The Shares that could make 2011 a prosperous Year

The Independent's tipsters had a good 2010 and beat the market. James Moore unveils the top 10 share picks for the next 12 months
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If only we'd taken the safe option and picked Tesco.

Last year The Independent put together a "special situations" portfolio, throwing caution to the wind and taking some big risks. Given the level of uncertainty out there, we thought that if you were going to play the market why not go the whole hog and roll the dice in search of some really big returns? For the most part this strategy paid off.

Our top performer, Heritage Oil, gained 6.2 per cent, closely followed by satellite communications firm Avanti (up 51 per cent). GW Pharmaceuticals, which makes pain-relief drugs using derivatives of the cannabis plant, was another high-flyer, gaining 29.3 per cent. In fact, of The Independent's 10 tips, seven finished in positive territory, all with double-digit gains. It was one of the three that lost ground that caused the trouble: JJB Sports had (another) annus horriblis. And its fall of more than 80 per cent turned our overall performance from fantastic into merely good. Because even with its tarnish, if you had put £1,000 into each of our stocks at the start of the year your £10,000 would have turned into £11,344.50 – a gain of almost 13.5 per cent. Tracking the FTSE 100, by contrast, would have turned £10,000 into £10,899, a gain of just under 9 per cent.

This year, with most experts predicting solid if unspectacular gains for the markets amid a still uncertain economic backdrop, we have chosen a more conservative approach. First up, there is a British technology star.

In 2010 there was an undeniable strengthening of the UK semiconductor industry. The stand-out pick from last year was Arm Holdings (423.3p). Its share price was at 177.5p last January. We are expecting more, with the next generation of Apple's devices due out this year, coupled with talk that Microsoft is to launch a Windows version running on Arm processors, suitable for tablets. Sale of smartphones and tablets are only going one way. Arm's share price should follow.

The principal business of Domino Printing (650p) is in labelling food packages. The firm produces machines that put the "variable data" – things like sell-by dates that can't be printed with the rest of the label – onto packets and tins, and then offers ongoing services to those clients. Domino put out a good set of full year figures in December, beating estimates and sounding bullish. We see the stock as pretty defensive, and it is making all the right moves in 2011, including seeing strong growth in China, India and South America. There's a good dividend as well.

Rio Tinto (4486.5p), the miner which recently unveiled an agreed $3.9bn (£2.5bn) bid for Mozambique-focused coal group Riversdale Mining, has gone back to being the company it was before embarking on the pricey acquisition of Alcan, the aluminium miner bought in 2007. Rio is very focused on its asset portfolio, hence the company's interest in Riversdale. Mozambique offers vast coal resources, and getting in now will put Rio in a strong position to capitalise on higher prices and higher demand in coming years. Rio's valuation, at seven times forecast earnings, also makes it look cheap.

At first glace, it may seem as if BHP Billiton (2551p) has had a tough 12 months. Plans to forge an iron-ore joint venture with rival Rio Tinto came to naught, and then it failed to acquire Canada's Potash Corp, being unable to convince the government there that the deal would benefit the country. But this horse is worth backing next year. BHP has tons of cash – so much so that even after it is done with its current buyback programme, analysts reckon it could spend a further $20bn-$30bn on this by the end of 2012. City scribblers of every stripe have been highlighting the prospect of higher dividends. And yet BHP only trades in line with the wider sector, many of whose constituents are much weaker.

Gold has soared almost continuously since the financial crisis, hitting a string of all-time highs this year and currently cruising at nearly $1,400 per ounce. But accounting for inflation gold is nowhere near an all-time high. In January 1980, at the height of the second oil crisis, it boomed to $850 – a whopping $2,423 in today's terms. Also look at the dollar. While most of the developed world slams on the spending brakes, the Fed is printing money like bally-hoo. Inflation is a real fear, and gold is a hedge against it. African Barrick Gold (611p) is the world's biggest gold miner and had good news recently from its Nyanzaga project in Tanzania. The stock is cheap at less than 10 times next year's forecast earnings.

So to oil. The worst is over for BP (465.55p). But the shares don't know it yet. From cruising along well above the £6 mark, the oil major's stock fell a gut-wrenching 55 per cent to just 296p in the aftermath of the Deepwater Horizon disaster, which unleashed the worst oil spill in US history. The shares turned the corner at the end of June, accelerating once gaff-prone Brit chief executive Tony Hayward was replaced by US smooth-talker Robert Dudley in July, and after the spewing well was finally plugged in September. There will still be legal and regulatory bumps in the road. But BP is fundamentally sound and the oil price is rising fast.

Sales growth at Morrisons (267.6p) has fallen behind its big three rivals – Sainsbury's, Tesco and Asda – and this has weighed on its shares since they surged past 300p in September. However, we think the recent sell-off has been overdone, and there are plenty more reasons to buy into Morrisons' shares again – not least as they trade at a substantial discount to Tesco and Sainsbury's. If consumers opt to limit spending to essentials, Morrisons is more focused on food sales than are its rivals.

Sports Direct (160.3p), the sportswear and equipment retailer, was in fine fettle last month, posting profits up 40 per cent for the half-year to 24 October. But the company – controlled by deputy executive chairman Mike Ashley – trades at a discount to many retailers (partly because of Mr Ashley). JJB isn't likely to be a threat for a long time to come, though, so profits ought to continue rolling in.

There is no doubt that much of 2010 has been tough for Smith & Nephew (676.6p), with the manufacturer of replacement knees and hips dropping under 540p in September, after coming into the year at nearly 640p. Yet it has seen a resurgence in December, and there is a real possibility the group could breach 700p before the end of this year. It seems likely the continued takeover chatter will continue to push it up.

Finally, to F&C Asset Management (84p). When markets rise, fund managers usually follow. And with activist investors pushing for a shake-up, the shares could get a double boost. F&C is a corporate governance champion, but it's not just its good reputation that makes it worth a punt.