Shares digital

The market is a fickle mistress and unfortunately the recent volatility is set to continue. So, what of next year’s fortunes? Dan Coatsworth and the Shares team calm the nerves and pick the companies worthy of your buck

Predicting the market performance for 2008 is going to be a tough call. The FTSE All-Share looks like it will end 2007 only marginally ahead on the year after what has been one of the most volatile sessions in recent times. Squeezing a profit out of the market next year may be even harder than the past 12 months but there should be a tidy pack of solid players who buck the trend. Shares’ team of journalists have worked hard to sound out the most likely contenders for success.

Anyone who has played the stock market in the past six months may be nursing a large headache. But many investors will be in much rosier health. You want to know how? It’s simple. They have read the wider signals and factored in economic-related trends when making their portfolio choices. This will be a crucial strategy in 2008 and paramount for survival.

So what should we have noticed? The fragile economic conditions depressing the US have passed over the pond to Blighty, leaving us susceptible to widespread market jitters.

A slow down in consumer spend has been exacerbated by tighter availability of credit. Banks are struggling with tarnished reputations; leisure companies and retailers are desperate for custom.

Price inflation is putting pressure on food producers; the weak dollar is hurting companies like oil producers who earn revenues in the greenback but pay costs in sterling; and the property sector is facing a sharp downturn.

Yuck. What a horrible picture, and that’s not even the full run-down. The issues have been widely reported so it is hard to imagine investors not being aware of the problems. If sentiment is poor in stocks exposed to these issues, then it is up to strong earnings growth, major contract wins or bid activity to drive their share price. Any company sitting quiet and merely trying to hold on to previous growth levels is going to see their share price drift downwards.

Diamonds in the rough

Given this rocky terrain, what does Shares think should we invest in next year? Russ Mould believes that if the economy does soften in 2008, a premium will be paid for companies with low earnings volatility and secular organic growth. He reckons Unilever (ULVR) fits the bill as it has over 40% of sales from emerging markets, brands strong enough to support price increases and a fierce restructuring story on top.

Big companies can offer a sense of security but we appreciate that many among you have a larger appetite for risk and are prepared to gamble on smaller stocks. As such, we have split our tips into three portfolios. Similar to last year’s format, they focus on large and mid-cap companies; small-cap and Aim firms; and high-risk, high-reward long shots.

The credit crunch has dominated the news agenda since the summer. Its impact on consumers and businesses might be felt for months or years to come, but there are beneficiaries to tighter lending.

Debt management companies could see a bumper 2008 as consumers find themselves in a pickle over borrowings. Buy into this stock market opportunity, says Simon Keane. He believes that IVA provider Debt Free Direct (DFD:AIM) will benefit from the decision by banks to start agreeing more IVAs following more transparent fees and better marketing.

For those desperate for hard cash, Cattles (CTT) is expected to fill the void left by banks clamping down on lending. Keane believes this specialist sub prime lender stands a good chance of picking up more business from the changing credit landscape.

We have picked 30 stocks covering the industry sectors most likely to succeed in 2008. Resource companies look attractive on takeover potential and ongoing strong commodity prices. There are several technology groups tapping into demand for environmental services. Retailers with strong internet presence have been picked as the few consumers actually spending money are doing so online.

Several large cap companies have been chosen for their solid financial performance and assets including National Grid (NG.). A few recovery plays have been thrown in the mix and there are a handful of hidden gems, including veterinary practice CVS (CVSG:AIM) that has defensive qualities.

Economists advised investors to take a cautious stance a year ago and this message remains today, so follow our lead and pick wisely.

WHAT’S IN STORE FOR 2008?

Shares Staffers:

John Marshall: FTSE 100 7,200

* Debenhams taken over by Baugur

* Sports Direct taken private by Mike Ashley at 140p

* Jessops will go bust

* Woolworths bid at 10p a share

* Food price inflation will continue to rise to 8%-10%

Tom Sieber: FTSE 100 6,200

* UK base interest rates to fall to 5%

* Oil price to rise to $115 a barrel

Susanna Twidale: FTSE 100 6,900

* ITV to get taken over

Rachel Robson: FTSE 100 6,700

* Property prices to fall 7% by the end of 2008

Steven Frazer: FTSE 100 6,900

* Oil prices to edge over $110 a barrel before end of this winter

* Leading UK banks to rally strongly

* Takeover speculation to swarm around Tesco

Dan Coatsworth: FTSE 100 6,675

* Chinese consortium beats BHP to buy Rio Tinto

* Gold price to end 2008 at $790/ounce

Timon Day: FTSE 100 6,700

* Siemens to buy Invensys for over £3 billion

Carlo Svaluto Moreolo: FTSE 100 6,500

* Aim All-Share index to slump to below 900

Simon Keane: FTSE 100 6,000

* Corporate insolvencies rise 15% to around 14,000

Shares Production Desk: FTSE 100 6,350

Russ Mould: FTSE 100 6,250

* US interest rates to go below 3% in 2008 (currently 4.25%)

* 2008 worldwide semiconductor sales to be down vs 2007's $257 billion

* Inglis Drever to win the World Hurdle, Cheltenham, March 2008. Currently 3-1 ante-post

Special Guest Predictions:

Mahoney (Dan Coatsworth's pet Cat): FTSE 100 6,300

Vince (Steven Frazer’s pet Gecko): FTSE 100 6,160

Magic Hat: FTSE 100 6,167

What The Experts Predict:

Amit Thakar, Seymour Pierce: FTSE 100 7,200

Omer Bhatti, Worldspreads: FTSE 100 7,177

* FTSE 100 to trade over 1,000 point range

* Vodafone hits 240p

* Intercontinental Hotels to fall out of FTSE 100

* FTSE 100 house builder to go bust

* Qatar’s Delta Two to buy FTSE 100 supermarket by July

* Brent oil to peak at $121 a barrel

Mike Lenhoff, Brewin Dolphin: FTSE 100 7,200

Stephen Barber, Selftrade: FTSE 100 6,700

* The Fed will continue to loosen monetary policy

* MPC will also reduce rates but more cautiously

Michelle Gibson, ABN Amro: FTSE 100 7,000

* Property price pressure to underpin equity market attractions

* Stock market to remain volatile through 2008

Tim Young, Collins Stewart: FTSE 100 over 7,000

Magnus Mathewson, Hichens Harrison: FTSE 100 6,500

Oliver Hemsley, Numis Corp: FTSE 100 6,500

David Jones, IG Markets: FTSE 100 6,400

Andy Wade, Seymour Pierce: FTSE 100 6,900

Keith Morris, Evolution Securities: FTSE 100 6,750

Rhys Williams, Arbuthnot: FTSE 100 6,600

Gavin Oldham, The Share Centre: FTSE 100 6,000

* House prices to fall throughout 2008

* Oil price to reach $125 a barrel

* Aerospace & Defence sector to benefit from global tensions

Dave Paxton, Hichens Harrison: FTSE 100 5,800

Eamonn Flanagan, Shore Capital: FTSE 100 5,700

RED HOT STOCKS FOR 2008

LARGE CAPS

BARCLAYS (BARC) – 523p, stop loss 418.5p

The banking giant should stage a recovery next year despite the earnings uncertainty surrounding the financials.

Vital stats:

Market value: £36.8 billion

Historic PE 2006: 9

Prospective PE 2007: 8.2

Prospective PE 2008: 7.8

Sector PE: 10.2

1-month relative strength: 16.7%

1-year relative strength: -25.5%

Yield: 6.52%

NMS: 38,000

Spread: 0.09%

The UK banks have been brought to their knees by this year's credit crunch, the first half's top performer Northern Rock (NRK) has all but crumbled and in the sector as whole billions have been wiped off market valuations. Barclays has suffered as much as anyone – down from a 12-month high of 790p - but we may now have reached the stage where valid concerns over earnings uncertainty are priced in.

