 65p to 103p, Booth Industries (security doors at No 10) up from 52p to 70p, the special materials group Wilshaw, up from 56.5p to 71p, and B Elliott, switching from machine-tools to higher value-added activities, up from 86p to 99p. All these shares look well placed to make further progress.

Sectors doing well include fund managers, where prices received a boost from the short-lived merger proposal between SG Warburg and Morgan Stanley. Shares in Mercury Asset Management climbed from 619p to 724p on the theory that they will benefit from anydeal. Other fund management group shares to go smartly higher included Edinburgh Fund Managers, up from 624p to 725p, and Jupiter Tyndall, rumoured as a possible bid target, up from 330p to 385p. There are also solid gains on bus shares, includi ng Go-Ahead Group, Badgerline, Stagecoach and GRT Bus, helped by the excellent results being reported.

Sharply increased profits are a key factor behind many of the outperforming selections. Companies reporting dramatic profit increases include the car safety group, First Technology, up from 333p to 370p, the plant hire specialist, Sheriff Holdings, up from 331p to 383p, and the Epos systems specialist, Real Time Controls, up from 163p to 171p.

An area of developing excitement in the stock market is high technology. Among the stars have been Magnum Power Selection, up from 65p to 114p having been as high as 144p, and Filtronic Comtek, 164p from 120p after peaking at 176p. A newly emerging star is VideoLogic, the multimedia technology specialist, where the shares have already leaped from 42p to 63p since I wrote about them last week. A share that has virtually trebled since the summer is likely to be hit by bouts of profit-taking, but the medium-term potential looks stunning.

Alongside figures showing continuing losses, the group has announced a partnership with NEC to complete development on a hardware and software package that should make video games machines cheaper, with more realistic pictures. The next key stage, likelyover the next few months, is an agreement with one of the giants of the video games market, Sega or Nintendo. The market VideoLogic's products are addressing has a global value around £15bn, and the shares remain an outstanding speculative buy.

Many of my recommendations have yet to make a significant move. This is unsurprising in a poor stock market. Patience is an important ingredient, but this only applies to stocks that are behaving well. If the shares are weak and the news flow is discouraging, the shares should be sold. This would include CML Microsystems, where the shares have tumbled to 208p from 269p, after a profits warning because of problems with its traffic division. Borderline cases are the US cruise giant Carnival Cruise Lines, down from $23.50 to $19.88, and Arthur Shaw, down from 26.75p to 21p. Carnival should be sold, but Shaw could be kept unless it drops below 20p.

My weak point has been overall market timing. My theory is that shares are cheap whenever the FT-SE Allshare index falls below 1,500. This has happened three times - in June, October and December. But so far, the subsequent rallies have been short-lived,which has made my recommendations to buy FT-SE 100 traded call options disastrous. My hunch is that it could now be third time lucky and that FT-SE 100 January 3,100 calls at 31.5p (expiring on Friday, 20 January) could be worth buying.

David Schwartz, who specialises in detailed analysis of stock market behaviour, insists that December is historically the best month of the year for holding shares, and that prices usually rise in years ending in a five - as next year does. The turn of the year also benefits from the stimulus of new year tips and pundits making forecasts for the year ahead.

Finally, there has been a pattern since the mid-1980s of bull and bear years coming in succession, pointing to a bullish performance next year.

Premature bullishness has also affected my blue-chip selections, which have languished with the indices. My strategy with blue chips is to try to take a contrary view and recommend buying when shares generally are weak. The reasoning is that shares in large companies always recover to new peaks eventually, so a patient investor should make money by buying into weakness.