Derek Pain: Out with the old and in with the new ahead of year of opportunity

No Pain,No Gain
Saturday 01 January 2011 01:00

Iintend to make some significant changes to the no pain, no gain portfolio. The new year provides an ideal opportunity for such an exercise which will, I hope, allow my little collection of shares to face the vicissitudes that probably lie ahead.

Progress in the past year was not as strong as I had hoped. True, profits moved ahead. But the advance should have been more compelling. Perhaps some ins and outs will have the desired impact.

My guess is that shares will again make headway this year although the going is likely to be exceedingly tough. The Footsie index could, I believe, close 2011 at around 6,300 points. Attempting to predict is always a hazardous exercise and the observation that there are only two kinds of forecaster – those who don't know and those who don't know they don't know – is never far away. Many believe that attempting to predict Footsie's level in 12 months' time is a waste of time (and space). Still, its an exercise I have attempted, with varied success, for many years and I do not see any reason to switch off now.

The economic outlook is not encouraging, with consumer spending under increasing pressure, There is also the possibility that many companies will only be able to increase profits by again slicing costs and not through growth. Hardly a happy prospect. But the stock market always endeavours to look ahead. There could well be some indications that the world's economy is really on the mend as the year progresses and shares should respond to any prospect of happier times. Such an improving atmosphere could provoke a revival in corporate activity which would add fuel to any recovery.

But a collapse of the euro – a distinct possibility – could destroy any wellbeing. Although, in the long run, the demise of such a controversial and politically inspired currency, would be beneficial, the short-term ramifications could be huge, shattering confidence in stock markets around the world. With so much uncertainty abounding I feel obliged to reshape the portfolio. I am dumping and Private & Commercial Finance. The departure of is rather sad. It is the longest serving constituent, having clocked six years of membership. But I fear there is a grave danger that the dividend will be cut this year. Profits are declining and in the current atmosphere I cannot see much hope of any trading improvement. The hearty dividend yield, around 8 per cent, represents the main prop for the shares. The possibility of a modest payment reduction may already be factored in to the share price but reality could have quite an impact. PCF's horizons seem limited. Quite simply my patience is exhausted.

I am also looking closely at a few other constituents, mainly Hargreaves Services and Mears. Both are well run. Hargreaves is one of my current successes but its exposure to the coal industry in this all-enveloping age of global warming hysteria could herald problems. Mears social housing and home care activities should not be pressurised by the Government's spending cuts but the stock market appears far from convinced that the group will escape the axe. The shares are highly rated and, like Hargreaves, offer a thin dividend yield. NCI Vehicle Rescue could also go – the belated interim figures were not encouraging.

Such a shake-up would leave some gaping holes in the portfolio. The relegation of Printing and PCF would reduce its strength to 12. If Hargreaves, Mears and NCI are also ditched – and I have yet to decide – only nine will be left standing. Recruits are essential, particularly as my favoured number is 16 shares.

In November I mentioned that I am minded to enlist Avation, an aircraft leasing group, and the Capital Pub Co. with around 30 mainly freehold outlets in and around London. A few others are also under scrutiny. They include Wm. Morrison, the supermarket chain, Ladbrokes, the betting group, and Lamprell, an oil equipment and servicing group.

Should Morrison join up it would represent a link with the portfolio's infant days, nearly 12 years ago. For one of its constituents then was the Safeway supermarket chain, victim of a hostile Morrison take over. The action, however, was not a great portfolio result.

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