The banking giant is sitting on a fat yield and its PE ratio compares favourably with the sector average. In fact Barclays has already gained from its year low of 474.5p. Next year may not be an entirely smooth ride – with the UK economy at least expected to slow down if not face a full blown recession, but Barclays, unlike peers such as HBOS (HBOS) and Lloyds TSB (LLOY), has relatively little exposure to the UK consumer. The ultimate failure of its bid for ABN Amro did at least entail the entry into Barclays share register of China Development Bank and Singapore's Temasek providing a possible short cut to emerging markets exposure. Unsurprisingly the bank's investment arm Barclays Capital has been the most troublesome division in 2007. Even here though the picture is not quite as bleak as might be expected. The most recent update did reveal £1.3 billion worth of sub-prime related write downs but as Collins Stewart banking analyst Alex Potter points out: 'It is notable that, excluding the write downs from US sub-prime. BarCap would have made £3.2 billion in the first ten months of 2007. That, in run rate terms is 72% up on 2006 which was itself 56% up on 2005.'

It may not be a continuous upward progression for the stock in 2008 but it is hard to believe that, with profits projected to total £7.5 billion next year, it will be out of favour for too long.

by: Tom Sieber

CATTLES (CTT) – 293.5p, stop loss 235p

Sub-prime lender with years of experience, will take new business as high street banks retreat from sector.

Vital stats:

Market value: £1.1 billion

Historic PE 2006: 11.2

Prospective PE 2007: 9.4

Prospective PE 2008: 8.5

Sector PE: 15

1-month relative strength: -2.4%

1-year relative strength: -27.9%

Yield 2007: 6.9%

NMS: 12,500

Spread: 0.1%

One consequence of the credit crunch is rising borrowing costs. The Bank of England cut base rates 0.25% but the London Interbank Offer Rate (LIBOR) - on which borrowing costs are actually based - remains high, even after the world's main central banks announced plans to inject £54 billion into interbank markets. Lenders are also more discerning. If they pass the tightened lending criteria those with bad credit ratings may expect to pay LIBOR plus a good margin.

This adds up to an effective withdrawal from the sub-prime segment by the big banks, which can only be good for specialist consumer lenders such as Cattles, which last week reported loan growth remained in a trading update. At the time of September's interims, Cattles heralded a return to 'old fashioned lending,' clearly referring to the loose and fast lending practices of the high street names. At the time, chancellor Alistair Darling was calling for lenders to tighten up loan selection criteria.

Cattles prides itself on knowing the sub-prime market and boasts low bad debts levels. Consumer credit (the main part of the business accounting for £2.1 billion of the £2.4 billion loan book) reported an 8% loan loss (bad debt) ratio for H1 compared with 8.2% last year. Last week's trading update pointed to a full-year loan loss figure up only marginally at 8.6%. Arrears in consumer credit - two thirds of whose H1 new lending were unsecured loans averaging £2,200 - were steady at 7.3% (7.4% in 2006) and on course for a full-year 7.2%.

One reason shares have come off sharply since the summer may be fears about how the company funds its lending. But unlike Paragon (PAG), Cattles is not reliant on the securitisation market for its own borrowing, but issues corporate bonds. Analysts don't foresee the company having problems issuing new bonds, which it'll probably need to do next year.

by: Simon Keane

ITE (ITE) – 159.25p, stop loss 127p

Desire to gain entry into new markets will lead to continued growth in its business.

Vital stats:

Market value: £414.7 million

Historic PE 2007: 18.5

Prospective PE 2008: 16.8

Prospective PE 2009: 14.3

Sector PE: 15.5

1-month relative strength: -5.8%

1-year relative strength: -5.4%

Yield: 3.17%

NMS: 2,500

Spread: 0.3%

An organiser of exhibitions in Russia, Central Asia and south east Europe, ITE has established a leading market position over the last 15 years. With US and European markets perceived to be experiencing a slow down businesses are desperate to gain entry into new markets where growth is solid which has led to a boom in profits at the company. It recently announced a 24.8% rise in pre-tax profits to £33.7 million, on a 20% increase in revenues to £99.1 million, with confidence leading the management team to up its dividend by 28% to 4.5p. This confidence perhaps comes from the fact that it has already booked £61 million of sales for 2008 and should have no problem in hitting next years' sales forecast of £102.5 million. 'ITE is clearly in the right place at the right time,' says Numis analyst Lorna Tilbian. 'The underlying markets in which it operates remain robust, while we continue to find visibility, resilience and cash generation of exhibitions attractive.'

Some £27.1 million was returned to shareholders during the year via buybacks and dividends while the £26.7 million cash in the bank at the end of its latest finals will be either used for bolt-on acquisitions or more returns, either of which will help to underpin its share price. Shares have fluctuated this year, peaking at 194.5p in June when it also entered the FTSE 250. At its current levels, however, the shares look to be a good buying opportunity and analysts also believe they have further to run. Numis has a 209p target price for the shares while analysts at Dresdner Kleinwort have an even more ambitious 220p target.

by: Susanna Twidale

LLOYDS TSB (LLOY) – 471.75p, stop loss 377.5p

Shares are more likely to end the year higher, especially given the big yield.

Vital stats:

Market value: £28.5 billion

Historic PE 2006: 9.7

Prospective PE 2007: 9.5

Prospective PE 2008: 8.9

1-month relative strength: 3.4%

1-year relative strength: -13.2%

Sector PE: 10.4

Yield for 2007: 7.2%

NMS: 25,000

Spread: 0.1%

A few years ago Lloyds TSB shares were worth twice as much as they are now, but since the 2003 nadir of 296p they have doubled to peak at 614p earlier this year.

New management headed by American banking supremo Eric Daniels has worked wonders. Even the dividend is rising again, although it tops the banking sector with an already generous 6.8%.

The credit crunch and worries about write-offs on exotic financial instruments and the possibility of rising UK bad debts next year have combined to hit bank shares, including Lloyds which fell to 451p a few weeks ago.

The trading update on 10 December has gone a long way to assuage these fears. Write-offs were a modest £200 million with a maximum liability of another £210 million if all asset backed securities and CDOs are written off.

Admittedly if things get really bad the Cancara hybrid asset backed commercial paper offshoot with almost £12 billion could prove sticky. But Cancara is run very conservatively with no exposure to US sub-prime mortgages and no default on any of its AAA rated bonds since it was formed in 2002.

Daniels is confident of earnings growth over the next few years. The low risk business model and stress on building long-term customer relationships is paying off.

Though the credit crunch will take many months to unravel, Lloyds should maintain earnings per share this year at 51.5p and jump to nearly 56p next year cutting the PE to 9. The prospective dividend for 2007 is 7.2% rising to 7.5% next year.

by: Timon Day

Morgan Sindall (MGNS) – £11.21, stop loss 897p

Low rating and decent yield, the sell-off has been overcooked and the shares will respond.

Vital stats:

Market value: £479 million

Historic PE 2006: 14.7

Prospective PE 2007: 11.8

Prospective PE 2008: 9.8

Sector PE (next 12 months): 11.1

1-month relative strength: -20.4%

1-year relative strength: -22.4%

Yield 2007: 2.6%

NMS: n/a

Spread: 0.267%

Sticking my neck out a bit on this one but I believe Morgan Sindall will handsomely repay investor faith over the coming 12 months. Yes, it's been through a rough patch recently, the shares have lost over a third of their value since late October thanks to property market worries, but has this been overdone?

Yes, looking at the numbers. Strong first half figures, showing profits up 18%, released in August have twice been bolstered by reassuring trading updates, late last month and again last week. The vital point to make is how broadly based management's enthusiasm is at a time when both the fit out and construction divisions might have started to struggle.

So it's encouraging to find over 20% revenue growth across both units and increasingly fat forward orders, even if construction margins do need improving.

Clearly, the two divisions from Amec (AMEC) have been good buys, although it is fair to assume the firm's exposure to big regeneration projects may make it sensitive to economic weakness.

