Small is beautiful

SOME time ago we decided to be cautious about consumer stocks. We took the view that consumer spending was bound to be affected as interest rates started to rise and concerns mounted about equity withdrawal from property.

As the latest market turbulence shows, this has served us well. Today, we are focused firmly on the industry and business services sectors.

At Unicorn we have a team of seven experienced investment professionals who seek out valuation anomalies within the UK market. We aim to identify and invest in companies with experienced and well-motivated management teams, growing markets, sound controls, good cash generation to finance development, and a progressive dividend policy.

Last year in this column I highlighted three stocks to follow. I am relieved to report that all three have lived up to my expectations, with an average gain in excess of

Wintrust, the small bank highlighted at 432 1/2p, appointed Lexicon Partners in January to consider a number of approaches for the company. As a result Wintrust announced a takeover approach from Singer and Friedlander at 520p, a 20% gain.

It has been a particularly busy year for Trevor Finn at Pendragon, then 148.4p. As a result of structural changes in its market that moved power 60% away from car manufacturers towards dealers, Pendragon was able to purchase rival dealer CD Bramall.

The purchase was funded by debt which has resulted in a substantial boost to earnings. As the two operations are integrated, we expect further cost savings and property disposals. The shares currently trade at 313 1/2p, which is a gain of 111%.

BSS Group, highlighted at 486p, distributes industrial pipeline and domestic heating equipment. It delivered excellent results over the last year. Sales rose 35% with resultant earnings growth of 33%. Since the new management team arrived, profits in the domestic division have doubled in two years.

BSS has continued to make in-fill acquisitions with the purchase of Pegler and Louden, which distributes valves. We continue to hold BSS, as we believe the management team will continue to develop and grow the business. The shares are now 750p, a gain of 54%.

Looking forward, a stock which we currently hold in the Unicorn UK Income Fund is James Halstead, a manufacturer and international distributor of flooring. Halstead (479p) reported record results for the half year to December and raised the interim dividend by a healthy 17.6%. Recently it sold a subsidiary for £10m, resulting in a very strong balance sheet with around £30m cash.

The market has now focused on the prospect of further share buybacks or a special dividend. Current market forecasts project healthy 14% earnings growth for 2004.

Wellington Holdings, another favourite, makes and distributes seals worldwide. At its recent agm it announced that its order book was at its highest for five years and that cost savings were now bearing fruit.

Wellington has gained from increased oil exploration in the Gulf of Mexico and from an upswing in demand for capital equipment.

As a result, profits in the second half of last year were 17% higher than the first half. Growth of 9% is forecast for 2004. With a yield just short of 5%, at 137 1/2p, and a significant strategic position, we believe the company is undervalued.

At Unicorn we believe that small and mid cap stocks continue to offer very good value in today's stock market. The continued return of the corporate investor bodes well for their future performance. As ever, small is beautiful!