Investment Column: Ted Baker is not the trendiest stock in town

Bellway; Oxford Instruments

Our view: Hold

Share price: 510p (unchanged)

As the oil giant BP will testify, not all UK companies are having a good time in the US at the moment, but in the fashion industry Ted Baker is finding the US trading environment far more favourable.

The quirky brand said the recovery at its US business had continued, as it posted an 18 per cent uplift in group sales for the 19 weeks to 12 June. The gain was ahead of City forecasts and was largely driven by a 20.4 per cent rise in retail sales, and boosted by new store openings and strong underlying sales both in the UK and overseas.

Ted Baker, which has retail, wholesale and licence operations in 17 countries, said it plans to add four new shops in Chicago, Santa Monica, Phoenix and New York later this year to its existing 10 in the US. It also said the relaunch of its US wholesale business under its own management had "started well", helping group wholesale revenues to grow by 8.2 per cent over the period. What's more, Ted Baker sees considerable scope to grow its wholesale business in the US.

With its overall trading performance ahead of expectations, Numis raised its pre-tax profit forecast for Ted Baker this financial year to £23.5m and it continues to expect 10 per cent earnings per share growth. One of the problems for Ted Baker, however, is that while it is a global business, the UK still accounts for about 80 per cent of total group sales. Therefore, we have concerns about the lack of substantial upside for trading on these shores in the short term, given that consumer confidence is likely to be hit by next week's emergency Budget.

Furthermore, its shares now look pricey, trading on a 2011 price-earnings ratio of 13 times, a premium to the sector average of 10.5 times. While we remain fans of this well-run business and the brand it has created, we believe investors should only dive back in when Ted Baker's shares represent better value, so hold.

Bellway

Our view: Sell

Share price: 621p (-14p)

Last week we recommended selling Barratt Developments, citing the fragile housing market which, we feared, was likely to be driven by the less-than-inspiring outlook, rather than the company's strengths or stock's valuation metrics.

Yesterday, we received further confirmation of the headwinds facing the sector when Bellway reported that the uncertainty regarding the looming fiscal squeeze had resulted in a "slight reduction in both site visitor levels and weekly sales rates" since the election.

The news led to a 2.2 per cent drop in Bellway's shares, which are now down more than 17 per cent since the beginning of May.

There is no doubt that, viewed purely in terms of valuation, the shares, which trade at a 28 per cent discount to Panmure Gordon's forecast net asset values for 2010, look attractive. But again, we return to the broader point. The housing sector holds immense promise in the long term – the gap between supply and demand is only getting bigger – but the short to medium-term picture is clouded by the prospect of sharp public spending cuts, the possibility of a below-par economic recovery and continued weakness – in historical terms – in the availability of mortgages, so sell.

Oxford Instruments

Our view: Buy

Share price: 290p (+20p)

Think crazy scientists working away on hare-brained schemes and you are probably not too far off when trying to work out what Oxford Instruments is.

The group, a spin-off from the ancient university, has designed a host of useful applications for commercial use, including coating thickness analysers, X-ray tubes and dynamic nuclear polarisation devices.

Of course, the mad scientist analysis is unfair and only goes so far. Oxford Instruments is also a very successful business, and yesterday posted a full-year profit of £27.4m, compared with £18.1m last year. Orders were up 22.4 per cent and, crucially for investors, the dividend for the full year is 8.4p, giving a decent yield of 3.1 per cent.

Picking the right smaller company to invest in is always problematic for investors, but with a strong commercial performance, a dividend and a share price that has put on more than 90 per cent in the last 12 months, Oxford Instruments ticks the boxes. And the fact that the shares jumped by 7.4 per cent yesterday shows that there is more to come.

We would have preferred an increased dividend in line with the higher profits, rather than payments simply being maintained yesterday, but nonetheless we still think investors will make money out of the company, so buy.