However, among the key beneficiaries of the government's Decent Homes Standard - an initiative designed to upgrade dilapidated local authority and housing association housing stock – this means Morgan should continue to cash-in on vast government sponsored regeneration and affordable home-building schemes.

Altogether the firm has £4.1 billion worth of work on its books, roughly five years worth of revenue at current rates. Yet after this recent share sell-off, the stock trades on a 2008 PE of less than ten. Factor in the three-times covered 3%-odd yield, there's a lot of bad news factored in, and if the building industry doesn't go to hell in a handcart, the rerating could be sustained and strong during the year ahead. I wouldn't be surprised to see the shares trading at £15 in the coming months.

by: Steven Frazer

NATIONAL GRID (NG.) – 820.5p, stop loss 656.5p

Recent shakeup combined with planned network improvements put National Grid in a strong position.

Vital stats:

Market value: £21 billion

Historic PE 2006: 17.7

Prospective PE 2008: 15.6

Prospective PE 2009: 14.3

Sector PE: 13.8

1-month relative strength: 3.7%

1-year relative strength: 11.6%

Yield: 3.4%

NMS: 33,000

Spread: 0.119%

This year's successful shake-up left National Grid in a strong position, as the UK's largest utility by market capitalisation and the second largest in the US by number of customers. This year it sold its UK and US wireless businesses for £2.7 billion and Basslink, a business in Australia, for £485 million. In September it completed the acquisition of Keyspan, a gas and electricity business in the East Coast if the US. The focus is now on growing profits through investment in the existing businesses and the integration of Keyspan. Benefits are already coming through from the plan to invest £16 billion until 2012. As a regulated utility, expenditure levels and returns of 95% of its activities are set by energy regulators, which may limit the scope for big surprises in turnover improvements, but it also means low risk on the downside. The the key goal is successful improvement of the quality of the networks, which will reap the profits of a more reliable service and smaller expenditure on maintenance operations. Quarrels with the watchdogs can affect sentiment but while at home National Grid only deals with Ofgen, in the US it works with a number of parties, which offsets regulatory risk. Shareholders will also be rewarded by growing dividends, a £2 billion buyback which is still ongoing and some other cash cows.

A generation business acquired with Keyspan, Ravenswood, is on sale. US regulators also pay back to utilities 'stranded costs', or losses stemming from wrong valuation of electricity assets prior to the deregulation of the sector. The company is trying to keep interest cover within a certain range, above which further buybacks could be triggered. Finally, National Grid's massive portfolio of brown field land may be sold, unlocking further cash payouts. Analysts reckon that the 2009 gas distribution price review should not disappoint too much either.

by: Carlo Svaluto

NEXT (NXT) – £16.74, stop loss £13.39

The website performance and refurbishment programme should help Next succeed in a tough market.

Vital stats:

Market value: £3,614 million

Historic PE 2007: 12.1

Prospective PE 2008: 10.9

Prospective PE 2009: 10

Sector PE: 12.8

1-month relative strength: -7.2%

1-year relative strength: -2.7%

Yield 2008: 3.1%

NMS: 25,000

Spread: 0.11%

The clothing sector has endured tough trading in the run up to Christmas but there are several reasons why Next should succeed where others are failing. The first is the Next Directory and its website. The Next website is by far the most popular of all the clothing sites - an operation in which execution is strong, helped by the excellent reputation for timely deliveries. Trading here has been strong lately. The second reason is that Next is investing capital into refurbishing its stores, improving the window displays and increasing marketing spend. The refurbished stores are enjoying improved sales, while the firm's recent TV ad campaign - its first in years - is putting the brand right in the face of consumers.

Importantly, Next has never tried to fight the discount clothing operators, preferring to stick to its knitting of reasonably-priced, smart, fashionable quality clothing.

Share buybacks are adding value, with at least 20.4 million shares, close on 10% of the total, being bought back. Next is clearly doing a better job in this tough climate than most, and that trend looks unlikely to change in the foreseeable future.

That also makes a 2008 PE of below 11 attractive. With earnings likely to growth in the low teens during 2008, an even modest re-rating to a PE of 13 by the end of the year would imply that the shares could shot to close on £23.00, for a potential 35% profit.

The writer holds chares in this company

by: John Marshall

SOUTHERN CROSS (SCHE) – 537.5p, stop loss 430p

Growing rapidly and has a solid business model, while consolidation potential adds to attractions.

Vital stats:

Market value: £1,087 million

Historic PE 2006: 60.7

Prospective PE 2007: 31.5

Prospective PE 2008: 19.9

Sector PE: 20

1-month relative-strength: -1.8%

1-year relative strength: 91.3%

Yield: 1.3%

NMS: 3,750

Spread: 0.09%

What a year it has been for the care home operator. Shares have zipped up a whopping 95% since the start of 2007 and look like they have even further to run. Operating under two brands, Southern Cross Healthcare and Ashbourne Senior Living, its care homes for the elderly provide a range of social and personal care services and nursing care services those with physical frailties and differing forms of dementia. Southern Cross also operates specialist services under the Active Care Partnerships brand which provides care for people with disabilities. The company recently boosted the number of homes operated under the brand to 46 after acquiring a specialist learning disability business in Shropshire. Acquisition opportunities have been plentiful for Southern Cross, which floated in July 2006, and it is also growing organically. It is the largest care home operator in the UK, with more than 700 homes and more than 36,000 beds throughout the country. Analysts at house broker UBS believe Southern Cross 'could continue to add up to 6,000 beds per year through acquisition.'

With the UK care home market remaining highly fragmented - Southern Cross only has an 8% market share despite its size – the group continues to see further opportunities to consolidate the sector. The company is in a good position to take advantage of these opportunities as and when they arise, and benefits from keeping its care and property businesses separate and from its sale and leaseback business model which helps to fund growth. Although chief executive, Philip Scott, recently announced he would be stepping down from his position at the start of 2008, analysts do not view this as a negative sign. Instead, they believe that Scott's replacement, current chairman Bill Colvin, will be highly suitable for the job, with plenty of experience in the care home market.

by: Rachel Robson

UNILEVER (ULVR) – £17.46, stop loss £13.97

A haven during volatility, benefiting from new people, and a new programme.

Vital stats:

Market value: £28.6 billion

Historic PE: 20.6

Prospective PE 2007: 18.7

Prospective PE 2008: 12.7

Sector PE (next 12 months): 14.5

1-month relative strength: 5.7%

1-year relative strength: 25.3%

Yield 2007: 3%

NMS: 50,000

Spread: 0.11%

If the Bank of England and US Federal Reserve are cutting interest rates because they are worried about growth in 2008, it seems sensible to pick stocks whose products are not unduly exposed to the economic cycle. Unilever fits the bill, especially as it also offers management change, a restructuring story and exposure to rising consumer expenditure in emerging markets.

A global leader in food, personal care and home care products, Unilever had garnered an unwelcome reputation as an underperforming plodder, before the arrival of Patrick Cescau and his One Unilever program in 2005.

The disposal of UCI fragrances in 2005 and frozen foods in 2006 improved Unilever's focus and November saw the company raise ?800m by selling its Boursin cheese and Lawry's and Adolph's marinades operations. A laundry business in the US is also for the chop. A mere 25 brands now generate nearly three quarters of sales, making Unilever easier to direct.

The arrival of outsiders Michael Treschow as non-executive chairman and James Lawrence as chief financial officer should help Cescau further his reforms, even though the early benefits are clear to see.

November's quarterly results revealed a third straight improvement in operating margin as a combination of price increases and cost-cutting helped the firm compensate for a 2.5% increase in raw material cost increases. This demonstrates the strength of the firm's key brands, which include Hellmanns, Knorr, Lux, Comfort and Vaseline

escau has targeted annual sales growth of 3%-5% a year and a profit margin of 15% by 2010. A ?1.5 billion cost-cutting programme launched in the summer suggests these goals could be exceeded, especially as over 40% of sales now come from emerging markets such as India and China.

