Punters roll up] Hot tips for 1994: Robert Cole asks the fund managers what the stock market holds in store this year

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The Independent Online
PUNTERS who bought the portfolio of five shares tipped by our panel of institutional fund managers this time last year should be more than satisfied with the 50 per cent growth achieved.

That is well ahead of the 22 per cent advance scored by the market average. But in similar fashion to 1992 the performance of individual shares in the portfolio varied from thoroughly spectacular to utterly miserable.

Top of the class is Richard Smith of Henderson Administration who selected publishing group Wace. Tipped at 63p Wace ended last week at 182p, an advance of 188 per cent.

Colin McLean of Scottish Value Management is wearing the dunce's hat. He tipped Ferranti International, the electronics firm laid low by scandal. From 9p last December, Ferranti climbed to 17.5p in March but - following an abortive takeover bid by GEC - receivers were appointed. Mr McLean's misfortune in 1993 comes after four very good years, and winning performances in 1989 and 1992.

And emphasising the sometimes quixotic nature of share tipping Mr Smith's success this year follows abject failure in 1992. He recommended Davies & Newman, which also collapsed.

Of the five shares in the 1993 portfolio, three are ahead and two behind. Along with Mr McLean, Philip Winston of BZW Investment Management gets a black mark. He selected London International Group. LIG, best known for making Durex condoms, hit problems in its photo processing side. The shares fell 46 per cent from 252p to 135p.

But gold stars are in order for Wilf Beresford of CIN Management and Bernard Clark of Lloyd's Investment Managers. Mr Beresford chose merchant bank SG Warburg and has watched shares rise 73 per cent from 545p to 944p. Mr Clark went for Chloride, the battery maker, and the shares jumped 137 per cent from 10.25p to 24.25p.

There follow another six shares for 1994. Mr Beresford of CIN has dipped out, but Douglas Ferrans of Scottish Amicable and David Manning of Legal & General are new challengers to outrageous fortune. A bottle of bubbly for the winner.

Richard Smith, of Henderson Administration: 'Ideally, I would recommend Wace again but for a fresh start I am opting for a company which has a big part of its business interests in China. Cathay International Holdings, formerly called Stonehill Holdings, is a rapidly growing group with substantial assets.

'It owns the Landmark Hotel in Shenzhen, development of which has been under way since 1988. The five-star hotel is expected to open before the Chinese New Year.

'Cathay also owns 60 per cent of a four-star hotel in Beijing. This hotel, called the Xiyuan, will be refurbished. Adjacent is a 12-acre site, which is to be developed in four phases to include two office towers, residential accommodation and significant retail space. The final stage is expected to be complete by December 1999 and the whole project will be done through a joint venture with the Beijing Municipal Government. I believe the asset value will rise steadily over the next few years to stand well above the current share price of 61p.'

Colin McLean, of Scottish Value Management: 'With shares having already made easy gains from re-rating and the lower interest rate environment, further performance must be largely earnings-driven. My share for 1994 came to a stock market listing in July 1993 and yet stands no higher than its issue price. At 222p, Court Cavendish, an operator of day care centres and nursing homes, is capitalised at just pounds 50m. It inhabits the quality end of the market but the shares are standing on a lower p/e ratio than (those of its) competitors.

'While the sector has a tendency to raise money at regular intervals to finance expansion, Court Cavendish is making incremental acquisitions very cheaply. I believe its growth will be recognised by sharp upward revisions in analysts' profit forecasts, giving the shares a chance to make good progress.'

David Manning, of Legal & General: 'In investment management the adage that it is darkest before dawn often holds good. My tip is Fisons where the chief executive has just been sacked and the finance director is retiring early. It has also been found that profits in two divisions have been massaged. These are not normally conditions leading to a buy recommendation but Fisons has good businesses within it, which new senior management should bring to the fore.

'The value of Fisons lies principally with its pharmaceutical business. Sales are over pounds 400m and margins should be sustainable at 20 per cent. It has particular opportunities in the world asthma market.

'Fisons has announced a big restructuring, which will incur substantial reorganisation costs but is aimed at improving the longer-term prospects. The scientific instruments business needs to cut costs to stem losses. The laboratory supplies business, however, is capable of achieving attainable margins of 5 per cent.

'It would be preferable to recommend the stock after the new management changes are known. However, over the year ahead the stock, now priced at 113p, could provide an exciting recovery opportunity.'

Douglas Ferrans, of Scottish Amicable: 'Ladbroke has been one of the poorest-performing FT-SE 100 stocks in each of the past two years, declining by over 60 per cent relative to the market average since its 1990 peak. Next year could be the turning point and, rather like Standard Chartered and British Aerospace in previous years, 1994 should see a strong bounce back for the Liverpool-based leisure group.

'Why? First many of the bear points for the share are becoming old and tired. Second, Ladbroke is in a period of transition from being the entrepreneurial but autocratically run creation of its founder, Cyril Stein, into a more mature, professional and open operation under a new generation of management headed by Peter George.

'Aggressive accounting and valuation policies of the past are to be replaced with conservative practices. Heavyweight non-executive directors are to be appointed to improve investor perception. The company will concentrate on core hotels and betting, and the dividend will be cut back to a sustainable level.

'All of this should be liberating for the share price, now 164p, as it will allow the market to concentrate on future recovery potential.'

Philip Winston, of BZW Investment Management: 'Looking to next year it is tempting to look at laggard sectors. Certainly there is considerable long-term value in many consumer sectors that have disappointed recently, but low inflation is dampening market conditions for these industries. What will be more important is to find growth from existing levels of turnover.

'I believe that glass maker Pilkington (179p) has considerable scope to improve profit margins. Earnings per share have fallen dramatically and while management has been slow to make changes, recent sales of non-core businesses and cost-cutting measures have shown a change of heart. European automotive and construction, two key industries for Pilkington, are at a low ebb so that any positive news will be beneficial.'

Bernard Clark, of Lloyd's Investment Managers: 'A recent newcomer to the market, Greater London-based independent pub operator Regent Inns, is trading at 209p and a prospective p/e ratio of 17. It can be expected to grow earnings per share at 20 per cent for the next two years on the back of excellent returns on capital being achieved on new investments.

'The managing director, David Franks, is a chartered accountant whose family has long experience in the catering industry. He also owns a significant part of the equity. Operating margins have risen from 8 per cent in 1990 to 13 per cent in 1993 and can be expected to reach 15 per cent in 1994. This should allow growth to be funded from internal cash flow. Meanwhile, healthy dividend growth should also be maintained.'

----------------------------------------------------------------- NEXT YEAR'S SIX TIPS ----------------------------------------------------------------- Cathay International . . . . . . . .61p Court Cavendish . . . . . . . . . .222p Fisons . . . . . . . . . . . . . . 113p Ladbroke . . . . . . . . . . . . . 164p Pilkington . . . . . . . . . . . . 179p Regent Inns . . . . . . . . . . . .209p -----------------------------------------------------------------

*Funds our tipsters manage may own or deal in the shares mentioned.

(Photograph and graphs omitted)