Market Report: Revival in smaller company stocks hits the buffers after summer

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The Independent Online
THE UNDERCARD'S gravy train came to a shuddering halt yesterday as a cocktail of bearish factors caused sharp falls in both the FTSE 250 and the SmallCap.

Second liners were on offer for most of the day, as a series of profit warnings and bearish statements compounded the usual fears over US and UK interest rates.

The double whammy caused a 94.4-point - or 1.5 per cent - drop to 5885.8 in the FTSE 250 and a 32.9-point slump to 2802.3 in the SmallCap. For once, the smaller indices underperformed their bigger brother. The FTSE 100 closed "just" 48.3 down to 6067.7 after another volatile opening on Wall Street.

However, the market talk centred on the tumble in the undercard. The two smaller indices have been the stock market stars of the past few months, rising to record highs as sentiment turned from the expensive blue chips to the undervalued minnows. This "small is beautiful" attitude has helped the second liners to outperform their bigger peers. For example, the punters and institutions who invested in the FTSE 250 during the summer are now 30 per cent richer than those who stuck to the FTSE 100.

However, yesterday's events could signal that investors are returning to the safe-haven of the bigger stocks in anticipation of a bumpy few months.

Dealers said that the obvious reasons for the falls were old-fashioned profit taking and investors' desire to offload rate-sensitive sectors such as housebuilders and engineers, which make up a chunky part of the undercard. However, there was a more intriguing reason for the fall from grace of some of the second liners. At the end of last month, a raft of FTSE 250 stocks were added to the much-criticised order book, allowing brokers to trade them electronically. However, mid cap stocks are generally more illiquid than blue chips and putting them on the automated trading system has only succeeded in increasing the volatility in their prices.

This flaw was all too evident yesterday when the falls in two new entrants were exacerbated by the automated trading.

The packaging group Rexam slumped 24p to 269p after announcing the resignation of director Bob Hamilton. In itself, the news should not have caused such a fall and should have warranted some of the daft spreads seen in the stock. However, brokers said that they were forced to slash the price because it was impossible to sell the shares on the order book. Similar story for paper group Arjo Wiggins, 18.5p lower to 196.75p and courier group NFC, 17p lower to 208p after Deutsche Bank downgraded.

Two stocks from out-of-favour sectors were also hit. Homebuilder Wimpey topped the list of midcap fallers with a 14p slide to 120p after lukewarm interims and a pounds 4m write-off due to accounting irregularities. Engineer Morgan Crucible plummeted 17.5p to 262.5p on the fall-out from recent poor figures. Rival BBA closed 15.5p lower at 451.5p after a series of roguish trade way below Tuesday's closing price.

The dairy producer Unigate plummeted 24p to a near five-year low of 341p on continued rumours that it has lost its contract to supply milk to Tesco. Rivals Express Dairies, 3.5p higher to 133.5p, or Dairy Crest, flat at 292.5p, could replace Unigate.

It was not all doom and gloom in the midcap. Housebuilder Wilson Connolly cemented a 8.5p rise to 153.5p. Brokers say that its 10 per cent discount to asset value could tempt a UK or US predator. Smaller rival Try - often mooted as a bid target - closed 0.5p lower to 31p despite a 52 per cent jump in interim profits to pounds 1.85m. House broker Teather & Greenwood is forecasting pounds 4.8m at the year-end.

Set-top boxes maker Pace Micro buzzed 8.75p higher to 212 after a $12bn bid for US rival General Instrument by Motorola. Using the same multiple, Pace is worth 350p. Video technology specialist Imagination Technologies, the old Videologic, fell 5p to 99p despite talk of a large contract win.

Blue chips were enlivened by bid rumours. Imperial Tobacco was the day's best big-hitter, puffing 35.5p higher to 740.5p. Heavyweight broker Warburg was said to have put a 810p price target on the stock. However, bid-happy dealers talked of a mega-merger between Imperial and Gallaher, 6.25p higher to 443p, which has also been linked to Philip Morris and Japan Tobacco.

The household group Reckitt & Colman was the other blue-chip star, mopping up a 33p rise to 775p. US house Morgan Stanley was rumoured to have bought stocks on behalf of US clients in anticipation of US regulatory approval for Reckitts' merger with Holland's Benckiser. However, there were also wild talk of a last-minute counterbid from Unilever, 2p lower at 576.5p, or even the buyout specialist KKR.

Revived talk of a strike from Pernod pushed drinks group Allied Domecq 9.75p higher to 355.75, while rival Diageo put on 13.5p to 616.5p ahead of today's results. BG, also reporting today, flared 4.75p higher to 377.25p, on hopes of good figures.

Hong Kong-based bank Standard Chartered cashed in a 16p increase to 836p as investors switched from HSBC, 28p lower to 717p, on growing fears of a collapse of its strategically important bid for Republic New York bank.

Publisher Emap firmed 3p to 1013p after placing a huge 18.9 per cent stake in Metal Bulletin, unchanged at 1,725p. The shares, placed at a discounted 1,600p, were picked by UK and European institutions.

Marks & Spencer slid another 12p to 364.5p after CSFB and Goldman Sachs sounded a pessimistic note of the retailer's summer sales. Oil giant BP Amoco drilled a 34p fall to 1,144p, while rival Shell slipped 7.75p to 497.25p after bearish comment on the crude price from the Venezuelan president and negative production numbers from the US.

AIM-listed oil minnow Independent Energy Holdings soared 152.5p to a record 940p on talk of a move to the main market and of a forthcoming presentation to analysts. Building group Lilleshall surged 9.5p to 81p after unveiling a bid approach. Property company Regalian developed a 1.75p rise to 33.75p after confirming a number of approaches. Rival Fairview, down 2.5p to 135p, is one of the mooted bidders.

Financial minnow Euro Sales Finance fell 10p to 757.5p despite good interims and an expected full year upgrade from house broker Williams de Broe.

Seaq Volume: 1.23bn

Seaq Trades: 77,800

Gilts index: 103.15 -0.11

THE TAKEOVER buzz surrounding BNB Resources refuses to die down. Insiders talk of frantic activity amid the recruitment group's upper echelons. According to the rumour, BNB could be targeted by a larger US or European rival. Its main attraction is its list of blue-chip clients, which include Rolls-Royce, Deutsche Bank and Somerfield. It is also rather cheap, as the shares have slumped from last year's peak of 213.5p to yesterday's 133.5p.

THE SCOTTISH housebuilder and hotel group Bett Brothers jumped 15p to a record 225p yesterday amid rumours of high-profile arrivals and a change of strategy. Punters are muttering that Adam Page, the entrepreneur behind pub and club group Springwood, is considering joining. According to the whispers Mr Page's brief will be to beef up Bett's leisure division and increase its focus on pubs and hotels.