'Independent' share tips outperform market

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The Independent Online

Economically, it feels like spring. And there has been a budding performance so far from The Independent's ten tips for 2002. Our quarterly term card shows the portfolio comfortably outperforming a still changeable market.

Aegis, our best performing stock, typified the mood of cautious optimism in its most recent update. The world's biggest independent media buying group, it expects trading to stay tough until the latter part of the year, but it is encouraging that sunnier weather is at least on the horizon. Sir Martin Sorrell, boss at the giant WPP, has predicted a "saucer-shaped" recovery, while Granada this month signalled that ITV advertising may show year-on-year growth for the first time in May.

The one-third gain in the Aegis' share price is partly due to the market's new warmth towards media cyclicals, and partly because its unique position could make it desirable to a bidder. On a price-earnings rating of 30, the shares are starting to look fully valued, but the $3bn bid by Publicis of France for Bcom3 highlights the growing momentum behind consolidation in the sector.

The bulk of our tips are companies emerging from corporate disaster of one sort or another and, mostly, these have made steady steps forward. British Airways unveiled its Future Size and Shape strategy document last month, sparking just the sort of stock market re-rating we had hoped for. The job and route cuts will leave it a leaner machine. Longer-term worries remain over its ability to compete with the low-cost carriers, but the effects of 11 September on transatlantic travel have been less profound than initially feared and the thawing business climate should ensure monthly traffic figures continue to encourage. The airline is accelerating away from fears of bankruptcy. S&P, the rating agency, has lifted its threat to reduce BA's bonds to junk status, and the house broker Merrill Lynch – which famously thought BA shares were not worth buying for much of 2001 – has turned positive. Operating losses this year are likely to be kept to £250m, half that originally feared, and BA should now be comforably profitable at the operating level in 2003.

BT Group has made more significant steps on the road to managable debts, which were down to £13.6bn by its latest results. It has been giving details of 13,000 job cuts across its retail business, including the rationalisation of call centres this week. Earnings now appear more stable and predictable. It remains for Sir Christopher Bland, the chairman, to elucidate a clear strategy for the future, however, and his on-off flirtation with the idea of a move into broadcasting suggests there is more work to be done.

Mothercare proved that profit warnings come in threes, completing its hat trick in January on finalising the £4.1m costs of problems with a new warehouse, after which the shares returned to positive territory. And Chubb, the security business, beat market forecasts with its 2001 figures and promises of 5 per cent top-line growth this year, with bolt-on acquisitions on top of that.

ScottishPower shocked the market with news it will cut its dividend by about a third from next year, erasing the steady progress it had made before this month. It is making better than hoped progress in cutting costs at PacifiCorp, the US business that has given it so much trouble in the last two years, and for at least another 18 months it remains worth holding for one of the chunkiest dividends in the FTSE 100.

Another disappointment has been Brit Insurance, which raised close to £300m to expand its ability to write insurance policies this year and capitalise on soaring premiums. There are worries that the rush to increase capacity may dampen the premium increases sooner than thought, but the insurance cycle is traditionally four or five years long and there is surely scope for growth. Brit's main problem has been worse than feared losses on 2001's natural disasters, but this has now been more than factored in.

BTG, which seeks and commercialises new inventions, has been a poor performer. Its decline reflects a continuing malaise in the technology sectors – which has seen the FTSE techMARK 100 slide almost 20 per cent over the quarter – and a hiatus in licensing deals. The company has 300 technologies under development, though, and a trading statement this week gave confidence it can sell on some at least this year. Our other tech play, the software services group Logica, has proved similarly disappointing to date. It has further reduced growth expectations for its text messaging division, and its p/e rating has been brought into line with the market as a result. But Logica has proved it can win contracts to supply telecoms firms with a new generation of mobile data software, and the shares look oversold.

Our shot to nothing, Clean Diesel Technologies, was the talk of the City's small-cap punters at the start of the year, and quickly spiked higher in an illiquid market. Results last week stoked hopes for strong revenue growth this year as it licenses its innovative catalysts for improving the emissions and efficiency of deisel engines. It gave news of the start of a distribution deal since the start of the year.

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