Investment Column: IG Group is a good bet in volatile markets

Oxford Instruments; Stagecoach Theatre Arts

Our view: Buy

Share price: 242p (+24.25p)

As all investors know, picking stocks in a volatile market is not much fun. The answer may well be IG Group, the UK's biggest financial spread betting company, which said yesterday that full-year profits will be up by an impressive 29 per cent.

The news, and the 11.1 per cent spike in the share price that followed, is in stark contrast to the group's update in March, when the shares slumped after a cautious update. The caution surprised some backers of the stock, who were under the belief that IG shares were a good way of getting exposure to equity volatility, without having to pick specific companies.

We think the rationale is still sound, especially since IG has altered various foreign exchange platforms to better suit market conditions, according to its chief executive Tim Howkins. He adds that further expansion into overseas markets is the trigger for future growth, while buyers should also take comfort after the company said that bad debts are under control.

The shares still have not fully recovered from the drop off in March, but we would agree with the experts at Daniel Stewart who say that "the current valuation [still] looks attractive for a business of this quality". There is a risk that comparative numbers later this year will look poor after the group recorded a big spike in revenues in the midst of the banking meltdown last October and November, but we would urge punters to ignore any temporary fall in the shares.

With most financial stocks still considered too toxic for investors of sound mind, those that traditionally like the sector should add IG. Buy.

Oxford Instruments

Our view: Avoid

Share price: 137.5p (-10.5p)

On the face of it, there seems to be little point buying shares in Oxford Instruments. The producer of hi-tech tools used for detecting the amount of lead in paint, among other things, said yesterday that it expects this year's profits to be flat, after recording only an adjusted profit last year.

Worry not about current trading, says the company's chief executive, Jonathan Flint, who argues that the group is on track to hit all the targets of its self-imposed five-year plan, which is now in its fourth year. Of course, the group did not expect to have flat profits this year (and in predicting that, Mr Flint says he is being cautious, given the lack of visibility), but such has been the growth in turnover and margins in the last three years, the plan is still on track.

Anyone looking for a solid long-term bet, especially when the "global economic crisis" is over, should consider Oxford Instruments, he says.

We do not necessarily disagree, but we would avoid the company for the time being. The shares dropped 7.1 per cent yesterday, taking the stock into negative territory for the past month, just as equities have generally become more popular.

There are plenty of other picks where the management is predicting a solid year, with solid profits. Add to that the prediction of the analysts at Arbuthnot, who say that the share price will reach just 150p in the next 12 months, and buying now seems to be a bit of a waste of time and, of course, money. There might well be a time to buy, but it is not yet. Avoid.

Stagecoach Theatre Arts

Our view: Hold

Share price: 51.5p (unchanged)

Shares in a group of performing arts colleges may not be the obvious place to park your cash, especially when the company in question relies on new franchisees having plenty of available credit from banks for its growth. However, Stagecoach Theatre Arts said in its update yesterday that it expects to be profitable this year, despite fewer franchisees coming forward to add to its worldwide series of schools.

If investors are looking for a single piece of evidence to confirm that a company's stock is undervalued, it is when the directors put their money where their mouth is and buy the shares themselves. That is exactly what the bosses of Stagecoach did in April, sending the shares up by nearly 75 per cent in a few days. The finance director, Richard Dawson, says the stock is still cheap, as it trades well below the flotation level of 93p.

We are not sure that that is too important, and the market is a lot different to when the group listed in December 2001. Share prices of companies as small as Stagecoach – its value is just £5.1m – are usually news driven and since yesterday's undoubtedly positive update did not elicit any life in the stock, we would conclude the stock is already appropriately valued. Hold.