Windfall fever is over, but are stocks feeling the chill?

Keeping hold of that odd portfolio may not be the wisest strategy, says David Prosser

Not many people recall exactly what they were doing 10 years ago, but if you were a member of the Cheltenham & Gloucester Building Society, your memories of May 1995 may be clearer. Lloyds TSB completed its purchase of the society that month, handing free shares worth thousands of pounds to C&G members, sparking windfall fever across the building society sector.

Not many people recall exactly what they were doing 10 years ago, but if you were a member of the Cheltenham & Gloucester Building Society, your memories of May 1995 may be clearer. Lloyds TSB completed its purchase of the society that month, handing free shares worth thousands of pounds to C&G members, sparking windfall fever across the building society sector.

Members who have kept the free shares they were given by societies such as Halifax, Alliance & Leicester and Northern Rock have ended up with a strange portfolio of banking stocks. But it's not just demutualisation shares that investors are hanging on to. Millions of small investors have a ragbag of shares in companies that were privatised during the Eighties.

Richard Hunter, head of UK equities at Hargreaves Lansdown Stockbrokers, says many investors now own an oddball selection of demutualisation and privatisation shares. He thinks it is important to rationalise such holdings.

"We would urge investors not to be overly sentimental about stocks that may have come from a privatisation, say," Hunter warns. "It is all too common for people to hold on to a share or even forget about it - quite often, if it has fallen significantly in value, people are waiting for it to rebound, which may not happen."

To help you make sense of your portfolio, The Independent asked Hunter and two of his stockbroking peers to give trading recommendations on more than 20 demutualisation or privatisation stocks.

ALLIANCE & LEICESTER

"Hold, though there is better value elsewhere in the sector," Hunter says. Hilary Cook, director of investment strategy at Barclays Stockbrokers, agrees with that, though she rates the share as a "weak hold". Graham Spooner, head of investment at The Share Centre, is more negative - he rates the company as a sell.

Several analysts believe A&L remains a prime takeover target in the banking sector. But the current share price already includes a premium reflecting this.

AWG (ANGLIAN WATER)

Spooner and Cook rate AWG, which now runs Anglian, as a hold, while Hunter's recommendation is buy. "The shares are trading at a discount to their current valuation," he says. The company is in the middle of an efficiency drive following a review of pricing in the sector by the regulator Ofwat last December.

AVIVA (NORWICH UNION)

Aviva is the stock market-listed owner of the former mutual Norwich Union. Although it is well placed to benefit from potential growth in private pension provision, the experts' views differ. Cook says the share is a hold, Spooner rates it as a buy and Hunter says sell. The latter suggestion is based on Hunter's view that the whole life and pensions sector faces "undesirable conditions".

BAA

Hunter and Spooner suggest buying the shares, but Cook is negative. She warns: "We anticipate weakening news-flow from BAA as traffic growth slows, while costs are rising and retail growth may remain subdued by a weak passenger mix."

BP

Britain's biggest company is a buy with all three experts. Cook says: "While the oil sector may now pause for breath following its strong run on the back of a sky-high oil price, we expect BP's shares to outperform the sector with its strong fundamentals and management." Hunter adds: "All segments of the company are performing well."

BRADFORD & BINGLEY

"Sell B&B, one of the weaker UK banks, if you are considering earnings potential," Hunter says. Spooner agrees, but Cook suggests the company is worth keeping for dividend income. "B&B offers an attractive yield and following a period of underperformance on concerns over a slowing market, we now regard the shares as fairly valued."

BAE SYSTEMS

BAE, the new name of former state-owned British Aerospace, is "an appealing investment given its significant defence bias," Hunter says. Spooner also suggests buying the shares, while Cook says hold.

BRITISH AIRWAYS

Cook is not a BA fan. "With excess capacity an ever-present problem in the industry, competition from discount airlines showing no signs of abating and the oil price remaining stubbornly high, we would now recommend taking profits," she says. Sell is also Spooner's verdict, but Hunter is positive (see story below).

