No Pain, No Gain: Lighthouse shines bright amid the small-cap storm

Lighthouse has performed with modest distinction since being recruited to the No Pain, No Gain portfolio in the summer of 2006. The shares were enlisted at 17.5p and went to 35p, but in the turmoil that subsequently engulfed so many small-caps, they retreated to 23p.

Still, it is encouraging to be in the money, even if the gain has been heavily diluted. Last week, the group, which is involved in wealth management and financial advice, duly delivered the sort of performance I anticipated when alighting on the shares. It announced that year's pre-tax profits had jumped from £673,000 to £1.9m, with turnover up by 12 per cent to £52.9m. For good measure, a maiden final dividend, plus a special interim payment, were also declared.

In the view of some, an intriguing merger overshadowed the results – splendid as they were. In a cash-and-shares deal, Lighthouse is acquiring another quoted money-firm, Sumus. It looks a good match. The resultant group will clearly be in a better position to help its clients contend with the increasing complexity of the fiscal measures being heaped on the nation.

It will become the largest group offering independent guidance, embracing 900 financial advisers. Combined turnover will be about £80m, and assets £22m. Clearly, this amounts to a formidable presence in what is still a rather fragmented market.

Sumus is a smaller version of Lighthouse. Its last profit was £1.5m, up 76 per cent. Like its new compatriot, it has made encouraging noises about the way its current year is shaping.

The takeover, valuing Sumus at £12.6m (about 42p a share), appears to be a done deal, with shareholders representing more than half its capital supporting the get-together. On the Lighthouse front, nearly 40 per cent have signalled their intention of backing the merger. As if to offer encouragement to its shareholders, Lighthouse has made the interim dividend conditional on the takeover being completed.

Although mergers between people companies – where most of the assets go up and down in the lifts – are among the more difficult to accomplish, I have no qualms about remaining a shareholder in the combined group. It is, perhaps, significant that both Lighthouse and Sumus have already displayed their ability to absorb businesses and, although this is the biggest deal yet attempted, they should be able to put the pieces together without significant casualties.

Two other portfolio constituents have produced modest ripples. Private & Commercial, the hire-purchase group, braved the unfriendly stock market to put through a modest cash-raising exercise. It pulled in £510,000 when stockbroker WH Ireland placed shares at 20p. Significantly, there was no discount, with the shares placed at the then market price. The group, by all accounts, is doing well and needs extra cash to support its growth.

Nighthawk Energy, the portfolio's only resources stock, produced a confident interim report. Not surprisingly, losses increased – to £474,000 – but I believe that the United States-focused oil and gas group is edging towards exchanging red for black. Indeed, the chief executive David Bramhill says he expects "an increasing production profile" this year. After the figures appeared, three Nighthawk directors – Dr Roger Norwich, Joe O'Farrell and Bramhill – added to their shareholdings. Usually, it is an encouraging sign when directors put their hands in their pockets to buy their company's shares.

The portfolio has taken a hammering in the stock-market turmoil. I suspect most buy-and-hold investors are suffering in these difficult times. I have held back from enlisting new constituents because I felt I should wait until the stock market became a less treacherous place. But with so many undervalued gems around, I may be unable to resist the temptation to recruit. After all, only exceptionally fortunate souls are able to call the bottom – or, indeed, the top – of share markets.

The retreat has produced some astonishing yields, often much higher than those offered on deposits. Of course, yield calculations are destroyed if dividends are cut. But many mainstream dividends are well covered, and on present form are unlikely to be reduced. Small-caps, where dividend returns are usually lower, are now offering the compensation of more reasonable returns, recognising that capital appreciation is more uncertain.

Buy when shares are down, sell when they are up. Such simplistic advice is as old as the hills, but it has yet to be found wanting.

cash@independent.co.uk