A healthy 3% yield and ongoing share buybacks should offer further support and generate solid performance in 2008.

by: Russ Mould

XSTRATA (XTA) – £36.04, stop loss £28.83

Without a bid, Xstrata remains a solid investment.

Vital stats:

Market value: £35.4 billion

Historic PE 2006: 16.2

Prospective PE 2007: 12.4

Prospective PE 2008: 11.5

Sector PE: 13.5

1-month relative strength: 9.2%

1-year relative strength: 51.6%

Yield: 0.7%

NMS: 8,000

Spread: 0.13%

Major resource companies are set for a shake up in corporate ownership as cost savings lead the boardroom agenda.

Global commodities demand remains strong with India following China's lead with infrastructure investments. There is at least another year left for strong commodity prices and even if they peak in 2009, miners should still be able to make good profit margins – as long as they address one negative issue.

Cost pressures from more expensive labour, equipment and energy has prompted the world's largest companies to consider M&A among their peers to find cost efficiencies.

BHP Billiton (BLT) has already made its move on Rio Tinto (RIO) and other UK-listed majors are set to follow with large takeover deals.

Xstrata is almost certain to be involved in a bid and has already signalled that it is open to offers. Last week it confirmed talks with rivals over potential industry consolidation. Brazilian mining giant Vale Inco (formerly called CVRD) is rumoured to be interested, particularly in Xstrata's strong project pipeline in Latin America.

Reports suggest a takeout price of £40 billion, 10% on the current valuation. A bid battle should easily push this price up.

A merger with Anglo American (AAL) is plausible. This may depend on coal producer Glencore reducing its 34.7% stake in Xstrata, for shares in the enlarged business and offtake agreements, said investment bank Credit Suisse, adding that a tie-up with Anglo would give Xstrata control of the world's largest platinum resource.

Recent acquisitions boosted coal resources and provided a solid entry into the platinum market. Annual nickel output could more than double by 2015 from recent acquisitions and development success.

A PE of 10.8 looks cheap compared to the 13.5 sector average. Pre-tax profit is forecast to rise 69% to £4.6 billion for the year. This increases to £4.8 billion for 2008 and an upgrade post full-year figures in March seems possible.

by: Dan Coatsworth

SMALL CAP

2 ERGO (RGO:AIM) – 177p, stop loss 141.5p

Good prospects caught in general small-cap falls - a buying opportunity.

Vital stats:

Market value: £55 million

Historic PE 2007: 21.7

Prospective PE 2008: 16

Prospective PE 2009: 12.5

Sector PE (next 12 months): 16.6

1-month relative strength: -2.4%

1-year relative strength: -38.6%

Yield 2007: n/a

NMS: 1,000

Spread: 3.3%

After leading the bull run that began in 2003, small caps fell out of favour this year and many stocks were sold indiscriminately, regardless of their financial performance. The shares of mobile telecommunications software expert 2 Ergo have been caught up in the melee and are more than a third off their year high. This looks to be a buying opportunity as the secular, organic growth offered by the booming mobile advertising and content market should look even more attractive if the global economy does cool next year.

Lancashire-based 2 Ergo's Multiserve platform provides content aggregation, delivery and billing capability to communications service providers that want to offer interactive, multi-channel content to their customers.

A strong presence in the UK was supplemented by last year's acquisition of Proteus in America. After an initial restructuring, Proteus is making profits on a monthly basis and 2 Ergo will now use the operation as a springboard into the booming Latin American markets.

Growth should also get a fillip from the creation of a new division, interactive media services, through which 2 Ergo plans to focus on rising demand for targeted advertising over mobile phones.

Recent deals with Vodafone (VOD), Rightmove and targeted mobile advertising start-up blyk are all testimony to 2 Ergo's technological prowess. September's full-year results highlighted its robust financial performance.

Organic sales growth was 8%, profit margins rose and cashflow was excellent, as management fears that the summer's television phone-in scandals would knock sentiment on the market overall proved unfounded. £9.3 million in cash and £4 million in investments underpin the £55 million market valuation.

Further acquisitions are likely but it is underlying double-digit trend earnings growth that should propel the shares upward.

by: Russ Mould

ASHLEY HOUSE (ASH:AIM) – 129.5p, stop loss 103.5p

Property business with clients in crunch-proof healthcare sector make this a rare defensive property play.

Vital stats:

Market value: £36.2 million

Historic PE 2007: 9.83

Prospective PE 2008: 11.1

Prospective PE 2009: 8.8

Sector PE: 11.1

1-month relative strength: -11%

1-year relative strength: n/a

Yield: 3.8%

NMS: 1000

Spread: 3.03%

Property might not be the hottest sector right now but Ashley House, founded in 1991 and moved to Aim from Plus in January this year, works in as defensive segment of the sector. It is a project manager and developer of health care infrastructure, and even the layman knows how much work needs to be done to improve the country's GP practices and health care parks. Exposure to the economic cycle is minimal, and the government keeps rising spending targets for the NHS. Interestingly, the company's separate asset management vehicle listed on Plus, saw the value of its portfolio go up in the first half, against a falling sector. Ashley House has five divisions. It does project management and development work for primary care trusts and GPs to build new practices. It is involved with the NHS LIFT programme through a partnership with PFI specialist Babcock & Brown (BBPP). A third works on large health care park projects, like the £25 million one it has been awarded in Scarborough. Finally, the company's asset management side is complemented by a clinical services operations, which provides capital, management expertise and other services to clinicians. The interims earlier this month highlighted progress in profitability, with taxable profits of £1.77 million, up 22% from 2006. The dividend was raised to 2.3p, and the forecast yield is 4.5%, as the company hopes to keep lifting payouts. Looking forward to the full-year performance, turnover will be flat as a result of delays in some funding decisions for primary care trusts, but that means that progress in the 2008-09 year will be impressive. Ashley House has completed more than 200 schemes since it started, and the pipeline of projects is hefty. Weakness in the share price is an opportunity to buy at the 2008 PE of 11.1 times. House broker Numis has a 207p target price on the shares, leaving some 59% upside.

by: Carlo Svaluto

CVS (CVSG:AIM) – 241.5p, stop loss 193p

There is limited competition on the same scale as CVS yet it only has 3% market share, offering substantial growth opportunities.

Vital stats:

Market value: £125 million

Historic PE 2007: 67.8

Prospective PE 2008: 29.6

Prospective PE 2009: 19.8

Sector PE: 12.8

1-month relative strength: 0.2%

1-year relative strength: n/a

Yield: n/a

NMS: 2,000

Spread: 2.9%

The veterinary group floated in October and we believe it could be a strong runner. CVS has bought 45 practices with 129 surgeries since 1999. It operates in the small pet market, typically dogs and cats. Not only does it treat animals but it also runs a laboratory testing business and is poised to expand its service range.

CVS has strong defensive qualities should an economic slowdown emerge in 2008. Pet owners are extremely loyal, not only to their furry companions but also to veterinary practices. Most owners are happy to pay for treatment as they regards the health of their pet as more important than the cost.

The company plans to keep acquiring practices, tapping into a market rich with owners wanting to sell out or retire. It only buys profitable businesses rather than seeking practices to turn around or building new outlets from scratch.

CVS has historically referred more complicated illnesses to specialist vets. It now plans to establish its own specialist operation, with capacity to handle both its own customers and take third-party work.

A fleet of catteries are planned. Chief executive Simon Innes believes owners would rather put their pets into short-term care with vets than an untrusted business. It may also seek acquisitions to develop pet crematoriums and grooming activities.

Laboratory work commands higher margins than core veterinary activities and accounts for 8% of revenue. Around 70% is non-CVS work and profits are growing at over 20% per year.

Profit before tax and amortisation is forecast to increase 117% next year to £5 million, rising to £7.7 million in 2009. The PE is pricey at nearly 29.6 for 2008 but drops to 19.8 the following year. House broker Panmure Gordon reckons the shares could rise 20% in the next year to 300p.

by: Dan Coatsworth

DEBT FREE DIRECT (DFD:AIM) – 202p, stop loss 161.5p

IVA provider, volumes were depressed last year but these problems now addressed and market recovering.

