Few stand out in year of poor performance

Jul 23 2008 by Vinay Bedi, The Journal

With the FTSE falling to its lowest level for three years, stock market expert Vinay Bedi looks at how the region’s publicly-listed companies, The Journal 40, have fared over the first six months of the year.

HEROIC Hargreaves has led the way in a desperately difficult period for many of our regional companies.

Towards the end of last year we were more than aware that the credit crunch was beginning to seriously impact on world stock markets but few envisaged the devastating effect it would have on our regional stocks during the first six months of 2008.

The reality is that only five of the North 40 stocks actually showed a positive share price return over the period.

It is worth highlighting the list:

Company (% Increase)

Hargreaves Services (+24.6%)

Wellstream (+24.6%)

Carrs Milling (+19.56%)

Imunodiagnostic Systems (+11.46%)

Brulines (+10.76%)

Suffice to say, the rest of the holdings within the portfolio suffered along with world stock markets.

In the six months to the end of June 2008, the FT All Share Index fell by 13%. Unfortunately, the overall performance of the North 40 stocks showed a deterioration of 28%.

Why have our North 40 stocks overall performed so badly?

Just as we benefited during the 2003/2007 bull market from having a large propensity of fast-growing small and medium-sized companies, we have suffered equally as these companies’ share prices have been hit in the downturn.

Smaller companies are perceived by investors to be higher risk, with a greater need for borrowing requirements and, of course, during an economic downturn this is not an area that most investors would wish to hold.

Hence, achieving an outperformance against the major indices was always going to be difficult but it does appear that we have suffered exceptionally badly over the last year.

The impact of the difficult housing market and poor consumer sectors has done us a great deal of damage, in particular highlighted by the severely depressed share prices of Bellway, Barratt Developments and the now suspended ScS.

However, let’s pay tribute to our five risers.

Hargreaves has performed supremely well, with profit forecast upgrades reflecting the group’s focus on the manufacture of coke for industrial and power station usage, as well as providing haulage services and waste transportation across the UK.

Hargreaves is ideally positioned to take advantage of increased demand for its products and services and this has been pleasingly reflected in its share price performance.

Wellstream came very close to being the leading performer for a second period running, with a share price rise of 24.3%.

This supplier of flexible pipeline products and systems for the oil and gas exploration industries has clearly benefited from the strong increase in the oil price and the level of exploration activity taking place worldwide.

Wellstream not only led our share price performers during the last review period, but was notable for being the only new entry into our list at the time.

During the period ending June 2008, we have actually seen no new entries on to the list as flotations into these difficult and volatile markets have slowed down to a standstill.

This is not an unusual occurrence during difficult markets but it clearly has impacted on the size of our list, bearing in mind the companies that have recently dropped out.

Since last time, we have said goodbye to three major stocks which have been part of our region’s quoted portfolio for many years, namely ICI, Scottish & Newcastle and Northern Rock.

We were aware of these impending movements but this loss of three large companies leaves Sage standing out as the one FTSE 100 company now left in the North 40.

Indeed, Sage’s share price performance of -3.1% is relatively strong and helps demonstrate that investors have shifted away from the smaller companies towards those more secure large caps.

Unfortunately, the North 40 list has suffered a large number of major share price fallers.

The housebuilding market has deteriorated sharply and this has naturally impacted on the share prices of our two major housebuilders, Bellway and Barratt Developments.

However, we also saw a major share price fall at ScS where the shares are currently suspended and the hopes of shareholders are now minimal.

Southern Cross, the nursing home operator, and Tanfield have also seen substantial share price falls as trading has deteriorated for both companies.

Sadly, one of the more recent additions to our list, eaga, has also been hit as stock markets took great displeasure in a minor profits warning issued earlier this year.

Recent more positive statements have led to a small recovery in the share price.

It is tempting to try to suggest that this very difficult market for investors is beginning to bottom out and show signs of recovery.

It is always worth bearing in mind that stock markets anticipate future events and recovery will come quickly, as and when markets turn.

However, at the time of writing, there appears little to justify any short-term optimism for investors.

It is worth re-emphasising, however, that we do have a lot of high-quality companies based in the North East and these companies will still be operating and growing in many years to come.

Selecting the right investments at this stage is almost a thankless task and one where we would strongly advise you to speak to your local investment adviser before taking the plunge.

The very poor overall performance of the North 40 list of stocks in the first half of 2008 leads us to conclude that the stock market has been overzealous in its rating of many of our companies.

We firmly anticipate improving performances from many of our shares in the second half of 2008 and into 2009 and we very much look forward to reporting this at the end of the year.

Vinay Bedi is divisional director at Brewin Dolphin stockbrokers, Newcastle