The Investment Column: Cray offers a lesson in wonder shares

The history of Cray Electronics should be a salutary lesson for investors swept off their feet by stock market wonder shares. The computer networks and software company was a darling of the City when such things were fashionable, but everything has gone horribly wrong since last year's profits warning. After peaking at 198p in February 1994 the shares are back almost exactly where they were when former chairman Roger Holland and his team bought in in 1989.

With luck, yesterday's results for the year to April should mark the nadir of the group's problems, although the imminent departure of Roger Dye, the only recently appointed finance director, is not a good omen. An pounds 835,000 profit in 1995 has been replaced by a massive pounds 19.4m deficit at the pre-tax level after new management threw in all the bad news it could find.

That the dismal tidings were hardly unexpected is reflected in the modest 3.5p dip in the shares to 41p yesterday. Most of the pain last year was borne by the Communications business, which makes equipment for and installs computer networks.An pounds 8.2m write-off on stock as a result of weeding out loss-making products and reducing the portfolio is only slightly higher than previously indicated. But the decision to concentrate the business on Watford has led to a further pounds 2.6m property charge.

That comes on top of a pounds 4.2m provision taken elsewhere to try to cap the running sore of paying uneconomic rents for properties now empty after the decision to reverse the previous expansion programme. Even so, Cray faces a annual drain of at least pounds 2m for rents which will wipe out the cost savings to be derived from the latest factory closures.

Management has taken decisive action to focus the business, symbolised in yesterday's pounds 11m deal to sell the profitable P-E International management consultancy operation to the AIM-quoted Lorien. The communications business now boasts an order book of pounds 79m, bigger than last year's turnover, and appears to have a potential best-seller in its ethernet switch. The partnership deals with industry leaders like Cisco and Stratacom of the US also look sensible for a tiddler like Cray.

Therein also lies its problem, as Cray is up against giants like BT and IBM. Profits may rebound to pounds 6m this year, putting the shares on a heady multiple of over 20, but the real hope must lie in takeover prospects. Hold.