Vital stats:

Market value: £87.3million

Historic PE 2007: 11.7

Prospective PE 2008: 16.7

Prospective PE 2009: 8.8

Sector PE (next 12 months): 15.1

1-month relative strength: -21.7%

1-year relative strength: -57.6%

Yield 2008: 2.6%

NMS: 2,500

Spread: 1.5%

With the individual voluntary arrangement (IVA) market, banks believed they were being overcharged by providers and refused to play ball – until the Insolvency Exchange, which represents the big high street banks HSBC (HSBA), HBOS (HBOS) and Royal Bank of Scotland (RBS), introduced a new fee structure on 1 September.

This reduces the upfront IVA fee (from an average of £6,600 to £5,200) and links the provider's remuneration to the IVA's subsequent performance. The drop in IVA volumes (down 14% in Q3 2007 versus last year according to government Insolvency Service statistics) mean unit advertising costs required to acquire new IVA customers have risen.

The squeeze on revenues and increased costs saw Debtmatters (DEBT:AIM) pull out, saying it could no longer operate profitably. Bigger players such as Debt Free Direct (to be renamed Fairpoint after an EGM on Friday, 21 December) have survived, and are in line to benefit from the expected upturn in IVA volumes - already apparent.

At last month's interims, Debt Free revealed it had processed an average 382 IVAs a month in the four months to April 2007. For the six months to end October that had risen to 614 and in October the company processed 755 IVAs. Compare with Insolvency Service statistics means counting joint names on IVAs, taking October to 949. Comparing that to the Insolvency Service's Q3 figure of 10,239 IVAs, Debt Free can claim to have cornered 28% of the market.

The final part of the new framework fell into place this month, when the British Bankers' Association (BBA) and Insolvency Service approved a new protocol, which covers issues such as how IVA providers should source new clients (no cold calling for instance) and should help to improve banks' confidence.

by: Simon Keane

FDM (FDMG:AIM) – 125p, stop loss 100p

IT skills specialist could easily shoot beyond 2007 highs as industry skills shortage sees margins and profits soar.

Vital stats:

Market value: £29 million

Historic PE 2006: 14.3

Prospective PE 2007: 10.2

Prospective PE 2008: 8.3

Sector PE (next 12 months): 13.7

1-month relative strength: -6.2%

1-year relative strength: 13.5%

Yield 2007: 2.1

NMS: n/a

Spread: 4.7%

Typical. Just as I'm eyeing up what I reckon will be a real profits winner in 2008, the firm reveals how well its doing to the market and the shares spike 13%. But do not allow that to put you off buying little FDM. This supplier of computer services and advanced IT training has grown revenues, profits and earnings consistently in recent years despite starting out during the technology industry fallout. FDM, led by industry veteran Rod Flavell, recruits and trains its own in-house consultants called 'Mounties', named after Mountfield, the software firm bought by FDM in 1999. These tend to be specialists in Java, the programming language that basically runs most modern technology platforms, including the internet, digital television and mobile phones.

The Java market worldwide is estimated to be worth about $100 billion a year, with an additional $100-odd billion spent on related IT, yet it remains a fairly new market, initially designed to help deal with the millennium bug and Y2K, so skills remain in short supply.

Consultants are worked hard, utilisation rates run in the high 90% area, while the headcount had jumped to 653 at September's interims. FDM has offices in Britain, the US, Germany and Luxembourg, and is strengthening its resources to meet the growing need for programmers with expertise in Microsoft's new internet programming language .Net, an alternative to Java.

H1's 15% revenue rise delivered a 45% hike in taxable profits, and margins are likely to improve substantially beyond the current 21% or so.

EPS has been predicted to jump about 30% for 2007, but the firm's revelation last week suggests nearer 40% could be on the cards. Assuming another 25% or so rise in 2008 would imply a 2008 PE of barely eight, plus there's a 2.5% yield. A rerating to a PE of 12 would see the shares soar beyond this year's 155p peak, to nearer 180p-190p, for a potential 45%-50% profit.

by: Steven Frazer

FINDEL (FDL) – 596.5p, stop loss 477p

With the Kleeneze deal and strong predicted growth, prospects look good for the year ahead.

Vital stats:

Market value: £524 million

Historic PE 2007: 12.2

Prospective PE 2008: 10.9

Prospective PE 2009: 9.7

Sector PE: 12.8

1-month relative strength: -7.8%

1-year relative strength: - 8.7%

Yield 2008: 3.6%

NMS: 5,000

Spread: 0.65%

Tipping the West Yorkshire-based firm didn't quite work out for us last year, but we're convinced it'll be different in 2008.

Findel's home shopping division has been transformed by a series of acquisitions, most notably Kleeneze last year. This was a gem of a deal, adding two online operations - Kitbag and IWOOT - alongside the key business, and this has helped drive online income to 50% of the firm's home shopping division's total.

The company has also successfully reshuffled its new and existing operations, shutting a warehouse in Bristol and diverting the workload through Findel's Accrington distribution centre, helping Kleeneze agents get stock more promptly. Out-of-stock levels have plunged from 65% to 5%.

More acquisitions are also on the cards, and changes to CGT rules should make it easier to pick up small businesses from owners keen to sell before the April deadline.

Chief executive Patrick Jolly believes that internet sales could grow to 60% of the home shopping division's total.

Apart from the home shopping division the group has the UK's biggest educational supplies operation, a business that continues to grow market share. This will be helped by greater certainty in school budgets now, which should enable the division to continue to grow significantly - a vital point now that Findel has decided not to demerge the unit.

Analysts at Numis have slapped a 877p price target on the stock and are predicting low-teens EPS growth to 63.5p in 2008/9.

The writer holds shares in this company

by: John Marshall

Haike (HAIK:AIM) – 117.5p, stop loss 94p

Cheap partly because it is Chinese and offers no dividend, but its rating is a quarter of the sector average and prospects look bright.

Vital stats:

Market value £45 million

Historic PE 2006: 10.9

Prospective PE 2007: 7.2

Prospective PE 2008: 4.2

1-month relative strength: 2.5%

1-year relative strength: -1.6%

Sector PE: 16.5

Yield: n/a

NMS: 3,000

Spread: 3.3%

It's been a bit of a yo-yo investment since Haike joined Aim this year with the shares almost doubling to peak at 200p, before halving on fears of lower-than-expected profits due to squeezed refinery margins.

The shares are now recovering strongly after the very positive trading update earlier this month. Profit margins have rebounded due to the fall in the crude oil price and the Chinese Government allowing a 10% price rise for gasoline and diesel.

The heavy oil refinery is now fully operational and boosting profits with production expected to soon be at maximum capacity of 800,000 tonnes a year. This business is higher margin than the petrochemical refinery and should remain so as the feedstock is petrolatum, the price of which is much less volatile than crude oil.

The speciality chemicals and biochemicals division is also trading strongly with capacity to be expanded in 2008.

House broker Hanson Westhouse lifted its full-year profit forecast by 7% from $16.3 million to $17.5 million on turnover up just 2.2% at £321 million. Next year the broker forecasts profits almost doubling to $33 million, slashing the PE to just four.

by: Timon Day

MATCHTECH (MTEC:AIM) – 396.5p, stop loss 317p

This sector has been out of favour but Matchtech is exposed to the right industries with the added benefit in the current environment of having a defensive model.

Vital stats:

Market value: £91.7 million

Historic PE 2006: 11.3

Prospective PE 2007: 10.5

Prospective PE 2008: 9.7

Sector PE: 14.6

1-month relative strength: -9%

1-year relative strength: 5%

Yield: 3.9

NMS: 500

Spread: 0.75%

Sentiment towards the UK staffing sector has been badly affected by fears of a credit-crisis fuelled economic meltdown. In November it underperformed the market by 10.3%, but companies in the sub-sector still have strong balance sheets and the level of recruitment activity remains high. In a recent note on the sector, in which it was described as 'heavily oversold', Seymour Pierce said: 'The dominant feature is still skill shortages... So far there has been little or no impact of the recent credit market problems, but investors remain wary.'

