Rampant bargain shares

During that aforementioned interview, Mr Fisher was asked what was the single most important lesson to be learnt from his career as an investor. The response is worth repeating."It is just appalling the nerve strain people put themselves under trying to buy something today and sell it tomorrow. It's a small-win proposition. If you are a truly long-range investor, of which I am practically a vanishing breed, the profits are so tremendously greater."

That rings true with my own investment style, which is to run my profits for as long as possible until it becomes obvious that the rationale for making the investment in the first place no longer holds. True, at some point I have to make the difficult decision as to whether the best of the gains have been made and whether the risk:reward balance continues to favour holding a particular investment. This task is easier said than done because you also have to decide if there is a better investment out there worthy of your capital. There is also a psychological element to investing too, because when investments have racked up substantial paper gains there is always the temptation to bank profits even though the investment case remains intact.

And this is precisely the position I find myself in right now with my 2012 Bargain Shares portfolio since we are now sitting on some significant paper profits, which have helped my portfolio generate a total return of 25.6 per cent (offer-to-bid basis) since 10 February. This compares favourably with the 1.5 per cent rise in the FTSE All-Share and 11 per cent increase in the FTSE Small Cap indices in the same period. It also raises the question as to whether it's time to bank some profits.

Solid foundations

East London housebuilder Telford Homes (TEF: 177p) has been a star performer and after factoring in dividends the holding has generated a 97 per cent return in less than a year. In fact, at their high point of 194p on 5 December the shares were up over 110 per cent, excluding dividends.

From my lens, this re-rating is fully justified as it reflects an impressive operational performance from the company, which I highlighted ahead of Telford's eye-catching interim results in late November ('Gold winning performance', 23 October 2012). Having doubled sales to 252 units in the six months to 30 September 2012, full-year estimates are in the bag as Telford only has to sell 42 homes in the second half to hit Shore Capital's full-year pre-tax profit estimate of £8m and produce EPS of 11.8p. To put that into perspective, Telford made pre-tax profits of £3m in the financial year to 31 March 2012, so in the six months to September 2012 made more than double the profit it reported for the whole of the previous financial year. The broker also expects the dividend to be raised a third to 4p a share at the March year-end so, on this basis, the shares, at 177p, are trading on a forward PE ratio of 15 and offer a prospective yield of 2.3 per cent.

This may look a punchy rating, but it only tells part of the story because Telford's forward sales have been so strong and the development pipeline is so well underpinned that Shore Capital was forced to upgrade its numbers for the March 2014 financial year by a hefty 20 per cent following a buoyant trading statement at the end of October. That's because Telford has secured a further 218 sales on its developments in the past six months, mostly driven by demand from overseas investors attracted by: the decent rental yields on offer (as much as 6 per cent on some units); high tenant demand; and the safe haven status of London property in these uncertain times. The company is also seeing decent demand from UK owner-occupiers and notes that many buyers are getting financial assistance from family members to get on to the property ladder.

As a result, Shore Capital now expects pre-tax profit to surge to £12m for the financial year to March 2014, which in turn would produce EPS of 18.3p. In other words, this is a company which is expected to increase profits from £3m to £8m in the financial year to March 2013 and is on track to increase profits by another 50 per cent in the following 12 months. However, despite this enviable profit growth, the shares are trading on less than 10 times EPS estimates for the financial year to March 2014. Moreover, factoring in the net profits earned, Telford's book value is set to grow to 152p a share by March 2014 and that's after factoring in another 50 per cent rise in the dividend to 6p a share in that 12-month period. On that basis, the forward dividend yield rises to 3.4 per cent.

So, given the positive dynamics driving demand, and the fact that the housebuilders habitually rally in the first quarter of the year ('Foundations for a rally', 10 December 2012), I have decided to continue to run my hefty profits on Telford Homes.

How Simon Thompson's 2012 Bargain Shares Portfolio has performed

Profitable land banks

Shares in housebuilder and strategic land specialist MJ Gleeson (GLE: 175p) have rocketed 59 per cent since I recommended buying in February, but still trade 8 per cent below net asset value of 191p, which is an attractive valuation given that the majority of the UK-listed housebuilders are rated on premiums to book value.

It's worth noting, too, that the company's share price performance is backed up by an improving operational performance as Gleeson has reported back to shareholders twice in the past two months with positive updates. In the latest trading update at the company's annual meeting three weeks ago, chairman Dermot Gleeson revealed that, although the housing market in the north of England remains relatively challenging, "weekly sales rates have been consistently in line with expectations and, compared with the same period last year, total sales, comprising reservations, contracted and completed homes are up by 63 per cent." Mr Gleeson also added that: "Gleeson Strategic Land has completed a further land transaction, bringing the number of land sales for the year to date to three, and there is strong interest from housebuilders in the further sites which Gleeson Strategic Land hopes to bring to the market in the second half of the financial year ending June 2013.”