BRITISH ENERGY

One of the worst-performing privatisation shares, but Spooner and Hunter advise holding on to the shares for now. "Rising power prices will be offset by a UK gas supplies squeeze in the short term," Hunter warns. Cook says sell.

BRITISH GAS

Spooner explains: "British Gas has been divided into three companies, exposed to individual sectors such as servicing (Centrica), gas production (BG Group) and gas transportation group (Transco)." These stocks face differing prospects. BG is a hold with all three experts, who also agree in tipping Transco, a good dividend provider that has strong US growth possibilities. Cook likes Centrica, though Hunter and Spooner are much less positive.

BRITISH TELECOM

"The traditional companies may no longer represent the value they once did," Spooner says. "Investors in BT, for example, cannot have failed to notice this stock has continually performed poorly over the last five to seven years." His sell recommendation on BT contrasts with a buy for O2, the mobile phone company spun out of BT in 2001. Cook also prefers O2 to BT, though she rates both stocks as a hold. Hunter tipsboth companies (see story below).

CORUS

British Steel, an early Thatcher privatisation, now trades as Corus, and the "current valuation may attract potential acquisitors," Hunter says. But Spooner's hold rating is less positive - the company is in a transitional stage - while Cook says sell.

FRIENDS PROVIDENT

Friends has disappointed since floating in 2001, though it is seen as a well-run company. Our experts suggest sticking with the stock if you already own it.

HBOS

Halifax, formerly Britain's biggest building society, has merged with Bank of Scotland to form a banking group capable of challenging the big four high-street giants. Cook and Spooner say hold, but Hunter thinks that, after recent price weaknesses, the shares are a buying opportunity.

KELDA (YORKSHIRE WATER)

Kelda is holding its own in the water sector without exciting investors. Cook and Hunter lack enthusiasm, rating it a hold at best; Spooner is more positive.

LLOYDS TSB

It's 10 years since Lloyds TSB awarded shares in the bank to Cheltenham & Gloucester members in return for ownership of the building society. Hunter thinks Lloyds shares are now a strong buy (see below); Cook and Spooner say hold.

NORTHERN ROCK

"Buy: Northern Rock is running away with mortgage market-share," says Hunter. "Hold, though it continues to deliver earnings growth ahead of the industry average," Cook adds. Spooner says hold, but warns: "Shares in some of the main mortgage banks would be susceptible to continued or greater falls in the housing market."

SCOTTISH & SOUTHERN

"Investors in utilities will have enjoyed the best of the privatised shares especially if they have reinvested income," says Spooner, who rates the company a buy. Cook and Hunter are less positive, but suggest keeping the shares for now.

SCOTTISH POWER

All three experts advise selling out of Scottish Power. "There are poor envisaged returns from Pacificorp, the US subsidiary," Hunter warns.

SEVERN TRENT

"Severn Trent is our preferred stock in the water sector," says Cook, who recommends retaining shares. Spooner and Hunter say buy. "The company has both defensive and speculative qualities," Hunter says.

UNITED UTILITIES

Hunter is a big fan of the company (see story left), while Cook and Spooner both say hold.

Richard Hunter, of Hargreaves Lansdown Stockbrokers, suggests investors realising cash from sales of windfall and privatisation shares look at five buying opportunities:

* "At Lloyds TSB, the core UK retail business is gaining momentum. Add in to the pot, general - if unconfirmed - bid speculation and a very healthy dividend yield.

* "BT has been the subject of pessimism but this may have been overdone. It is conceivable BT could increase its dividend yield over the next few years to 8 per cent and buy back a sizeable slice of its equity.

* "Sharing the same ancestry but a different animal altogether is O2. Bulls would say the company is valued without debt, and is aggressively seeking growth in the rapidly expanding German market.

* "United Utilities is a classic defensive play, which makes the shares interesting given the market's current lack of direction and nervousness. Its core businesses have a strong outlook and there is a high dividend yield of nearly 7 per cent.

* "The 'Easter effect' that has left many retailing stocks reeling after shoppers deserted the high street has had the opposite effect on British Airways. The recent weakness in the share price has provided a buying opportunity."