What to buy for 2002

THIS was the year the bears roared. Hopes of a recovery in share markets were dashed, first by the deepening difficulties of techs and telecoms, then by the September 11 shocks.

That sent us into a fully fledged bear market. The FTSE 100 is some 1,000 points, or 17% lower than in January, and 26% below its 2,000 peak. The techMARK 100 is a vertiginous 75% off the top.

It was a grim year for share tips generally, and in the circumstances our own selection did not do too badly. Four of the nine finished with gains. If you followed our recommendation and used a stop loss system, selling when the price fell 20%, our portfolio finished with a loss of 2% for the year.

That is hardly sparkling, but way ahead of the market's 17% fall, and pension fund managers' average drop of 11.4%. If you did not use the stop loss and held the shares all year, the loss was 8.6%.

Retailer GUS - Lucy Farndon's choice - was our top performer with a gain of 21%. City Editor Alex Brummer's Bank of Scotland rose a respectable 13%.

For 2002, the choice is tricky. Market pundits are optimistic that the world economy will recover and shares will follow. But pundits are always optimistic. The latest terror scares show that the world's troubles are far from over. The rebound in bombed-out tech shares is running far ahead of reality. Some share prices have doubled already, which is certainly not the case with their profits (where there are any). Hedge funds, heavy sellers on the way down, have turned to chasing prices higher. They could easily turn back into bears.

Against this background, our choices emphasise companies with real profits and real assets. You should operate a firm stop loss policy. If you follow our tips, set a stop loss order with your broker to sell if they fall 20% below the tip price. That at least caps your loss if the bottom falls out of the world.

My own choice last year, Countryside Properties, lifted its profits, dividends and assets sharply. The market remained grudging and the shares ended just 7% higher at 168p. They still look very cheap.

For 2002, I am relying on the rapid growth in outsourcing from the public sector and big companies, which are increasingly buying in services from outsiders. That has already made a fortune for investors in highly-rated specialists such as Serco (45 times earnings) and Capita (60 times). Cheaper by far is White Young Green the engineering and environmental consultant formed by a merger in 1997. Since then sales have doubled and profits soared 140%. It has a healthy order book and earns 40% of its revenues from private finance initiative projects - a huge market worth £20bn over three years.

At 188 1/2p, White shares sell at under 14 times prospective earnings. A cheap play on this fast-growing market. Tuck them away for 2002. This will be the third year in a row that investors will need to tread warily. After two years of falling markets, let us hope for third time lucky.

Alex Brummer picks Boots

THOSE who read my daily City comment will recognise that I am less than bullish about prospects for Britain and the stock market in 2002. That is why I am sticking with defensive favourite Boots at 578p with a good strong cash and dividend flow, rather than anything more speculative.

This strategy paid off last year when my choice - the Bank of Scotland - tied the knot with the Halifax in a deal which pleased the market and produced a tidy profit, without too much sweat. Boots chief executive Steve Russell recognises that scepticism will continue until he finds a way of achieving better earnings from Boots the Chemist. The alliance with Sainsbury's is producing some growth and the roll out of own-brand cosmetics looks a success.

The jury may still be out on its 'new age' treatments, but the beauty area can earn superb margins. The core pharmacies are a good recession beater. Cold and pain are always with us!

Geoff Foster tips IFTE

MY tip for 2002 is IFTE, at 132p. Fire safety is a global priority following the US attacks. The Aim-listed company runs simulators to train firefighters, including a full-scale computer operated replica Boeing 747 at Heathrow. It will open another simulator in Amsterdam soon.

The purchase of US group Symtron, whose clients include the New York Fire Department, helped push IFTE into the black for the first time. More than 1,800 airports worldwide are potential customers. IFTE is unique and a market leader. Its potential is vast.

Entertainment Rights, my 2001 choice, is a disappointing 16p, down from 25 1/2p. The global media group, which specialises in children's characters, is worth holding. It recently bought Postman Pat's creator, Woodland Animation, for £5.1m. A snip. The deal will be earnings enhancing in the first year. And there are terrific opportunities for ER to develop Postman Pat.

