Not only are low interest rates and economic recovery beneficial, but a large number of these companies have also had every penny of excess costs wrung out by the recession. Many are still reporting tough times, but demand is now at - or close to - the trough of the cycle. There could be some years of vigorous profits growth ahead.
Whether investing in small or large companies, the prudent investor will go for a spread of stocks. But if funds are limited, three or four stocks gives a portfolio surprising resilience.
The best gains come from buying shares in companies that are pursuing strategies for growth in a world where raising prices may not be an option for a long time. One medium- sized company undergoing a transformation is Matthew Clark, which is yielding 3.8 per cent at 557p. For many years, the business prospered without setting the world on fire, as the UK distributor for Martell and other drinks brands.
Then at the end of the 1980s, global restructuring in the industry brought the loss of much of this business and the appointment of a non-family chief executive, Peter Aikens, formerly managing director of Courage.
Mr Aikens recognised that there was no future in the agency business as a source of long- term value for shareholders, and repositioned the group as a supplier of its own products, such as British Sherry and Stones Ginger Wines.
These are surprisingly solid - if mature - businesses, and they were augmented by the pounds 11m purchase of Strathmore, the leading Scottish bottled water business. Helped by expansion in the UK, this is growing by 20 per cent a year.
But the real excitement, which has enabled the group to make two successful rights issues in a year, is its move into wholesale distribution.
The key here is the new trading environment that has arisen from the enforced changes in the drinks industry. Pubs, clubs and hotels are now looking for modern levels of service from specialised wholesalers rather than taking delivery from associated breweries.
Mr Aikens has become a strong force in this market by purchasing first Freetraders from Devenish and then Grants of St James from Allied Lyons. In terms of brand strength and wholesaling activities, Mr Aikens says, Grants and Matthew Clark are mirror images. That offers huge scope for cost cuts and is going to put a rocket under profits for years to come. Group profits are expected to top pounds 10m this year (to the end of April 1994) and pounds 15m next year, against a market capitalisation of pounds 125m.
It doesn't always take a change of management to change a company's prospects radically. Entrepreneurs with large stakes in businesses they have built from scratch are fast learners when they see years of effort put at risk by recession.
An excellent example is Tony Cookson of Hadleigh Industries, a small Suffolk-based company with a wide range of transport-related interests. Between 1989 and 1992, the shares fell from more than 220p to nearly 40p, as the group mounted an expansionary charge into the teeth of an unexpectedly severe recession.
In the two years to 3 April 1993, the group made losses of more than pounds 1.5m, while borrowings peaked at more than 70 per cent of shareholders' funds.
But the group is already well over the worst, with its financial controls having been sharpened by a new finance director, Stephen Yapp, and a buoyant performance from a bulk- handling business with outstanding growth prospects in a market where it is already the world leader.
I expect profits to reach pounds 900,000 this financial year and suspect that the house stockbroker's forecast of pounds 1.2m for next year could be well beaten. On that basis, the shares, at 88p, are on a prospective price- earnings ratio well down into single figures, backed by net assets of 76p a share. A concern has been the group's long-established links with Tiphook, the struggling container giant, but the financial exposure is minimal.
Three companies floated in the late 1980s that look ripe for buying are Banner Homes, the housebuilder, at 134p; Allen, the construction, plant hire and house-building group based in Wigan, at 145p; and Dart Group, the transport services specialist, at 142p.
Banner, which concentrates on the M40 corridor around Oxford, alarmed its bankers with sky-high borrowings and trading losses in the early 1990s but in recent weeks has announced interim profits up from pounds 4,000 to pounds 552,000, a rights issue to raise pounds 2.9m, and participation in its third BES scheme.
An 800-plot bank acquired (or to be acquired) at advantageous prices in a booming market for building land will underpin massive growth in profits over the next two or three years.
Allen is rapidly building a nationwide plant-hire business, and is also experiencing strong growth. Profits could treble in the next two and a half years from the pounds 1.5m reported for 1992-93.
Dart, headed by Philip Meeson, has a virtual monopoly on flower imports from Guernsey, a growing business in aviation services and air freight, and a rapidly expanding produce distribution business using the same temperature-controlled network that has been so successful transporting cut flowers. Falling oil prices are an important bonus for a group that spends pounds 180,000 a month on fuel. Full-year profits should comfortably top pounds 2m to keep the shares heading higher.
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