New year stock take

Caught in the web

Shares in Fiberweb, a manufacturer of state-of-the-art non-woven materials and fabrics for hygiene and industrial speciality products, have surged 50 per cent from 66p to 100p since I highlighted the company's recovery potential last autumn (Casting the web, 20 Sep 2010). A trading statement last week confirmed the progress being made with profits for calendar 2010 now expected to 'slightly exceed analyst expectations' and trading in the industrial and filtration businesses particularly strong. And this comes after analysts at Panmure Gordon had already upgraded their 2010 pre-tax profit estimates last autumn from £10.5m to £12m, pencilling in EPS of 9.38p.

Prospects for 2011 are looking even better following this month's earnings-enhancing acquisition of Boddington's, the only UK producer of geosynthetic nets as well as a wide range of accessories and laminates for use in civil engineering projects and temporary ground protection. Importantly, the business is highly complementary to Fiberweb's Wales-based Terram operation, a UK market leader for geotextiles. There is also a long-standing and growing supply relationship between the two businesses, accounting for around 10 per cent of Boddingtons sales.

The plan is to form a new business unit to be led by John Warner, the CEO of Boddingtons, by merging Boddingtons and Fiberweb's existing geotextile operations and to invest in a specialist, needlepunch geotextile production line in the UK. The benefits of this could be substantial with annualised cost savings of £500,000 expected to be generated this calendar year, rising to £1m in 2012, as a result of better polymer purchasing, lower corporate costs and increased scale. But even before these savings come through, Fiberweb looks to have made a smart buy, paying £9.4m for a business - the consideration is in shares and cash - that made £1m operating profit on £14m sales in its last financial year.

Factoring in the cost savings, and the contribution from Boddingtons, Panmure Gordon upgraded its 2011 pre-tax profit estimate from £13m to £14.5m and raised its EPS forecast from 10.3p to 11.1p. That puts the shares on a prospective current year PE ratio of 9 which looks modest considering EPS are expected to rise 18 per cent this year. Moreover, even if the company only maintains the 4.2p full year dividend, the shares still offer an above average yield of 4.2 per cent. So although they hit my 100p share price target last week, I am running my profits as I see scope for earnings upgrades in the months ahead and have raised my six month price target to 120p, offering a potential further 20 per cent upside.

Elektronic returns

Elektron, a small cap manufacturer of technology and engineered products, is also generating strong earnings momentum with adjusted pre-tax profits expected to treble to £4.9m in the 12 months to 31 January 2011 and underlying EPS set to more than double to 4.2p based on sales of £49m, up from £29.9m the prior year. The benefits of taking costs out of the business - most manufacturing is now located in lower cost offshore locations in Tunisia and China - a recovery in trading and last year's shrewd acquisition of rival Hartest are key to this bounce back in earnings.

The company's technology business - accounting for three quarters of revenue - makes and distributes a range branded components under three main brands: Arcolectric , Bulgin and Sifam. Products include switches and indicator lights for printers and computers and analogue and digital meters and control knobs for use in audio mixing equipment, industrial, electronic and medical instrumentation.

Following the acquisition of Hartest the board reviewed its approach to new product development and has restructured its operations to provide an even greater focus on using its core technologies for innovative product design and development. John Wilson, divisional managing director of Elektron's technology division, has been appointed the company's new chief executive, reflecting his experience in fast tracking technology to market. Elektron ventures division, which manages a portfolio of four companies within the industrial and technological sectors, will now no longer operate as a separate unit.

These changes look sensible and I see no reason to change my positive stance on the shares having seen them rise 19 per cent to 43.5p since I advised buying six weeks ago at 36.5p (Switching on Elektron, 29 November 2010). Trading on 10 times earnings for the year to 31 January 2011, I am raising my six-month price target from 47p to 50p - Elektron is next due to report its full-year results on 12 May 2011 – and continue to rate the shares a medium term buy.

Built on solid foundations

Shares in East London residential developer Telford Homes and urban regeneration and strategic land specialist MJ Gleeson have performed well since I pointed out the massive discounts to net asset value (NAV) on offer in these two plays on the property market (In search of value, 15 November 2010). I was clearly not the only one to spot value as shares in Telford have recovered 17 per cent from 69.5p to 81.5p in the past eight weeks, while Gleeson has done even better, rising 35 per cent to 135p. However, I would run your profits as the companies shares still trade 37 per cent and 28 per cent respectively below NAV, and it's worth remembering that the first quarter has been a great time in the past 30 years to own value stocks in the housebuilding sector.