Richard Inder chooses Debenhams

DEBENHAMS looks a good defensive play in times of such uncertainty. Certainly, it is exposed to a slowdown in consumer spending. But where the economy goes, Debenhams follows and by no stretch of the imagination is the UK likely to contract next year.

With wages growing ahead of inflation, spending power is growing. Debenhams' 96 stores, spread liberally throughout the country, offer protection against regional downturns such as the meltdown in the City.

Its shares at 398p are more cheaply rated than most at just 12 times earnings. Next, the leader in the sector, sells at 17 times earnings. Belinda Earl, the new chief executive, comes from the shopfloor and should know how to boost margins. She plans 16 new stores by 2006, five of them overseas.

Cliff Feltham picks EMI

DIXONS, tipped at 224p, surpassed my expectations by racing to nearly 300p, but difficult retail markets saw it end at 240p. It remains a class act and holders should stay with it. This year I am sticking my neck out to recommend music giant EMI.

It has disappointed for so long that the time has come when it must perform or face the consequences. After two failed attempts to merge its music side, EMI has made drastic management changes, bringing in big hitter Alain Levy from PolyGram to head the recorded music division.

Early action is imperative and certain to involve cost cutting and reorganisation with more resources being used to develop new artists. Music publishing is making a growing contribution to profits. EMI has lost more than half its value since 2000 and major shareholders are becoming impatient. At 354p, it offers real scope for recovery.

Lucy Farndon tips Kingfisher

LAST year I picked GUS, which has risen 20% and been one of the FTSE 100 index's best-performing stocks in a dismal market. It still offers good value. Argos is steaming ahead and Burberry has been resilient, despite a fall in demand for luxury goods. The Experian credit information arm is vulnerable, but the shares are worth holding.

This year, I am opting for Kingfisher, which appears to be finally getting its act together. The shares have surged 40% since September to 386p, but are well below the 500p-plus levels seen at the start of 2001.

The B&Q do-it-yourself arm is the star performer. The electrical stores are weak, but unlikely to worsen. Losses in Germany are being reduced.

New chairman Francis Mackay will ensure there is no more dithering about the future. A demerger or break-up of the group is possible. If performance does not improve, predators will be circling.

Ruth Sunderland chooses Barclays

The attacks on 11 September took a toll on my tip for last year, HSBC. I liked its emerging markets side - but terrorist attacks and economic downturn drove the shares from 985p to a low of 608p. They have been climbing steadily since to 807p, but not enough for a gain.

This time I am backing another big bank - Barclays, at 2251p. The jewel in its crown is Barclays Capital, its investment banking arm. Its fixed interest markets operation has prospered as investors sought safe havens. It earned a fifth of the bank's 2001 profits, expected to rise from £3.5bn to £4bn.

Bad debts could increase, but the bulk of Barclays' business is in retail financial services, less risky than corporate lending. Its Woolwich acquisition has done well, and tracker fund specialist Barclays Global Investors should benefit from disillusionment with active fund managers. Barclays should knock Royal Bank of Scotland off its perch as the market's favourite bank this year.

Brett Arends picks Jarvis

JARVIS Hotels is a great looking value buy. Foot-and-mouth and 11 September hammered trading, but the shares have fallen much too far. At 85 1/2p, they sell at just six times the previous year's earnings and barely three times the cash flow. The dividend yield is 6.3%.

Jarvis is well placed to bounce. The balance sheet is copper bottomed, net assets are 145p a share and a cash distribution is on the cards. The hotel chain - rebranded Ramada - is being linked to a global sales network.

Alas, last year's tip, British Telecom, was too early. Factoring in the rights issue and mobile mmO2 demerger, returns fell 41%. I apologise, but this should come right. BT has slashed debt and has seen off upstart rivals. And mmO2 is likely to be taken over. Hold on.