Shares: Week Ahead - Small caps to steam ahead as blue chips slow

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The Independent Online
AT LAST second and third liners have come to life. After trailing miserably behind their blue chip peers in the long bull run, they have picked up an increasingly powerful head of steam.

Although the mid caps index has hit 14 peaks this month it was not until the last two days of last week that it really started to challenge the gap which has opened up with the Footsie. The FTSE 250 index closed on Friday at 5,184.9 compared with the 4,8861.5 it opened February. The mid cap performance has been mirrored by the small cap index which is also standing at a new high.

Mind you, second and third liners often perform well in the early months of a year. The array of New Year tips, inevitably concentrating on the smaller fry, is one influence; tip sheets with their tendency to highlight tiddlers also seem to have a greater impact before the year starts to get stale.

This time round there have also been the conversion windfalls; the soaring shares of the former building societies and Norwich Union must have encouraged many to cash in at least some of their chips and extend their portfolio.

NatWest Securities believes it is now possible to make a case for the mid and small caps. Says Bob Semple and David McBain:

"The valuation case has turned against the large cap stocks. Footsie has outperformed despite achieving slower earnings growth than either the small or mid caps sectors. Looking ahead the small and mid cap sectors are expected to record faster growth than the large caps but more importantly they now stand at a significant p/e discount".

Many fund managers regard straying outside blue chips as hazardous. They are fearful of being caught by the lack of liquidity in many mid and particularly small cap shares.

Still, the under valuations which exist in the mid and small caps have been underlined by the rush of takeover activity. The possibility of a bid sent Trust Motors soaring 55.5p to 195p on Friday.

It is difficult for the mid and small cap indices to outperform Footsie. High flying financials represent nearly 30 per cent of Footsie with the more depressed engineers accounting for just 6 per cent. Financials make up 10 per cent of the undercard indices and engineers 25 per cent.

NatWest suggests investors trawling through the mid and small caps should look at financials, such as Britannic, Northern Rock (due to go into Footsie) and United Assurance; on the property pitch it goes for MEPC and Slough Estates. Others on the NatWest buy list include Barratt Developments, Northern Foods, Hazlewood Foods, BBA and Cobham.

This week's results are again dominated by blue chips. Financials are to the fore with Halifax producing its maiden year's figures. Underlying profits should emerge at pounds 1.64bn against pounds 1,43bn. The dividend should go up by around 18 per cent to 17.5p a share and there is a strong possibility the sleeping giant of the banking world will indulge in a handsome cash hand-out, probably through a special dividend.

Other money groups reporting include Royal & Sun Alliance (pounds 800m expected against pounds 403m) and General Accident, already on the merger bandwagon following its deal with Commercial Union. About pounds 500m, up from pounds 421m, is likely.

BTR, the conglomerate which now wants to be regarded as a focused engineer, is, however, likely to attract more attention than any other blue chip on the reporting schedule.

It is due to produce year's figures on Thursday. They will not be good as befits a group which has made no fewer than five profit warnings in three years. Around pounds 1.1bn is expected against pounds 1.3bn. There is a danger the year's dividend will be cut. BTR his being reshaped by Ian Strachan who has undertaken an extensive disposal programme. It is floating off its Australian interests and is looking for buyers for such diverse operations as glass and plastic bottles and building products.

BTR is one blue chip to miss the fun. The shares were above 400p in 1994; they closed last week at 161p after touching 152p, a 70 per cent under- performance.

Rolls-Royce, the aero engine group, should offer a sharp profits advance, from pounds 220m to pounds 274m; non Footsie Vickers, seeking to sell its Rolls-Royce car division, is on line to produce pounds 74m (pounds 83m).

Enterprise Oil will show the scars of the strong pound, lower production and higher costs and should announce net income of, say, pounds 100m against pounds 142.5m.

Other blue chips reporting are Cadbury Schweppes pounds 570m (pounds 592m); Hays pounds 90m (pounds 71.7m); Ladbroke pounds 222m (pounds 163m) and Billiton pounds 130m (pounds 93m).

Zeneca, the drugs group, is another on the profits treadmill. The perennial takeover candidate should do its bid prospects no harm at all with profits emerging around pounds 1.1bn against just over pounds 1bn.

Some famous mid cap names feature in a busy week. Inchcape, the international trader, should offer pounds 180m, up pounds 15m, and Hanson, the building materials rump of the old warrior conglomerate, is seen as checking in with year's figures of pounds 220m.

Hillsdown Holdings, the food group which may well signal the flotation of its house-building operation, should check in with profits of pounds 156.5m, a pounds 6m advance, and Cookson, the industrial materials group, could achieve pounds 177m against pounds 166m.