Our investment in self storage company Lok'n Store has also been rewarding with the shares rising from my recommended buy-in price of 100p to a high last month of 142p (Value investors, Lok to Store, 13 Sep 2010). They have since drifted back to 128p on profit taking as some investors will have booked these bumper gains after my original 140p year-end price target was hit. However, I can see further upside as the share still trade 30 per cent below July 2010 NAV (after deferred tax) or on a 42 per cent discount on an adjusted basis which is far deeper than for listed rivals Big Yellow or Safestore. I am maintaining my upgraded price target of 150p, albeit on a six month basis.

A slick investment

Shares in energy consultancy, KBC Advanced Technologies, have taken off since I highlighted the investment case three months ago (Driving a hard bargain, 11 October 2010), rising 50 per cent from 52p to 78p. It's easy to see why as the strong profit recovery analysts forecast this year should mean that adjusted pre-tax profits increase by around 18 per cent from £4.9m in the 12 months to 31 December 2010 to £5.8m in 2011. If the company hits these numbers then adjusted EPS will rise from 5.2p to 6.2p.

Moreover, KBC is a highly cash generative business and year-end net cash is expected to have increased by around 10 per cent to £4.5m, offering clear scope for the full-year dividend to be raised from 1.6p to 1.8p as some analysts predict when the company reports its preliminary results on 16 March 2011. At this level the shares now trade on 12.5 times forward earnings and offer a prospective dividend yield of 2.3 per cent. That's no longer the bargain they once were – the shares were rated on a modest 8.5 times earnings estimates before the rerating – and I would recommend banking profits on half your holding.

A happy anniversary

There has also good news from small-cap luxury interior furnishings company Walker Greenbank which has announced that profits for the year to January 2011 will be materially ahead of expectations following a successful autumn selling period during which sales of wallpapers and fabrics hit record levels. The company's Harlequin brand is seeing record sales even though the business was up against tough comparatives and Sanderson's vintage collection has been the brand's biggest selling collection since the business was acquired seven years ago.

Current trading is buoyant with strength seen right across all areas of the business which prompted analysts at Oriel Securities to raise pre-tax profit estimates from £4.2m to £4.6m for the year to January 2011, and upgrade their forecasts by 11 per cent to £5.2m for the 12 months to January 2012, giving EPS of 5.8p and 6.6p, respectively. It's hardly surprising that the shares have surged and at 51p, they are now up 70 per cent on my last buy recommendation at 30p (Happy anniversary, 6 September 2010) and a hefty 131 per cent up on my original buy advice at 22p (Luxury at a Bargain price, 8 February 2010).

They are also rapidly approaching my 55p target price, but on the basis they still only trade on 8 times recent upgraded earnings estimates for the year to January 2012, and offer a prospective yield of 1.4 per cent, I see no reason to bank these gains. In fact, I am raising my six-month price target to 66p which if met would mean the shares still only trade on a forward earnings multiple of 10. Offering a potential 30 per cent upside, I remain a strong buyer.

Key small-cap recommendations

*Small cap, Fledgling indicese is quoted Jan-Dec 2010.

Playing Footsie

If you followed my advice to take advantage of a likely Santa Claus rally during what is consistently one of the most profitable months for equities (Santa's Christmas Treats, 20 November 2010) you should have now banked profits. The trade to buy the FTSE 100 on Friday 10 December and close out the position on Wednesday 5 January has once again delivered the goods with the blue chip index rising 4 per cent from 5812 to 6043. This wasn't a one-off either as we made a 4.95 per cent profit on the same trade in 2009 and 5.2 per cent in 2008. As these gains are being generated over just 15 trading days this remains one of the best trades in the market.

US Dogs Bark Back

My Dogs of the S&P Portfolio has not disappointed either - rising 18.8 per cent since 1 October 2010 against a rise of 10.9 per cent in the S&P 500 (10 shares to buy now, 1 October 2010). This is no fluke as by taking on five different types of risk - liquidity, volatility, distress, market and economic - this trade has posted a profits in every year since 1997, apart from in 2008 when it took Wall Street's crash to derail the trading strategy.

It's really no surprise that it continues to work as common sense tells us that risky stocks should outperform other stocks eventually, simply to compensate for their greater risk. A combination of the US fiscal year-end, window dressing by fund managers and the start of a seasonally good time to be holding equities - the S&P 500 has risen by 4.4 per cent on average in the final three months of the year since 1950 - all help our risky stocks to outperform in the final quarter.

If you followed my advice to buy the 10 Dogs of the S&P 500 (see table below), I would bank profits especially as the market has shown a tendency to correct in January in recent years.

Dogs of S&P 500 Portfolio 2010

Finally, I will be starting work on my 2011 Bargain Share Portfolio shortly. The 2010 portfolio is currently up 47 per cent including dividends and the 2009 portfolio returned 53.4 per cent. My bargain shares for 2011 will be published on Friday 11 February.

BARGAIN SHARE PORTFOLIO UPDATE 2010