So with good newsflow likely in the weeks ahead and housebuilders competing to buy land off Gleeson to support their own development pipelines, I anticipate Gleeson's shares running up further ahead of what are likely to be upbeat first-half results in late February. My advice here is to run your profits as I can see the shares trading at a premium to book value before long.

Molins shares smoking ahead

I have just read an interesting broker note on specialist engineer Molins (MAIN: 140p) from broker Canaccord Genuity after analyst Michael O'Brien met with the company's management a fortnight ago.

Mr O'Brien expects the company to report flat adjusted pre-tax profits of £4.5m and EPS of 17.7p in 2012, but notes that "these estimates could prove conservative". It is also fair to assume that, with net funds of around £4m at the year-end, the 5.3p-a-share dividend is safe so, with the shares trading at 140p, Molins is rated on less than eight times earnings and yields 3.8 per cent. The share price is also trading well below book value of 151p. But to rectify that low valuation we need a catalyst to spark a re-rating, which as it happens looks firmly on the cards in the coming months.

To recap, around 60 per cent of sales come from the tobacco industry, where Molins specialises in improving the effectiveness of existing customer plant, monitoring and testing product quality and conducting the analysis of cigarette smoke. This is the high-end part of the business, accounting for a quarter of revenues, and a likely source of some exciting news in the months ahead. That's because Molins has been investing heavily in capital expenditure in its tobacco testing business, Arista Laboratories, to take advantage of the extra demand for its services resulting from tighter US regulations being implemented by the Food and Drug Administration (FDA).

The US regulator has now heard representations from cigarette manufacturers in advance of issuing guidance on testing requirements with a view to tightening up the testing regime for harmful compounds found in tobacco smoke. The new regulations are expected to be published in April. True, the timescale and nature of the FDA testing regime is uncertain, but what is not in doubt is that Molins is well placed to capitalise on the opportunities, especially as Arista has a significant logistical advantage and a marketing one, too, to attract new business for its onshore US testing services. In fact, industry analysts believe that several of the major tobacco manufacturers, which currently do the testing of these compounds in house, will have to outsource much of it in future if the FDA dramatically expands the number of harmful compounds on its consultation list. In turn, this could offer a real opportunity for Molins to grow its testing business. So in advance of the FDA making its announcement, I remain a firm buyer of Molins' shares - especially as a positive outcome would underpin the 10 per cent profit uplift being forecast for the company in 2013.

A very noble investment

International rare coin, banknote, medal and stamp dealer and auction house Noble Investments (NBL: 195p) has acquired The Fine Art Auction Group, a business that includes the well-known auctioneers Dreweatts and Bloomsbury, in a smart looking deal.

Dreweatts, a company dating back to 1759, provides fine arts, antiques, jewellery and collectables auctioneering and valuation services from its salerooms at Donnington Priory, Bristol and Godalming. For the past 18 months, it has also been conducting auctions in Mayfair following the acquisition of Bloomsbury Auctions, a specialist in rare books, manuscripts and contemporary works on paper. So once you factor in Noble's existing businesses, Baldwins and Apex, at a stroke the company is elevated into a top five UK auctioneer behind Sotheby's, Bonhams and Christie's. The acquisition is sensibly priced, too, at £5.5m, split 50:50 between initial and deferred consideration over the next two financial years. To put this valuation into perspective, Fine Art Auction made pre-tax profits of over £500,000 in 2011 and the deferred consideration is dependent on cash profits rising materially over the next couple of years.

It's also comforting to see that two directors from Fine Art Auction, Stephan Ludwig (executive chairman) and Peter Floyd (company secretary and chief financial officer) have joined the board of Noble, as executive director and finance director, respectively.

True, the acquisition will not have a huge impact on current-year profits since "September to December is traditionally the far busier period for Fine Art Auction" according to analyst Eric Burns at broker WH Ireland. However, the full benefits should be seen in the financial year to August 2014 when Mr Burns expects Noble to report pre-tax profits of £4.1m and EPS of 20.3p. This would represent 16 per cent growth on the 17.5p-a-share forecast in the 12 months to August 2013. On this basis, the dividend is forecast to rise to 5.5p and 6p, respectively, over the next two financial years.

So with the acquisition taking Noble into the wider collectables market to add to its current expertise in coins and stamps, and the shares modestly rated on 11 times current earnings estimates, falling to less than 10 times the year after, I am upgrading my previous target price of 200p. That price target was hit in double-quick time after I recommended buying Noble shares at 167p ('A noble investment', 17 September 2012). I continue to rate Noble's shares a buy and have a six-month price target of 240p.