The Investment Column: Snap up shares in Provident, the sub-prime winner

Telecity; Renold

Our view: Buy

Share price: 894.5p (+74.5p)

AS A financial services company Provident Financial must surely be a screaming sell. Even if its own business model is sound, the stock must be being dragged down by the malign influence of all those other banks that rather got ahead of themselves 18 months ago and are now suffering in the markets as a consequence.

On the contrary, investors should buy the group, which is enjoying life picking up the customers that most of the other finance houses are casting aside. Provident Financial's main business is lending to what are now described as sub-prime clients by handing over small amounts of money and collecting it back from doorsteps over the course of the following year.

This is clearly working as the company yesterday reported a 34.3 per cent increase in pre-tax profits to £51.3m in the first half of its financial year.

The lender is continually adding new customers with the stock finishing nine per cent up on the day. What other financial institution can claim to be having such fun at the moment?

The reasons are pretty simple. The group's sales people get to eyeball potential customers and are paid on collection of loans rather than on the amount they lend. There are few self-respecting salesmen prepared to lend to someone if they think they are not going to get paid.

Investors can also take comfort from the fact that there is potential in the share price. The group has recently launched a credit card business and a new personal finance arm, which chief executive Peter Crook reckons are not yet factored in. Analysts at UBS agree, saying that based on a discounted cashflow model, the shares will hit 1050p, implying a price earnings ratio of 15.5 times this year. Given that the watchers reckon that the company presently trades at 11.9 times, they are arguing that it is solidly undervalued.

Buyers believing that banking stocks are close to reaching their nadir would be better off buying some of those groups that have taken a true hammering in recent months, but most will be satisfied with this stellar performer. Buy.

Telecity

Our view: Buy

Share price: 270p (+6p)

Different businesses face different risks and challenges. While most companies are bleating about the credit crunch and slowing consumer demand, data centre group Telecity is more worried about finding suitable locations for its sites, which require enough power to sustain a village and can take two years to get working.

The company, which houses and manages technical and online infrastructure, announced its maiden profits yesterday and had the analysts fawning over it as a result. If investors believe that the internet is something more than a fly-by-night fad, then Telecity is a pretty good punt.

Watchers at Jefferies say that: "against a backdrop of margin expansion and with net income breakeven firmly in view for H2 2008, our Buy stance on Telecity is well underpinned, with the prospect of further estimate upgrades". Investors might well wait for the upgrades, especially as Jefferies has a price target of just 290p. Other watchers, such as those at Kaupthing, are also cautious and have the target price at just 280p. That said, the company has achieved one of those rare feats of seeing its stock grow by more than 25 per cent in the last three months, and there is nothing to suggest a slowdown.

Chief executive Michael Tobin reckons that there is a lot more to come from the shares: as group revenues continue to soar (up 34 per cent in the first half of the year) against a largely fixed cost base, so the stock will rise, he argues. Investors should be assured that barring unexpectedly bad news, they are likely to do very nicely out of Telecity. Buy.

Renold

Our view: Hold for now

Share price: 73.5p (-1.5p)

Renold is a UK engineering company that is exposed to the surging steel prices and the US market. To cap it all, the company is also a listed small cap group, which have generally been hit very hard in recent weeks.

Despite the obvious disadvantages, Renold, which principally makes industrial strength chains, is doing rather nicely with yesterday's trading statement outlining a 32 per cent growth in the group's orders, and increasing sales.

Renold has fundamentally changed in the last four years, getting rid of much of its expensive Western labour force by moving about 40 per cent of production to lower-cost places. While this is bad for former employees, it is another reason for investors to cheer.

In the next few months the group will complete the buyout of Indian company, LGB, which will make it the leading chains maker in India overnight.

The watchers like the group. Those at Kaupthing, who say that Renold suffers from having a small market capitalisation, reckon that even without any organic growth, the company comes at a 50 per cent discount to the market.

That said, the watchers have a price target of 94p and given that the shares traded at just less than 90p in mid-June, the target does not offer buyers that much uplift. Hold for now.