Feeling bold? Then dip into our 'special situations' portfolio

With a string of companies showing signs of recovery, now is the time to be daring. James Moore picks some high-risk hopefuls
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The Independent Online

After 2008's annus horriblis for The Independent's tips, 2009 was an annus mirabilis.

The FTSE 100 posted a gain of 22 per cent despite the general gloom surrounding the economy, but The Independent's portfolio comfortably outpaced it, with seven out of nine tips in positive territory. Our notional £9,000 invested in them would have produced £12,301, compared with £10,980 if the same amount had been invested in the blue-chip index.

And so to this year. Playing it safe really doesn't appear to be a great strategy – just what can realistically be considered as a "safe" stock in the current climate? So given the stunning performance of last year's portfolio, we're going to take risks again. There are a few lower-risk picks below, but we've also taken a punt on a number of "recovery plays": companies which have found themselves under the weather which we think can now overcome their difficulties and produce a healthy return. As such, you could consider this to be The Independent's "special situations" portfolio.

If we can outperform the FTSE 100 again (the vast majority of "active" fund managers struggle with this, despite the high fees they charge), perhaps we should consider taking this up professionally. If that's not put the mark of Cain on this year's portfolio, nothing else will.

Many would consider our first pick the riskiest of the lot. JJB Sports nearly went bust last year, and its most recent trading update was hardly glowing with optimism. Then there are all the unseemly goings-on among the "big men" either at or circling around the company and its rivals. There have been dirty dealings aplenty, black PR, complaints to the FSA, outraged regulatory announcements. Still, David Jones has got the company refinancing, the worst performing stores have been shut and those that remain will (finally) be fully stocked in the first quarter. The market leader, Sports Direct, might be cheap, but as a shopping experience it's truly horrible. The company's focus on high-margin sports equipment should help the bottom line, and then there's the small matter of the World Cup. These shares are only going one way.

The London Stock Exchange is, arguably, more of a risky play. Its market share has been under pressure from new entrants, and signs of a double-dip downturn would do nothing to help sentiment. But we've been impressed by the new chief executive, Xavier Rolet, who's been making strenuous efforts to improve a difficult relationship with customers while filling some strategic holes. The exchange, for example, now owns a technology company – important given that the kit has been provided by others in the past. Revenue from flotations is poised to pick up in the first half, and although the acquisition of the "Turquoise" trading platform saddles it with a loss-maker, Mr Rolet can turn it around. The shares have also been unduly depressed by worries about a sale by Dubai, which holds a substantial chunk. That's a short-term problem, though. And even if Mr Rolet runs into difficulty, a takeover remains a real possibility. This is an easy buy.

It is well understood by all that a punt on a small-cap, cash-burning company that has little revenue or profit to show for its efforts is at best a risky bet. But, by picking the eventual winners from that pile of companies, investors can end up sitting very pretty indeed. We think one of them can be GW Pharmaceuticals. It receives more than its fair share of attention (and that's no bad thing) for its use of the cannabis plant, right, in its pain-relieving treatment, Sativex, which is already well on its way to becoming one of the success stories of the biotechnology sector. Sativex has successfully completed trials and is being tested for relieving the pain caused by a number of illnesses; it is already being used to help those with multiple sclerosis. Investors have learnt to expect great things from this company.

The problem with oil exploration companies is that for every Tullow (from penny share to FTSE 100) there's a bevy of Ramcos (now a green power company after its oil proved uneconomic) or Cadogans (which lost 90 per cent of its value after being racked by scandal). We think Heritage Oil can be one of the diamonds amid a lot of rough. Italy's Eni is tipped to buy its Ugandan assets for $1.35bn (£839m). Some watchers are predicting that either Heritage's Lake Albert Basin partner Tullow will exercise its pre-emption rights, or that some third party may step in, kicking off a bidding war that can only be good news for Heritage. Either way, the company stands to see a major windfall in the near future. Meanwhile, Heritage's other major assets are in northern Iraq. It discovered 4.2 billion barrels of oil in Kurdistan earlier this year, and once the ups and downs of the Iraqi government's regulations are finally ironed out, it will be in a strong position in a fast-growing market.

On to tech, where the Government has pledged to provide everyone in Britain with broadband by 2012. The demand for ever faster internet is not going to abate any time soon. BT may be speeding up its roll-out of superfast broadband, and Virgin Media customers can subscribe to a service of 50Mb, but the biggest beneficiaries are those living in cities. People in more remote areas of the country just don't have the infrastructure in place to access broadband.

That is where the satellite broadband group Avanti Communications comes in. The company, which has previously used other satellites, is preparing to launch its own next year to provide broadband to UK customers. This month it secured funding to launch a second satellite, which will expand the business into Europe and parts of Africa and strengthen the UK business. Its chief executive, David Williams, says the group has a potential market of 100 million homes and businesses, and this looks like a good buy to us.

