Investment Column: Be patient on expensive Chloride shares

Chloride

Our view: Hold for now

Share price: 156p (+3.75p)

At first glance, you would be mad not to buy Chloride, the emergency power provider. The group issued upbeat preliminary results yesterday saying that adjusted pre-tax profits were up 31 per cent. Encouragingly, while a number of peers have said that things are getting tougher, Chloride's order book at the start of this financial year is in good shape, with its finance director, Mark Warner, saying that the company's confidence comes from being more diverse than its rivals. Yes, some markets are slowing, but Chloride expects to have a good year.

Investors will also be heartened by the watchers at Numis, who reckon the stock is a "core holding". The experts do say, however, that the shares are expensive (trading at 13.8 times 2010 earnings) and while there are "good fundamental growth drivers ... [and we] would be happy owners, we would look for weaker levels to top up." Likewise, we would wait for modest falls in the stock price before jumping in.

Punters should be aware that the group has been a takeover target in recent years and any return to more normal economic conditions might bring a new bid. The share price certainly includes some bid premium, but we would expect a spike if a concrete approach materialised.

We would hold for now, but investors should keep an active eye on the price of the stock and get in at cheaper levels.

Sterling Energy

Our view: Sell

Share price: 1.82p (-0.13p)

Like many companies, the Iraq and Africa-focused oil and gas group Sterling Energy has its debt problems. The company's debt is "above the calculated available level," the group said in yesterday's preliminary results statement, adding that a waiver on repayments, which it agreed with banks in April, expires in August. Negotiations continue about a longer-term settlement.

After impairment charges linked to the falling price of oil in the second half of last year, Sterling reported an annual loss of $180.1m, with average production down 17 per cent. Operating profits and revenues were both up.

Why would investors bother to invest in a company with such problems? We would argue they should not, given that there are plenty of other companies in the sector with equally decent prospects, without the burden of all the debt. Its chief executive, Graeme Thompson, says Sterling has great interests in Kurdish northern Iraq and western Africa, and that the banks would not have granted a waiver to a company they thought would fail. The kicker to the share price will come when an agreement on the debt is secured, argues Mr Thompson.

We agree that any deal with the banks would be great for the stock, but why take the risk on what remains a penny share, especially when the company is focused on cutting debt, rather than on looking to take advantage of the strengthening oil price and investing in its more promising projects?

There are bits of good news that might tempt the speculative buyer. Sterling is bent on selling its US assets in the Gulf of Mexico, and Mr Thompson says that there has been more interest in recent weeks as the oil price has strengthened towards $60 a barrel and beyond.

Unfortunately it is not enough to persuade us, especially when there are safer punts available. Sell.

William Sinclair Holdings

Our view: Hold

Share price: 76.5p (unchanged)

A fishwives' tale that always gets an airing in a recession is that people start growing their own vegetables in an effort to save money. There must be some truth in the idea, judging by yesterday's interim numbers from William Sinclair, the horticultural goods producer.

Bernard Burns, William Sinclair's chief executive, points out that sales of grow-your-own products are up 500 per cent in the reporting period, and that, despite concerns over some of the group's retail partners, trading is strong. The company posted its traditional first-half loss, albeit much smaller than usual, and with pretty woeful comparison numbers to compete against for the rest of the year, we would expect William Sinclair to post good full-year results.

Sadly for new buyers, the market appears to have cottoned on to the story some time ago, with the stock up nearly 40 per cent in the last quarter: yesterday's inactivity in the shares suggests that the good news is priced in. Mr Burns disagrees, pointing out that only at 88p will the share price reflect net asset value. He adds that the group is also likely to be handsomely compensated after the EU designated a peat bog it owns in the Lake District as a special conservation area. Hold.