Shares: No need for a fast reaction: If an event is big enough the full impact on share prices takes time

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The Independent Online
STOCK market reactions to dramatic new pieces of information do not happen overnight but have a slow-burn impact. Investors can exploit this.

A classic example was the response of the overall stock market after sterling's membership of the European exchange rate mechanism was suspended. Share prices took off and within three days the FT-SE 100 index had climbed from 2,300 to over 2,550. They then carried on climbing to a peak close to 3,000 in March.

Shares in smaller companies have done even better but initially reacted hardly at all to the dramatic economic developments. The big rise in share prices dated from late October.

The same thing happens with individual shares. A good example in 1991 was the collapse of the number two player in package tours, Intasun, and the effect on others in the industry, particularly Airtours. The immediate effect of the huge withdrawal of capacity was a boom at Airtours, with bookings running at four to five times the previous year's levels. The shares took off and within a month had doubled to 80p (adjusted for subsequent scrip issues).

Investors who piled in then, when some might have thought it was too late, would now be holding shares standing at 339p and still looking excellent value. A simple indicator that something dramatic is happening to a company is the trend in profits. One indicator I have looked at is companies reporting doubled profits. It may seem pretty obvious but if an event is big enough the full impact takes time to come through - plenty of time for the alert but not right-on-the-inside investor to make excellent profits.

One group of companies where something amazing is happening to profits is stock market-related businesses. The market-maker Smith New Court and the fund management group Perpetual have both recently reported stunning figures. Smith New Court's profits for the year to 30 April rocketed from pounds 18.4m to pounds 38.7m, with earnings per share up from 16.6p to 36.2p. Perpetual's interim report for the six months ended 31 March showed profits up from pounds 2.2m to pounds 5.1m.

Neither company has much of a following among analysts, partly because of the extreme difficulty of forecasting profits for such volatile businesses. But the conditions that have made for the change seem likely to persist and I believe there is more good news to come.

Smith New Court is strengthening its hand with a rights issue and has much in common with US financial services operations that have grown into giant businesses. Perpetual has a string of highly successful funds, has recently launched its first investment trust and is pulling in new money at a spectacular rate.

Brave forecasters are looking for earnings per share to reach 26p this year and top 40p in 1994, which would make the shares attractive even at 520p. Smith New Court at 271p is on a historic P/E of 7.5, which is undemanding even for such an unpredictable profits stream.

Another company that has just reported a dramatic profits improvement is Sterling Publishing, with earnings per share on continuing operations up from 1.5p to 7.8p from profits of pounds 5.3m. The group nearly collapsed in 1990 because of huge borrowings and losses on a disastrous US venture. But the basic business of selling advertising on a string of international publications is both profitable and cash-generative. With profits next year expected to reach pounds 7.5m, implying a P/E of around 10 at 153p, the shares look as though they could climb much higher, even doubling over the next 12 months.

Another pair of profit doublers that still look full of running are the truck rental and sales concern Dawsongroup, at 223p, and Control Techniques, at 334p, a company with a strong position in the niche- market business of selling drives for electric motors.

Dawsongroup reported profits for 1992 up from pounds 1.13m to pounds 4.75m. With trading still going well, the group's stockbrokers have raised their current year forecast from pounds 5.5m to pounds 6.5m, implying a prospective P/E of about 15. This is being achieved at an early stage of the recovery and with huge pent-up demand after years of sharply reduced truck sales.

Control Techniques recently reported profits for its first half to 31 March up from pounds 1.6m to pounds 3.7m, putting it on course for a 50 per cent advance to pounds 9m for the full year.

The group is at the leading edge in its technology, is building a new state-of-the-art factory in Wales and is spreading its chain of CD Drive Centres around the globe. The shares look well worth buying.

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