`Independent' team's hopes for 1998

It was not only PDFM's Tony Dye who read the runes badly in 1997. After respectably outperforming the market in 1996, The Independent's share selections for this past year have, with one or two exceptions, been lacklustre. We failed to capitalise on the surge in banking and pharmaceutical stocks.

For 1998 we have come up with a spread of stocks we hope will perform rather better. The biggest winner in 1998 is likely to be a bid victim, probably in the financial sector. But picking bid targets is an inexact science so the list is slanted towards stocks with either good growth or recovery prospects.

Leisure stocks feature prominently, beginning with Trocadero. After a breathtaking rise the shares have crashed from a high 79.5p to stand at 17.5p. The problem has been not the flagship West End complex but Segaworld, the hi-tech games park which proved an embarrassing flop for the old management team.

Replacements John Conlan and Nick Tamblyn are poised to resurrect the group's fortunes. The pair built up First Leisure from scratch and now have more than pounds 100m at their disposal to start all over again. The group's rights to all of Enid Blyton's books and characters could also turn out to be a little goldmine.

Greenalls, the pub company, is another potential recovery stock. The company overpaid for Boddingtons two years ago and its shares have fallen sharply since last year's high of over 600p. Now at 439p they are off their low but should climb higher. Management is increasing capital expenditure with 20 new pubs and 600 new bedrooms in its De Vere hotels division. It is rolling out more pub formats such as its Miller's Kitchen brand, while underperforming boozers are being pushed into the tenanted estate. If current management cannot deliver a re-rating, a potential predator could break the group up.

Our final choice in this sector is Northern Leisure, the fast-growing operator of licensed dance halls. The shares have doubled in value over the last 12 months and now sell at 30 times historic earnings. But earnings per share are expected to grow from 12.8p this year to 20p next year and 30p in 1999. If so the shares should top pounds 5 in 1998.

Another area which looks promising is the UK's nursing home sector, shaping up for a better 1998. Local authorities have bigger budgets to pay for long-term care and consolidation has removed some of the more disreputable operators.

Tamaris is one of the smartest left. Though capitalised at just pounds 18m, it has grown profitably from 234 beds in 1994 to almost 5,000 now. It leases rather than owns its homes, allowing it to expand with minimal capital and with no direct exposure to the volatile property market. Tamaris' management has achieved returns of more than 25 per cent and average occupancy of almost 90 per cent. Tamaris is on 1998/9 p/e of just 7.5 times, with the shares at 2.25p.

Another growth area in 1998 will be outsourcing - taking on tasks like IT contracted out by large companies and government departments. Here our choice is WS Atkins. At 363.5p its shares trade at 18 times forecast earnings - modest compared to the sky-high ratings enjoyed by more established outsourcing groups. That gap should narrow this year as the group brings in new contracts. Its engineering consultancy division is pursuing overseas business, while Atkins also has a pounds 43m cash pile to spend on acquisitions.

This year we have largely steered clear of industrial stocks with heavy exposure to sterling. But one stock that ought to be on the way up is BTR. It had a dreadful time of it in 1997 with repeated profit warnings and was the worst performing FTSE 100 stock. The strategy of selling off superfluous assets and concentrating on its core engineering capabilities is undoubtedly the right one, however, and its long term prospects are excellent.

Another index stock to tuck away for the new year is BSkyB. Its shares didn't do much better than BTR's last year. Sky faces a couple of years of flat or falling profits as it invests in its digital future. Growing competition and regulatory pressure mean it cannot hope to enjoy the same monopoly of subscription TV in the digital age that it had with analogue. None the less Sky remains supremely well placed to exploit the opportunities of pay-per-view and interactive TV.

With independence for the UK's regions high on the political agenda, our "devolution stock" for 1998 is the Scottish-based Morrison Construction. The shares are up from 235p this time last year to 325.5p. The company has built everything from multiplex cinemas and supermarkets to hospitals and roads under the private finance initiative. It has thrived while most construction companies have struggled, and now has a market capitalisation of pounds 220m. The shares are at a premium to the rest of the construction sector but cheap against the market.

In investment banking we have gone for Close Brothers - that rarest of endangered species, an independent British merchant bank. There is a bit of a bid play, but the main reason for tipping Close is its good run of earnings growth, driven by the Winterflood stockbroking arm and the ex- Hill Samuel corporate finance team. The shares have already climbed from 320.5p at the beginning of 1997 to 530.5p now, after hitting 549.5p in December. With a prospective p/e of 15 they hardly look overvalued.

And finally, to one of the all-time investment flops. Floated a decade ago at 350p, Eurotunnel shares have been underwater for as long as anyone can remember. They started 1997 at 77p and ended the year at 60.5p. But the debt refinancing is approved, the operating concession has been extended and the merger of the two ferry operators should mean fewer price wars and better revenues this year. Sooner or later the tunnel will turn into a licence to print money and although the first dividend is still on the distant horizon, 1998 may just be the year when Eurotunnel rediscovers itself.

City Writers

How they performed in 1997

Tipped at Price now Gain/Loss

Sears 95p 52.5p -48%

Storehouse 258p 237.5p -8%

Allders 173p 236.5p +37%

Pearson 749.5p 791p +5.5p

Flextech 677.5p 527p -22%

Pace Micro 230.5p 46p -80%

Caspian 46p 23.5p -49%

Ascot Holdings 285p 250p -12%

British Taxpayers Assn. 28p 13.5p -52%

Average performance -23%

FT All Share 2013.66 2411.00 +20%

FTSE100 4118.5 5135.5 +25%

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