Six shares that will stop the rot this year

proved to be disastrous for equities, and 2003 may not be much better. But 'IoS' staff are tipping some companies to walk tall out of the wreckage

Investors could be forgiven if they give the equity markets a wide berth after a dreadful 2002. But bravery has its rewards. The bottom of the market could be near. Certainly, the shares in The Independent on Sunday 2003 portfolio are all a lot cheaper than they were a year ago.

Continuing our cautiously optimistic view, we have chosen a mixture of defensive stocks and higher-risk plays on bombed-out markets. The question is, do you feel lucky?

AstraZeneca

When even the most bullish market pundits are forecasting no more than slow growth in 2003, it makes sense to load up the portfolio with something big, solid and defensive. Drugs giant Astra-Zeneca fits the bill nicely.

Last year, the City rather lost faith in big pharmaceutical companies; there were doubts over whether size really did matter, especially when it came to building a healthy pipeline of new drugs. This, combined with various legal wrangles, left AstraZeneca's price a good 15 per cent down over last year, and at 2,183p the shares are certainly looking cheap now.

When it comes to the threat of generic competition and dried-up pipelines, AstraZeneca is considerably better insulated than most. It should continue to deliver strong revenues next year whatever the economic climate.

AstraZeneca's shares could even be in line for the odd spike. At the very end of 2002, the group impressed analysts with a clutch of early-stage drugs, and more news on these can only help the share price.

However, the biggest argument comes down to the dividend, which is fast becoming the buzzword for investors girding their loins for another tough year. All the big City investment houses are telling their clients to look for stocks offering decent dividends. Over the long term, they are reminding people, dividends have provided 60 per cent of all returns on equity.

Admittedly, AstraZeneca's dividend payout may make only a small difference to your wealth between now and 31 December 2003, but if the institutions start to buy into that investment theme, it will give the shares plenty of momentum through the year.

Cable & Wireless

What can you say about a company that has lost nearly 90 per cent of its market value in the last year, has shareholders baying for its chief executive's blood, saw its new chairman resign before he took up the post, unveiled a potential £1.5bn tax bill that it had told no one about, and faces having its remaining lucrative business scythed apart by competition regulators? The answer, obviously, is: buy.

The case for Cable & Wireless shares is based on the City's lack of trust in the company and its management. How else would you explain the fact that a company with £2.2bn of net cash in its accounts last September can now be valued, at Friday's close of 46.5p, at just over £1bn? This gives the group a negative enterprise value, and the reasons for that are:

* Although Cable & Wireless says it will not have to pay the £1.5bn tax bill arising out of its sale of the One2One mobile phone network, no one believes it.

* Although Cable & Wireless says it is going to stop the outflow of cash into its soon-to-be-closed US business, no one believes it.

* Although Cable & Wireless says the competition issues arising in its regional businesses, most of them in the Caribbean, are nothing new, no one believes it.

The lack of trust in Cable & Wireless, particularly in its chief executive Graham Wallace, means the City has written down the group's prospects to near apocalyptic levels. This situation is unsustainable. Mr Wallace will almost certainly be replaced and a new face will be able to convince the City that Cable & Wireless's world is not about to end and the company has to be worth something, even if it is only its net cash value.

Commerzbank

If you were picking any European market to back based on last year's performance, Germany's would probably not be the one. The DAX index of big German stocks fell 44 per cent last year, which was its largest annual drop since 1948 and reflected a sudden collapse of confidence in Europe's largest economy.

Within the DAX, Commerzbank was one of the worst performers, with its shares falling 53 per cent over the year and 80 per cent down since their peak in 2000. In one light, that's a disaster story; in another, it leaves a very cheap stock.

The point you have to remember is that the German government is not, repeat not, going to let Commerzbank go under. Huge parts of the industrial heartland of Germany – known as the Mittelstand – are privately held and bank with Commerz. However bad things get, Germany can be relied on to shore up the bank against any problems that emerge in order to stave off a complete meltdown.

There are good reasons for being optimistic. If 2003 is, as some predict, Europe's year for recovery, then it will probably be Germany that gets the ball rolling. Commerzbank has been quietly ruthless in its cost-cutting measures, and has turned itself into a streamlined play on the recovery of the wider German economy. With the euro still looking robust against the dollar, Commerzbank's margins will be especially flattered.

Commerzbank shares make an interesting each-way bet. If things get better in Germany, the bank's shares, as they now stand at €8.27, will look like a steal. If things get dire, either the government will step in with a fat cheque or any one of Europe's acquisition-hungry banks will make a lunge. Either way, you win.

Reuters

The news and financial information giant has experienced tough times over the past two years. Reuters has come up against some doughty competitors, such as Bloomberg and Thomson Financial, in all of its main markets. In addition, its core customers, the investment banks, are shedding staff in their tens of thousands.

Fewer employees mean fewer Reuters screens on City trading desks, and money worries at the investment firms mean that they may be looking to cut costs further – including the amount they spend on information sources such as Reuters.

In addition, the company's internet share-trading subsidiary, Instinet, faces pressure on sales due to poor trading on the Nasdaq stock market in the US.

In response to these concerns, the company's shares have plummeted, with its current price of 187p down from around 700p at the start of last year.

All these issues may continue to plague Reuters in 2003. So why tip the shares? The chief executive, Tom Glocer, has been in place for around 18 months and has yet to make his mark. But three new products are due to be launched this year and they have already received warm responses from some City analysts. If successful, these could start to take market share back from Reuters' fierce competitors.

The company has also been cutting costs savagely in order to improve its margins. Although one-off costs have hit headline profit, the cash flow has been strengthened. This should keep Reuters' relatively healthy balance sheet in good shape.

Any sign of a recovery in the financial markets should help Reuters' share price substantially, as will any success with the new information products. Additionally, there is some hope of a bid, particularly as Thomson Financial is rumoured to be interested. Reuters is a high-risk investment, but one that offers potentially high returns.

Scottish Power

Investors seeking the relative security of a utility with the potential for a little upside sparkle should look no further than Scottish Power.

There are three arguments for this: what Scottish Power isn't; what it is; and what it could be.

First what it's not. Scottish Power is not a pure generator. On top of its power stations, the company has some 3.5 million customers. This means that it is shielded to a large extent against the fall in wholesale prices, which is the main reason why British Energy is in the mire. Some investors have taken flight from the electricity sector because of British Energy's woes, but this is an over-reaction.

Second, what Scottish Power is. Despite its name, over half of the company's profits come from its American business, PacifiCorp. This has been a thorn in its side over the last couple of years. A poor bet on US electricity prices and worries over the California energy crisis plunged Scottish Power into the red, and its shares have fallen accordingly.

However, these troubles are largely behind it and in November Scottish Power reported net income of £178.4m for the half year. The company also promised to double its US operating profit to $1bn in three years. But this message seems to have fallen on deaf ears and Scottish Power's shares have hardly budged.

Finally, what it could be, because there's the growing prospect of an electricity union with Scottish & Southern Energy. While many mergers have in the past destroyed value for shareholders, there seems to be real logic in the combination of Scottish Power's growth prospects and Scottish & Southern's ultra efficiency.

All these factors make Scottish Power shares worth a look at their current price of 356.25p.