Where beer money exerts renewed pulling power

SMALLER COMPANIES

Those investors eager to find the next growth stock would do well to look for a theme or sector where there is plenty of growth potential, and the upside is clear to see. Pharmaceuticals, media and software fall into this category. It is then a matter of tracking down the company or companies that meet your specific criteria for investment.

The alternative is to adopt a "bottom-up" approach, and find companies that match exacting criteria, regardless of which sector to which they may belong.

One business which has been abuzz for the last two years is the market for new, more customer-friendly pubs. There are still plenty of spit- and-sawdust boozers around, but they are being replaced by pubs aimed to pull in punters around the clock.

Among the promising contenders are Regent Inns, Yates, Wetherspoons, Grosvenor Inns, Surrey Free Inns, and the Old English Pub Company. All have been showing remarkable rates of growth. Analysts expect earnings per share at Wetherspoons, the biggest of the pack with a market capitalisation of pounds 442m, to rise 13 per cent this year. That is the lowest rate of growth; at the top is the Old English Pub Company, which is expected to achieve a 190 per cent increase. What the operators have done is provide attractive venues for young people with cash to spend. One of the better bets would appear to be Surrey Free Inns. Capitalised at pounds 51m, it is one of the smaller operators. Its branded bar is the Litten Tree concept: big pubs in a high street location. The idea is to get in lunch-time trade from those who want a bite to eat. At night, their music formula aims to draw in a younger crowd.

There are nine Litten Trees, with another eight in the pipeline. On average, each one earns pounds 250,000 before interest, depreciation and central costs, to deliver a 27 per cent return on investment. According to figures from stockbroker Charterhouse Tilney, the business is growing faster than most of its peers, while standing on a discount to them. In 1997, pre- tax profit should reach pounds 2.2m, almost double the pounds 1.2m posted last year, rising to pounds 3.3m in 1998.

The shares, at 446.5p, although expensive, rate a buy. One word of warning: Surrey Free Inns was voted AIM Company of the Year 1996. Such accolades can be the kiss of death. You are warned.