Even if you are not fully convinced on recruitment stocks in general Matchtech is a safer bet than most of its peers for two key reasons. Firstly, it is focused on industries in which these 'skill shortages' are particularly acute. The company's most recent results in October revealed that engineering has seen a marked increase in permanent recruitment, coupled with salary inflation - this has been especially true in the power and nuclear areas. There was also exceptionally strong growth in aerospace. Earlier this year Matchtech, which floated in October 2006, announced a 'master vendor' contract with Mouchel (MCHL) and will manage all the company's technical contract labour. Demand in all of its divisions should remain strong particularly in light of the massive development anticipated in advance of the 2012 Olympics. In addition the two other major master vendor contracts the firm currently has with Devonport Royal Dockyard Limited and VT Group (VTG) are up for renewal next year. The group's chairman George Materna is 'fairly confident' they will be reaffirmed. A second compelling reason to have confidence in Matchtech is its defensive model – with a 70% contract and 30% permanent staff split. Long-term contracts provide a further comfort with good earnings visibility and Arbuthnot recently reiterated its 'buy' rating on the stock with a 540p price target – a 36% premium to the current share price.

by: Tom Sieber

PLANT IMPACT (PIM:AIM) – 53p, stop loss 42p

Interest in products growing rapidly and technology could really take-off next year.

Vital stats:

Market value: £12.3 million

Historic PE 2007: n/a

Prospective PE 2008: n/a

Prospective PE 2009: n/a

Sector PE: 17.9

1-month relative-strength: -1.7%

1-year relative strength: -30.9%

Yield: n/a

NMS: 500

Spread: 3.7%

The developer of plant stress management technologies helps a range of crops to deal with extreme temperatures and drought, increasing crop yield. Plant Impact joined the junior market in October 2006 and has been making steady progress since then, although the shares did not reflect this during 2007. The company has completed successful worldwide field trials on a variety of crops such as tomatoes, lettuces and grapes, and the new year is expected to bring plenty of further good news. The group is currently in the process of obtaining UK and US registration for its BugOil pesticide product, with the final dossier due to be filed by mid-2008. Several licensing and/or distribution deals for BugOil are also expected to be completed before the registration process is finalised. Plant Impact has been working towards boosting brand awareness, and many large players in the agrochemical industry are showing increased interest in its technologies. The group strengthened its cash position during 2007 and although it has yet to move into the black, one or two large licensing or distribution deals could easily change this.

The group has also been in collaboration with Lancaster University since January 2007 to assist Plant Impact in the development of Alethea which has been shown to protect crops against abiotic stress. Plant Impact's first container of nutrient products was shipped to the US for commercial evaluation on fruit and vegetables back in April, following receipt of an order from an independent manufacturer of fertilisers. Although much smaller than rival Plant Health Care (PHC:AIM), with a market value of £12 million against Plant Health Care's £119 million, the group holds the key to some very promising products. Chairman Martin Robinson has described the next six months as being 'potentially the most exciting in the group's history'.

by: Rachel Robson

PROTHERICS (PTI) – 53.5p, stop loss 42.8p

Milestone payments and a strong pipeline should provide solid news to lift the shares in 2008.

Vital stats:

Market value: £182.7 million

Historic PE 2007: n/a

Prospective PE 2008: n/a

Prospective PE 2009 : n/a

Sector PE: 12.4

1-month relative strength: -6.8%

1-year relative strength: -28.4%

Yield: n/a

NMS: 3,800

Spread: 1.8%

Tipping a loss-making company is always a tricky business but the nature of the biotech sector means it can be several years before the fruits of labour start pouring in. Protherics, however, has already tasted success and at its current price looks extremely undervalued. Unlike many of its peers it has already taken a product through development to market and has secured a deal with one of the big boys, AstraZeneca (AZN) for another.

It generates solid revenues with its rattlesnake anti venom CroFab contributing to a 31% increase in revenues at its recent interims to £14.8 million. The exciting thing about the company however its its pipeline. In 2008 it will be getting results from a phase IIb study of its Digibind product which is being developed to combat pre-eclampsia. This is a potentially life threatening condition associated with pregnancy for which there are currently no other treatments. Analysts believe the market for the product could be around $500 million a year.

It is also developing a treatment for anti-sepsis, CytoFab, with AstraZeneca as part of a licensing deal which could be worth as much as £195 million plus royalties if it is successful. Given that this is lower than its existing market cap it is easy to see why some analysts believe the company is vastly undervalued. CytoFab is set to enter phase III trials and is expected to address a market worth some £2 billion on its launch. Shares have had a poor run in 2007 dropping from highs around 80p to a low of 46p. However, they have already begun to climb on the back of the expected newsflow for next year and Numis analysts Bret Pollard has an ambitious 104p price target.

by: Susanna Twidale

BLUE SKY PUNTS

BEGBIES TRAYNOR (BEG:AIM) – 102.25p, stop loss 81.75p

The upturn in the insolvency and business recovery market is highly encouraging for Begbies.

Vital stats:

Market value: £83.4 million

Historic PE:12.7

Prospective PE 2008 :18.7

Prospective PE 2009:14.3

Sector PE: 14.6

1-month relative strength: - 26.2%

1-year relative strength: -37.5%

Yield: 2.4%

NMS: 10,000

Spread: 1.9%

It might have confessed a fortnight ago that its 2007/8 results would be far short of original expectations, yet the outlook for Begbies remains enouraging. The company specialises in insolvency and business recovery, and during much of this year it has been increasing its head count so that it now has 400 business insolvency experts working from 38 offices. It has recently acquired Bartfields, a Leeds-based practice and David Horner, an insolvency practice in the North East.

This increased investment coincided with 'one of the quietest periods for corporate insolvency for nearly 20 years'.There was a 13% decline in voluntary insolvencies in the first nine months of this year.

However, the days of easy credit are being replaced by a vicious credit crunch. Individuals are discovering that banks are no longer a 'soft touch'. Businesses are discovering a more aggressive attitude when they seek additional funds. Already, Begbies is detecting the first signs of an upturn in the business recovery market and is forecasting a 'stronger second half performance'.

Another firm, BDO Stoy Hayward, is forecasting that business failures will reach a five-year high next year of 17,700. It is also believed that there will be an increase in personal insolvencies, which are forecast to rise to 115,000 next year and 130,000 in 2009.

The group is in the happy position of having increased its commitment to the market just ahead of a substantial increase in activity.

Begbies is committed to diversifying away from its insolvency base into allied areas such as tax consultancy, which should remain resilient. The impending changes in the CGT regime offers potential to negotiate with a number of potential vendors, making prospects look bright.

The writer holds chares in this company

by: John Marshall

BLUEWATER BIO (BWB:AIM) – 13p, stop loss 10p

The absence of a track record of revenues may make Bluewater a risky play, but with innovative, well-tested technology and large potential market it's very easy to see the upside.