Now, that's the punts out of the way. On to the less risky plays, which should keep us out of complete disaster.

Anglo American is first up. The mining giant came within a whisker of losing its independence earlier this year, when the fitter, leaner and more aggressive Xstrata tempted shareholders with its so-called "merger of equals" deal. Xstrata believed it could hook Anglo on the cheap, and had it not been for the company's new chairman, Sir John Parker, who persuaded shareholders of the value of an independent Anglo American, it may well have won the day. Despite Sir John's efforts, Anglo's board got a fright, and since the bid collapsed in October it has been making great strides to cut away at its excess fat. The group has replaced a number of long-standing non-executive directors and has already sold off several non-core businesses, with more sell-offs promised. With commodity prices on the up after the slide of 12 months ago, miners are a good punt for investors, and Anglo American will need to stay on its toes to repay the backers who said no to Xstrata. If Anglo's current board fails, Xstrata, or others, could yet give a boost to Anglo shares by taking a second bite at the group.

On to tech again, where the rise and rise of pay-TV has seen the number of households willing to pay for Sky television soar past nine million, while Virgin Media is building up a nice little business of high-paying subscribers. For those who don't want to pay a monthly subscription but would still like access to a range of digital programming, there is Freeview and Freesat. As analysts have pointed out, after the digital switchover in 2012 everyone will have at least one set-top box in the house. This seems like a good opportunity for Pace. It's not a household name in the UK, but its set-top boxes are likely to sit on top of many household's televisions. The group builds these for companies including Sky and Freeview, who pass them on to customers. As the digital revolution gathers pace, this could be a canny pick.

Another "safer" bet, we think, is Taylor Wimpey, the most attractive of the housebuilders with a good land bank and reduced debts. The sector remains on bombed-out valuations after two tough years for the UK housing market. But while most independent forecasters see only a modest rises in house prices in 2010, transaction numbers will undoubtedly rise – and remember that the Government has ambitious long-term targets for new builds that the Tories are unlikely to drop. This stock will benefit strongly from even a small shift in sentiment.

To shops again, and there is plenty to recommend in the home-shopping retailer N Brown. Its shares are currently cheap, trading on a 2010 price- earnings ratio of 10.6, a substantial discount to the retail sector. Operating in an under-served niche market, N Brown has a highly regarded management team and industry-leading operating profit margins. Its clothing sales are benefiting not only from the increased waistline of its core mid-life female customers, but from the shift to online shopping. The City expects N Brown to post a further improvement in declining customer arrears from bad debts in January, which should bode well for the rest of 2010.

Finally, we were intrigued to hear about Nanoco. Quantum dots conjured up images of James Bond and science-fiction heroes. The reality is more prosaic, but we think Nanoco Group could be a British technology star. Which means it will get bought up (at a healthy premium). What are quantum dots? Tiny particles of semiconductor materials, about one-thousandth of the thickness of a human hair, that produce very bright lights. They can be used in devices from light bulbs to televisions, but are much more energy-efficient than traditional methods and emit very little heat. Nanoco is the first company to mass-produce them commercially. Big contract wins with serious Japanese players are on the cards. This is our sleeper and it could outdo the lot of them if the boys in charge can live up to the hype.

Chocs and trains on Luke's list

Taking over from Harry Prosser as this year's special guest tipster is Luke Moore, the two-year-old son of The Independent's deputy business editor, James Moore.

Luke has some strong opinions on what he likes and what he doesn't, and he's taking a few risks with his tips for 2010.

The first is Thorntons, a company's whose product Luke admires. He thinks the recent slide in the share price represents a buying opportunity, and with all the m&a activity in the chocolate sector he reckons his favourite will have a good year.

Next up is Kier, a construction and engineering company. It's the sort of group where Bob the Builder might find employment, and Luke thinks Bob is poised to have a good year this year thanks to the improving economy.

Pace, the maker of set-top boxes which is also part of The Independent's tips, finds favour with Luke too. With its set-top boxes, Pace helps to bring his favourite programmes to his parents' television screen.

Luke is a firm fan of Serco and the trains it operates on the Docklands Light Railway, and so are his parents. It's a child-friendly form of transport and relatively reliable (for London).

His final suggestion is the mining company BHP Billiton, some of whose metals can be found in his Thomas the Tank Engine toys.

Harry had a mixed year in 2009. GlaxoSmithKline (up 3 per cent) was a winner, as (perhaps surprisingly) was the Irish construction group CRH (up 13 per cent).

However, his portfolio was held back by Scottish & Southern Energy (down 5 per cent) and Ladbrokes (down 17 per cent), which managed to disprove the notion that the bookies always win.

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