The Investment Column: Liberty has performed well but it's time to take profits

Micro Focus International; Armour Group

Our view: Take profits

Current price: 1119p

When Jon Hunt sold out of Foxton's earlier this year, some observers took it as a sign that the property market had peaked. But the commercial property market was supposed to be different – subject to a different cycle and detached from issues affecting the residential market.

Despite posting a bullish set of third-quarter numbers yesterday, Liberty International, the commercial and retail property giant, gave a more cautious outlook. Pre-tax profits for the quarter fell from £31.5m to £28.8m, although there was a slight increase in pre-tax profits for the first nine months to £96m. Net rental income for the first nine months rose by 6.1 per cent to £261m.

The company cautioned that investor enthusiasm for commercial property was "diminished" – hardly a surprise given the collapse of the credit markets since the last update. That said, its focus on high-quality retail space, mainly in out-of-town shopping centres, offers investors some protection against a weaker wider market.

Liberty shares have been a solid performer over the past few years, riding on a wave of property investment, cheap credit and liquidity in capital markets. But regardless of the quality of its portfolio it is difficult to see those conditions returning in the near term.

The shares are far from cheap either, and the stock is now trading at an 18 per cent discount to its net asset value, dearer than its peers and a valuation that will begin to look very stretched if conditions in the credit markets do not improve soon.

Any investor in the stock for a reasonable time should still have plenty of profit left on the table. While this is an impressive set of results against a tough environment, the shares have held up much better than some of their rivals. But investors should err on the side of caution and make sure that they bank their profits now – Jon Hunt may have timed his exit from the property cycle perfectly but it is still not too late to follow suit.

Micro Focus International

Our view: Buy on weakness

Current price: 355.5p

Technology investors with long memories may not recall Micro Focus with a great deal of fondness – it was one of the first pure software groups to list in London, and it suffered as much as any as the dot.com boom burst. A period in private ownership resulted in a return to the markets in mid-2005 and, judging by yesterday's trading update investors could do much worse than take another look.

Micro Focus produces software that allows companies to update older systems without having to fork out for a complete overhaul of their information technology systems. It may come as a surprise to readers, but approximately 70 per cent of transaction systems still run on mainframe computers, and given the current economic climate corporations are more likely to upgrade legacy systems than invest heavily in new systems.

First-half trading was impressive. Sales came in at $107m, well ahead of even the most bullish forecasts and 35 per cent better than in the first half of 2006. Most importantly, the US side of the business, which has struggled in the recent past, looks to be turning the corner and reported sales growth of 20 per cent.

Like most technology stocks, Micro Focus is not cheap, trading on more than 21 times forecast 2008 earnings – and given the 21 per cent rally following yesterday's statement that number is now significantly higher. Although the company looks to be making all the right moves and is undoubtedly in a strong position, both financially and within its markets, it remains a volatile stock, and better buying opportunities will arise in this market. Buy, but hold your horses for now and wait until some profit-taking bites.

Armour Group

Our view: Buy

Current price: 42p

Armour Group has gone through something of a transformation over the last few years. It used to own Turtle Wax, among other household brands, but now sells high-end consumer electronics, the sort of thing boy racers want in their cars and their homes.

Although pre-tax profits for the full year fell sharply, coming in at £289,000 from 2006's £2.05m, most of that fall was a result of disposals of some of Armour's previous operations, which also resulted in a decline in net debt to £2.9m. The transformation of the company is now complete, and stripping out the disposal costs the numbers look very encouraging. Operating profit rose 40 per cent to £3.8m on the back of a 33 per cent jump in sales to £57.4m.

The sale of the custom installation business in September allows Armour to focus fully on its branded product business, which is driving its growth. The company has exclusive distribution deals with a number of top-name hi fi equipment makers, including NAD,Q Acoustics, Tivoli andAlphason, on top of manufacturing its own kit including Autoleads.

Armour's strategy of teaming up with house builders and car retailers to offer its products as extras in major purchases is clearly working. Although a potentially slowing economy and a stagnant housing market is cause for caution, Armour Group has made a solid start to the year and its executive product range should offer some defensive qualities. On an undemanding price-to-earnings ratio of under 9 times forecast 2008 earnings, the shares offer good value and plenty of upside for high-risk investors. Worth a punt.