Vital stats:

Market value: £28 million

Historic PE 2007: n/a

Prospective PE 2008: n/a

Prospective PE 2009: n/a

Sector PE: 13.9

1-month relative strength: n/a

1-year relative strength: n/a

Yield: n/a

NMS: n/a

Spread: 7.4%

Newly-floated Bluewater Bio brings a clever technology opportunity to the junior market - one that has already been successfully tested and is operational in South Korea. It also comes with six years of data that demonstrates its worth. HYBACS, the company's flagship waste-water treatment technology, is based on bacteria that eat the waste component in waste-water. Such systems already exist but HYBACS, which was developed by specialists Yeon Je Cho and Garry Hoyland, who are part of the management team, has some huge advantages. While in common bacteria processes bacteria are poured in the dirty water and left eating the dirt, Bluewater's multi-phase process system controls the life cycle of the bacteria by changing some elements of the environment where they live. Wastewater is sent through the HYBACS units and at the last stage of the process, when the bacteria's cleaning work is done, the system sends them 'to sleep' and carries them back to the start. This means the units can save corporations and utilities up to 15% in capital expenditure and a huge 30% in operational costs. They can be installed within any treatment systems, using up to 90% of the existing infrastructure, and taking up little space. As much as 50% less energy is needed over the lifetime of the plants. The unit's efficiency is huge, as the system can remove up to 99% of biological contamination from concentrated wastewater, and cleaner water can be reused, making companies' water bill lighter. CEO Daniel Ishag says that soon there should be news about deals with major European corporations for the sale of the units. It is a risky punt, as the company doesn't have a track record of revenues, but the potential market is huge, as other wastewater treatment methods are not nearly as efficient. On that basis, interest should send the shares up quickly.

by: Carlo Svaluto

COOLABI (COO:AIM) – 34.5p, stop loss 27.5p

Solid management is set to grow the media IP group both via acquisitions and organically.

Vital stats:

Market value: £8.5 million

Historic PE 2007: n/a

Prospective PE 2008: n/a

Prospective PE 2009: n/a

Sector PE: 12.8

1-month relative strength: +9.9%

1-year relative strength: +9.4%

Yield: n/a

NMS: 1,000

Spread: 8.3%

Two years ago the small media company had little about it to recommend, but since then the addition of Jeremy Banks as chief executive and the acquisition of Zenith Entertainment, Purple Enterprises and Indie Kids has turned it into an exciting proposition. It is now responsible for the popular ITV show the Worst Witch, the BBC's Fungus The Bogeyman, and has the rights to the Purple Ronnie brand. Its most recent contract win was with the Disney channel for the rights to a live action and animation programme with the working title The Shaila Show. The driving force of the turnaround is Banks who was formerly chief financial officer and commercial director of Chorion. There he was was behind deals such as its acquisition of the Roger Hargreaves estate comprising of the Mr Men brand. He helped to grow the company, which was valued at £53 million when it listed in May 2002 into a business strong enough to attract the attentions of PE groups, succumbing to a £111 million bid from 3i in 2006. Banks has similar growth ambitions for Coolabi, and while admitting things are at an early stage says they are progressing nicely. Given the pedigree it almost seems unfair to put the company in the high risk category but it is merely due to its size and the relatively wide spread. A share consolidation is on the cards which Banks hopes will help the company to improve liquidity and shares have already ticked up 17% over the last two months. As of yet the tiddler has no broker coverage but this is likely to be addressed early in the new year which should generate more interest and provide a further boost.

by: Susanna Twidale

EGDON RESOURCES (EDR:AIM) – 223p, stop loss 178.5p

Plans to build huge natural gas storage chambers in Dorset will be decided soon, and if approved, the shares could double.

Vital stats:

Market value: £154.3 million

Historic PE 2007: n/a

Prospective PE 2008: n/a

Prospective PE 2009: n/a

Sector PE (next 12 months): 17.3

1-month relative strength: -2.1%

1-year relative strength: 12%

Yield 2008: n/a

NMS: 750

Spread: 2.2%

Plans to build huge gas storage chambers in a 400-meter thick salt deposit 2km under the Isle of Portland in Dorset may double investors' money in three months. Egdon is currently priced at 240p but it would be worth 500p if a planning application with Dorset County Council (DCC) is approved says house broker Seymour Pierce.

The next quarter will be key, when news is expected from DCC and the Department for Business, Enterprise & Regulatory Reform (BERR) from which permission is also required for a pipeline to link the gas storage chambers to the national grid.

Malaysia's state-owned oil company Petronas has made a 365p a share bid for Star - a 46% premium to the quoted share price prior to the bid. Star's gas containers of choice are disused North Sea oil fields and storing gas in the middle of an ocean is clearly more desirable. It may only be sparsely populated but the Isle of Portland is five miles from a major town (Weymouth) and safety considerations will no doubt play a role in the planning decision.

Portland is also next to Chesil Beach, an unspoilt section of Jurassic coastline and recognised as a World Heritage site - where the MSC Napoli ran aground and spilt oil in January.

The plans should eventually pass on appeal or at a planning inquiry (when the broader national interest issues are given more weight) but this may be too late for a project requiring three years to engineer. It's probably next year or never but worth a punt. The exploration and storage parts of Egdon are being hived off into separate Aim company in January. Wait for the listing of Portland Gas (to trade under the PTG ticker) if you want a pure storage play.

by: Simon Keane

LIDCO (LID:AIM) – 8.5p, stop loss 6.8p

After rough 2006 LiDCO is stabilising, while recent fundraising and promising products could prove a catalyst.

Vital stats:

Market value: £12.1 million

Historic PE 2007: n/a

Prospective PE 2008: n/a

Prospective PE 2009: n/a

Sector PE: 20

1-month relative-strength: -1.3%

1-year relative strength: -38.9%

Yield: n/a

NMS: 3,000

Spread: 11.1%

Shares in LiDCO have been a dog, but is the company finally on the road to recovery? A recent share placing to raise £2 million and a promising set of interim results in October have marked a significant improvement over the last year. The group is learning to control its overhead costs and funds raised will be used to support general marketing and R&D efforts. House broker Panmure Gordon believes that a lack of funding has been the main hindrance to LiDCO's share price, and as a result the shares should now start to pick up.

However, LiDCO still faces the risk of slow technology uptake in hospitals which is limited by budgetary pressures, rather than clinical demand. Back in June, the group signed an exclusive marketing deal with Becton Dickinson which will result in the joint promotion in certain UK hospitals of a number of critical care products currently being sold by the BD Medical Surgical systems business unit. The main customer for LiDCOplus technology is currently the intensive care physician, but recently the group discovered a newer (and large) opportunity within the anaesthesia/major surgery market. As a result, the group is developing a new anaesthesia product, LiDCOrapid, which is designed to be simple to interpret, quick to set-up and cost effective. It is the first haemodynamic monitor designed specifically for use in the demanding conditions in the operative room and the potential is promising. The group is also continuing to develop LiDCOlive, a PC-based software product that displays real-time patient data on any PC or laptop anywhere in the world, helping to improve the care of high-risk patients. Both of these products are due to be launched next year and if the technology takes off, the company could really start going places.

by: Rachel Robson

PAYZONE (PAYZ:AIM) – 70.25p, stop loss 56p

The enlarged business is highly cash generative which should help to quickly reduce the e250 million debt position.

Vital stats:

Market value: £206 million

Historic PE 2007: n/a

Prospective PE 2008: n/a

Prospective PE 2009: n/a

Sector PE: 14.6

1-month relative strength: n/a

1-year relative strength: n/a

Yield: n/a

NMS: 12,000

Spread: 2.8%

Formed in early December from the reverse takeover of cash machine operator Cardpoint by electronic payments group Alphyra, the business hasn't got off to a good start but brave investors can use price weakness to their advantage.

Alphyra and private equity backer Balderton had planned to sell down half their combined 59% stake at the listing, but scrapped the placing because Cardpoint's share price had fallen so much in the preceding months. Although this created a stock overhang, Alphyra indicated that it will place the shares once market conditions improve – and believes Balderton will also do so.

It may take several months for Payzone to win over investors' confidence, yet buying now could net you a bargain. The business has close comparisons to PayPoint, one of Shares' Tips for 2006 at 474p and now trading 31% higher at 621p.

While the two companies fight over the same customers in the UK for household bill payments, mobile phone top-ups and cash machines fees, Payzone is a much greater beast in mainland Europe.

In the past five years it has gone from operating in five to 21 countries. Its biggest growth regions are Germany, Greece and Romania. The UK is a mature market, prompting PayPoint to seek growth through internet services, whereas Payzone has focused on building geographical scale.

