Tips of the Year review 2009

However, our portfolio substantially underperformed indices for smaller companies, whose share prices were most likely to respond to the enormous and collective sigh of relief that accompanied unprecedented levels of state support for the global financial system during the year. So, for example, the FTSE 250 index of medium-sized listed companies rose 46 per cent in the year, while the FTSE Fledgling index of tiny listed companies rose 74 per cent and the Aim All-Share index rose 66 per cent.

In a way, that's not surprising. Our tips of the year are deliberately chosen to cross a broad spectrum, both by size of company and type of investment - growth story, income stock, recovery play. So, when the market fixates on just one type - and in 2009 it was "recovery play" - on average, we are likely to lose out.

Note that during the year we changed our view on Mitchells & Butlers, Redhall, Renishaw and Talvivaara. That said, the average performance of the eight tips would not have been greatly altered if the performance table was based on the prices of these four at which we made our changes. Note also that the tip prices shown in the table are as at the close of play on 9 January, the day of publication, not those shown in the magazine of the same date.

How our recommendations fared

Eros International

Shares in Indian movie producer and distributor Eros surged to hit highs of 200p in mid autumn, but the price has since retreated as investors await news of a secondary share listing in India.

Eros has had a turbulent year. The group suffered from the fall in the Indian rupee, the economic downturn - which led it to delay the release of four key movies - and a dispute between Indian cinema multiplexes and an Indian film-trade organisation, the United Producers Forum. All these issues have been resolved, but they did hit Eros during the year – the delays and the rupee's depreciation saw pre-tax profits shrink by almost one third to $20.8m (£12.4m).

But Eros's release pipeline for 2010 looks impressive, with the bulk of movies already substantially funded. Eros has also moved to increase its co-production efforts, with 10 planned co-productions due in 2010 (just two in 2009).

Eros's issues look safely behind it and, with the listing on the Mumbai Stock Exchange likely, the shares remain worth buying.

Faroe Petroleum

Our tip for the North Sea oil explorer rested on the company's exploration programme and on the potential of its existing oil reserves, which, on the basis of the tip price, were valued at just $7.80 a barrel, about half the average for reserves of European oil companies. Faroe's drilling prospects duly delivered two large discoveries - Glenlivet and Tornado - that sent its share price to over 150p.

Faroe's portfolio remains well balanced between production, appraisal and high-potential exploration, and the sale of its share of the Breagh project boosted its balance sheet. Faroe also benefits from Norway's tax regime, which rebates 78 per cent of exploration and appraisal costs, thus enabling smaller companies, such as Faroe, to carry out exploration programmes that, otherwise, only oil majors could afford.

Faroe is aiming to drill several of the most highly-rated exploration prospects in its portfolio during 2010. Its share price has eased back, but there could be a lot more upside to come. Buy.

London & Stamford

A year ago, London & Stamford (L&S) was on the verge of securing one of the best "distressed" deals of the UK's property slump - acquiring a 50 per cent stake in British Land's giant Meadowhall shopping centre in Sheffield. The deal was done in February and by March, commercial property values and listed property share prices were recovering.

Having raised capital in 2008, London & Stamford was able to strike at the right time, securing a string of well-priced deals. The turning property market has already boosted the value of L&S's stake in Meadowhall by £2.4m, and new acquisitions have doubled its rental income to £6.7m since March.

With so many competitors now pushing property prices up, L&S's bosses have become more cautious and, at 120p, L&S's shares are on a par with the City's forecast for net asset value for the year to end March. But L&S plans to turn itself into a real-estate investment trust and move its share quote to the main market. These factors should sustain the shares. Still a buy.

Mitchells & Butlers

A year ago we thought Mitchells was the pubs group with the most potential for recovery as it was not so burdened with debt as Punch Taverns and Enterprise Inns. Even so, we quickly advised readers to take profits after the share price rose 52 per cent to 264p in three months

During 2009, the group's trading has borne out its reputation as a sound pubs operator. The key issue now facing Mitchells is shareholder unrest. In the wake of the credit crunch and a disastrous attempt to unlock value from Mitchells' property portfolio, the group's major shareholder, Robert Tchenguez, sold out. A battle is now raging between Mitchells' board and Bahamas-based tycoon Joe Lewis, who bought Mr Tchenguez's 23 per cent stake. Mitchells' directors complain that Mr Lewis and his cohorts are attempting to wield undue influence over the company. The worry is that the row will distract management from doing what it does best – running pubs. So the shares are no more than fairly priced.

Redhall

Specialist engineer Redhall's lack of size meant it was at risk if some contracts proved troublesome or anticipated business did not come through. This happened twice in 2009. First, just a few weeks after our tip, it lost a £9m contract inherited via an acquisition in 2008. This hit sentiment, but management isolated it as an inherited problem and eked out some reparation from the client. Then came a second profit warning in October as the company suffered from delays to awarding contracts by the Nuclear Decommissioning Authority. At the same time, chief operating officer Tony Price, brought in for his expertise in the nuclear industry, departed. As a result, Redhall's share price dipped sharply and has yet to recover, even though subsequent results suggest the company has returned to an even keel.

Redhall's share price is almost 30 per cent down on our recommendation; its management has seen its reputation tarnished and it may take some time to repair investor confidence even though long-term prospects remain solid. Fairly priced.

Renishaw

A rotten start to the year for instrumentation group Renishaw prompted management to lay off 500 employees and ask staff to take a 20 per cent pay cut.

Now shareholders at least have something to cheer. A gradual improvement in trading during 2009 means the share price has finished the year higher than our tip price. That's not to say this was a good tip, especially as we lost our nerve when the company issued two profit warnings in quick succession and moved our recommendation to fairly priced. Investors with more backbone may now be in profit. Even so, the return has been poor compared with the All-Share index, especially as the company also axed its dividend.

Still, with trading almost back on track, the attractions of Renishaw may become clear again. The business remains a global leader in its field run by a management team with a great track record – that it couldn't escape the unprecedented manufacturing slump shouldn't be held against it. Fairly priced.

Shire

Last year should have been good for holding shares in a pharmaceuticals group. After all – come rain or shine – people still get ill and need prescription drugs, whose costs are largely funded out of the public purse. That it did not quite work out like that is a comment on the pace of the economic revival, which favoured recovery stocks, rather than defensives.

Still, good things were happening at Shire. Its progress at substituting the declining sales of its off-patent blockbuster drug, Adderall XR, with its new attention-deficit-disorder drug Vyvanse was the main reason for the rise in the share price, as Shire managed to dispel doubts about the switchover of patients to the new product with an improved set of sales figures. This, combined with a potentially lucrative expansion into niche medicines to treat enzyme deficiency diseases, means Shire continues to punch well above its weight in the UK pharmaceuticals sector and we still the rate shares a buy for the long term.

Talvivaara

A chief reason for tipping Talvivaara's shares was that the Finnish miner, unlike many of its competitors, stood a good chance of being profitable even at the depressed nickel prices that then prevailed. Thanks to its innovative leach-processing extraction method, the company has a low cost base; more recently, it been helped by a recovery in the nickel price, too.

Ramping up its operations suffered some teething problems, which is quite normal in mining. This required the company to fast-track the expansion of its crushing capability to enable it to increase capacity, and Talvivaara raised £71m to help finance this.

The shares rose to 350p in June, at which point we recommended that investors should sell enough of their stake to lock in a profit come what may. Nevertheless, Talvivaara's story remains attractive, particularly as exploration drilling indicates that its mineable deposits could be much larger than originally thought. The shares remain fairly priced.