The Investment Column: Hold on for the ride as Stagecoach's train operations get back on the rails

Ignore Bellway's pessimism and stick with the shares for the time being - Err on the side of caution and avoid Game shares

Stagecoach is one of the UK's biggest bus operators, second only to FirstGroup in its share of the market. It runs 7,200 vehicles covering 90 towns and cities. And it has a 25 per cent share of the UK rail market, too, through its own franchises and those of its Virgin Trains joint venture, which operates the West Coast mainline.

Stagecoach is one of the UK's biggest bus operators, second only to FirstGroup in its share of the market. It runs 7,200 vehicles covering 90 towns and cities. And it has a 25 per cent share of the UK rail market, too, through its own franchises and those of its Virgin Trains joint venture, which operates the West Coast mainline.

The bus group is winning new passengers in London, as are its rivals, thanks to the aggressively pro-public transport policies of the mayor. Outside the capital, Stagecoach is growing passenger numbers in a way that its rivals are not, thanks to telemarketing efforts and innovations such as megabus.com.

Yesterday, it was the rail operations which were in focus, when a trading update suggested the division - and the group as a whole - will beat market forecasts for the financial year just ending. In common with other transport companies, Stagecoach is reporting an improvement in public confidence in the safety and reliability of the railways, after the disasters and consequent disruptions of the early part of this decade. Passenger numbers are up.

A new timetable at South West Trains has spurred Stagecoach to additional success. There are more frequent departures from the busiest stations and the timetable is easier for Stagecoach to run, so punctuality is improving too.

Stagecoach will make more than £10m from its 49 per cent share in Virgin Trains this year, better than expected because of cost controls and despite very poor reliability. Analysts need to see the results of a renegotiation of the West Coast franchise before they can work out how profitable this franchise will be in the long run for Stagecoach. It has been a disaster so far, largely because of delays to the upgrade of the line. Talks with the regulator will begin in autumn.

That adds one element of uncertainty to the Stagecoach investment story, but overall this is a stable company now that its disastrous US acquisition of 1999 has been unwound.

It was able yesterday to make soothing noises about its overseas operations, including in North America, where its chartered coach operations are performing well, and in New Zealand, where competition from the railways in Aukland is no worse than expected.

The City was not ready to upgrade forecasts for the 2005-06 financial year, since the rising cost of fuel will eat into profits growth. But cash flows are strong and a dividend yield of 3 per cent is decent enough. At less than 13 times earnings, Stagecoach shares are worth holding.

Ignore Bellway's pessimism and stick with the shares for the time being

Bellway, the housebuilder, lined up the general election campaign as an excuse yesterday, in case trading takes a turn for the worse. The company cautioned that "the attention and uncertainties that such an event attracts may further prolong buying decisions". There has already been a marked cooling of the housing market since last summer's interest rate rises, and it is more likely the usual fears over indebtedness and wild talk of a crash are leading people to be more measured.

Margins will come under pressure across the housebuilding industry as companies work through land they bought at ever-rising prices over the past few years. In addition, wage costs are rising because of labour shortages.

This was an unnerving undercurrent in yesterday's fantastic results from Bellway, but it oughtn't frighten investors into selling.

Bellway has a spread of operations around the UK and some of the most conservative accounting policies in the industry. It is focused at the lower end of the market, where most demand is concentrated, and has an average selling price of £167,000. It is also increasing efforts in social housing. Despite lower selling prices to local authorities and housing associations, Bellway doesn't pay to market these properties, so margins are remarkably similar.

The likelihood continues to be that a sharp fall in house prices will be avoided. Simply, houses are in short supply. Bellway is one of the builders planning a big increase in output over the rest of the decade, but even this will not be enough. Its shares are priced for armageddon at six times annual earnings. Hold.

Err on the side of caution and avoid Game shares

Game's share price has been up and down faster than Super Mario jumping to collect a power star in his adventure for the new Nintendo DS console.

The video games retailer said on 31 March that it had received a bid approach but by Monday the talks were off. It was never clear who had bid, but the simultaneous announcement that the US giants Electronics Boutique and GameStop are merging suggests it was one of them.

Yesterday, it was back to the business. Game's results for the year to 31 January showed a 5 per cent decline in sales (or 12.5 per cent if new stores are excluded). Pre-tax profit, before one-offs, also fell. It was a bad year for Game, with no new console launches to drive sales, poor availability of existing consoles over the key Christmas period, and falling prices for software.

This year looks bad, too. Early sales figures suggest like-for-like growth of 8 per cent thanks to Nintendo DS, but margins are being squeezed. Much hinges on whether Sony's PlayStation3 and a new Microsoft Xbox will be available in quantity by Christmas.

You could take the view that a US giant spotted value in Game shares before this new cycle of product launches, and wanted to pinch the company. Alternatively, you may decide that this cycle will be less profitable than the last: the increased capabilities of the new consoles do not look as dramatic as the improvements made last time, and Game will be competing with the expanding non-food ambitions of the supermarkets this time. Our advice is to err on the side of caution. Avoid.