No Pain, No Gain: Shares are cheap and could be cheerful in 2005

I am painfully aware that predicting is a hazardous exercise. My recent New Year attempts at forecasting the direction of the stock market have been so wide of the mark that I wonder whether I should again indulge in what has become rather an embarrassing activity.

I am painfully aware that predicting is a hazardous exercise. My recent New Year attempts at forecasting the direction of the stock market have been so wide of the mark that I wonder whether I should again indulge in what has become rather an embarrassing activity.

But duty calls. And as I find myself out of step with the herd, I feel there is justification for offering an alternative view. Most City observers seem to expect 2005 to be a quiet year for shares. My instinct tells me they could be wrong. I believe shares will build on the strength displayed in the closing months of last year and I would not be at all surprised if the Footsie tops 5,500 points at some stage in the next 12 months.

I realise there are enormous dangers. Terrorism could again devastate confidence, and the tragic repercussions of the tsunami demonstrate nature's ability to wreak unbelievable havoc. The stock market will have to contend with the uncertainty of a general election, as well as the continuing machinations surrounding the European Union. Other shadows hover, but I put my trust in shares, primarily for two reasons: they are fundamentally cheap and still a long way from their all-time peak.

It is worth remembering that the Footsie index reflects the performance of only the top 100 shares. There have been some encouraging displays down among the small caps. And it is often on the undercard that the real hits are achieved. Indeed, the No Pain, No Gain portfolio's love affair with the shares of lesser-known companies has paid dividends.

Two of its constituents are currently involved in takeover action. Burtonwood, the pub chain, has surrendered to Wolverhampton & Dudley Breweries, and Merrydown, the cider and soft drink group, is in talks with an as-yet unidentified predator.

The Wolves offer is 550p in cash compared with my 185.5p buying price. But a partial share alternative has lifted the shares above the cash bid. As it is a done deal, I decided to ignore the cash offer and sell the portfolio's holding in the stock market, thereby taking advantage of the strength of the Wolves share price. So I have collected 570p a share, locking in a £10,300 profit. With the Burtonwood success, the portfolio, started almost six years ago, is showing a profit of £56,000 on the £160,000 which has been invested in 32 shares (13 remain in the portfolio).

Burtonwood has certainly been an intoxicating investment. With the founding families still enjoying effective control, I did not regard it as a takeover candidate. When the portfolio acquired the shares in August 2000, I took the view that it was well-run and undervalued, and the shares would eventually respond. I suppose last year's decision to cut its brewing connections left it more vulnerable. After all, a number of old brewers have succumbed after leaving the beerage to concentrate on retailing.

I have toyed with the idea of unloading Merrydown without waiting for the bid to materialise. Talks are dragging on and delay often means dismay. But, on balance, I think it best to hang on.

The involuntary departure of Burtonwood and the likelihood that Merrydown will also be captured means the portfolio is, numerically, looking rather light. I have been scouting around for recruits and hope to produce new constituents in the next few weeks. I have moaned in the past about the disappointing performance of a couple of existing portfolio members, but I do not intend to ditch them unless more suitable shares are available. The first task is to replace Burtonwood.

During my festive absence, printing.com, the hi-tech printer, produced a fine set of interim figures, prompting the respected researcher Roger Hardman to suggest it was on its way to becoming a printing force in the high street and may even pay a token dividend this year. He reckons the year's profits will be about £1.62m, up from £940,000.

Avon Rubber's annual results were a shade disappointing. But the respirator potential, one of the reasons that I alighted on the shares, is still considerable. And there are signs of stirrings at Wyatt, the little risk consultancy, headed by Bob Holt, the creator of the highly successful Mears support services group. The acquisition of a drug-testing business could be near and new shares are being created for takeover ammunition.