Cardpoint has fought financial troubles but Payzone is targeting e6.5 million cost savings within a year. Chief executive John Nagle says Cardpoint's issues should quickly be ironed out by being part of a bigger group with greater financial resources.

PayPoint's solid stockmarket performance will be the benchmark for Payzone. Despite being half the market value, Payzone has every chance of repeating its peer's stock market success. The pan-European presence gives diversified exposure to multiple economies and a broad platform from which to grow.

by: Dan Coatsworth

PETROLATINA RESOURCES (PELE:AIM) – 12.25p, stop loss 9.75p

Despite having been through a difficult period this stock has production and appears massively undervalued by the market.

Vital stats:

Market value: £14.2 million

Historic PE 2006: n/a

Prospective PE 2007: n/a

Prospective PE 2008: n/a

Sector PE: 16.8

1-month relative strength: 13.5%

1-year relative strength: -31.2%

Yield: n/a

NMS: 5,000

Spread: 11.5%

This hasn't performed well at all over the last 12 months thanks to uncertainties surrounding the extension of a key licence and changes in management. However, this has diverted attention away from what this stock actually offers. Focused primarily in Columbia, earlier this month Petrolatina revealed the news that investors had waited almost 18 months for – that it had secured an extension on the Tisquirama licence. The company floated on Aim early in 2005 and the following year it picked up two exploration licences and acquired a producing oil company in Columbia - Petroleos del Norte (PDN). PDN's former president Juan Carlos Rodriguez is now CEO of the whole group, and has invested £1.5 million of his own money, following last month's departure of Rudolph Berends. Current output stands at 1,000 bopd but that should increase to more than 4,000 as the firm completes the development of its fields in Columbia. Another cash generator in the portfolio is the Rio Zulia – Ayacucho pipeline. Revenues from it totalled $1.6 million this year and with Columbian and Brazilian state oil companies Ecopetrol and Petrobras developing a field nearby, that will utilise the pipeline, this figure should increase.

The company, which is in the process of agreeing a financing package, is planning to drill eight wells in 2008 and there is particular excitement about the well due to be drilled early next year on the La Paloma licence which is targeting potential reserves of 16 million barrels.

As with any E&P company there is more than a modicum of risk and drilling disappointments could send the share price south. However, a market valuation of £14.25 million suggests the market is yet to fully understand Petrolatina's potential. Positive news flow early in 2008 might just provide the catalyst this stock needs to soar.

by: Tom Sieber

PETRONEFT (PTR:AIM) – 29p, stop loss 23p

Winter drilling and reserves assessment could spark return to 2007 high of 60p-odd.

Vital stats:

Market value: £53.7 million

Historic PE 2006: n/a

Prospective PE 2007: n/a

Prospective PE 2008: n/a

Sector PE (next 12 months): 17.3

1-month relative strength: n/a

1-year relative strength: n/a

Yield 2007: n/a

NMS: n/a

Spread: 5.882%

For a high-risk punt with the potential to repay your faith in spades, check out Petroneft, based in Dublin, operating in Siberia, and run by American Dennis Francis. Its main main asset is licence 61, covering 4,991 sq km, with two proven oil fields, Lineynoye and Tungolskoye, originally identified in the 1970s by Marathon Oil, the company that first discovered the huge Sakhalin field, and the former employer of many of Petroneft's management.

According to a study by resources auditor Ryder Scott, proven and probable oil reserves across the two fields stand at 33.5mmbbls (millions of barrels), while altogether there could be as much as 291mmbbls under the ground, although these figures are likely to be updated, and hiked, in the very near future.

The winter schedule will see a handful of wells drilled holding an estimated 53mmbbls, a figure that could well prove conservative, while a pipeline deal could come sometime during the year too as could further acquisitions.

So why have the shares plunged when oil prices are so high? Company insiders believe this is largely due to the firm's chunky Irish shareholders, who own something like 20% of the shares. Many of these shareholders have been burned CFD trading and pulled out of the market. Doubtless, management's reluctance to overly hype itself, a rarity in this business, plus a few technical drilling problems (albeit, par for the course) haven't helped.

However, while year-round output is unlikely before 2009, first production should come in the months ahead, adding precious cashflows to the firm's $6.4 million in the bank.

Petroneft is in a position not disimilar to where Imperial Energy (IEC) was five years ago, and it's jumped 20-fold since. Petroneft won't do that in 2008, but it could easily return to the 60p-plus highs of 2007.

by: Steven Frazer

SCISYS (SSY:AIM) – 37p, stop loss 29.5p

Old bad news priced in, but not new broom and good prospects.

Vital stats:

Market value: £11.1 million

Historic PE: 15.2

Prospective PE 2007: n/a

Prospective PE 2008: 6.7

Sector PE (next 12 months): 28.9

1-month relative strength: -3.7%

1-year relative strength: -60.7%

Yield 2007: 3.4%

NMS: 500

Spread: 2.6%

]If economic conditions are going to get tougher in 2008, it is perhaps a good idea to find a stock where there has already been a lot of bad news priced in.

IT consultant SciSys has endured a wretched 15 months since it was spun out of CodaSciSys, suffering a trio of profit warnings and the departure of its chief executive, Mark Hampson.

The Chippenham firm's share price has plunged from 110p to 38p as a result, but a lowly valuation, the return of a highly experienced management team and the prospect of merger and acquisition industry all mean the stock looks worth a punt.

A pair of mishandled contracts and two delayed defence contracts have forced the company into loss this year.

Chairman Mike Love has taken up the reins and overhauled the management team, even bringing back some old hands who had moved on but still intimately know SciSys and its customers' workings.

Assuming a line can be drawn under the botched deals when SciSys reports figures in the spring, the firm should rebound into the black next year. A recent acquisition in Germany, VCS, appears to be going well and end demand from its space, defence and public sector client base should offer some insulation from any economic slowdown.

With a market cap of barely a third of its annual sales, SciSys looks cheap, especially when one-time suitor, Vega, has just been snapped up by Italy's Finmeccanica for around one times' sales.

A key risk is that small caps have been out of favour since May and a buyers' strike could simply see the shares drift downwards. But a prospective PE of barely 7, according to brokers Landesbanki, means this is a risk worth taking. Love clearly agrees, as he snapped up one million shares in November to take his stake to 12.4%.

by:Russ Mould

WAGON (WAGN) – 32p, stop loss 25.5p

On the road to recovery and Wagon could well be a takeover target as the auto parts industry continues to re-shape.

Vital stats:

Market value: £37 million

Historic PE 2007: n/a

Prospective PE 2008: 4.6

Prospective PE 2009: 3

1-month relative strength: 25.4%

1-year relative strength: -78%

Sector PE: 9

Yield 2007/8: 7.8%

NMS: 1,250

Spread: 4.6%

The wheels fell off Wagon big time with its shares crashing from a high of 263p last year to hopefully bottom out at 23p this month.

Recovery is predicted after better-than-expected interim results. These showed a jump in underlying pre-tax profits from £200,000 to £5.4 million on sales slightly higher at £324 million. Analysts are hopeful of £14 million profit for the year to March, rising to around £20 million next year.

With a market value of £37 million, or a tenth of sales, and a prospective PE ratio of under three for 2009, there must be a catch, especially as the dividend should be around 2.5p this year, compared with 9p in 2006, making a smashing 8% yield.

Yes indeedy. Its name is debt. Interest charges surged from £4.8 million to £6.6 million as Wagon borrowed more to finance its restructuring programme. But borrowings are now falling as cash flow is rising and capex decreasing.

With a bit of luck gearing might be down to 65% at the year end.

Admittedly the automotive parts industry is cuthroat. However profit margins have risen from 1.8% to 3.7% and should return to the more normal 5% or 6% in around 2-3 years.

High cost factories were closed and new ones opened in low cost countries such as Turkey, China and the Czech Republic.

Best of all a German engineer takes the helm as chief exec next month called Jurgen von Heyden.

by: Timon Day