Steel yourself for a punt on Corus

Thorntons fails to whet the appetite; Sell Colefax before it wears too thin

Corus was probably the Investment Column's biggest disaster last year, in magnitude and timing. We tipped the steel maker at 83.5p in June, a fortnight and a few pennies from the peak. A month later it embarked on its half-cocked attempt to merge with CSN of Brazil, a deal which fell apart in November. Worst of all, the profit upturn many were predicting turned out to be yet another false dawn.

UBS Warburg, a long-time fan, abandoned its "buy" rating on Corus shares yesterday, citing the "confidence shattering 2002", while another broker couldn't bring itself to recommend the stock either, despite listing a string of reasons why it might be an interesting punt. Are things really that gloomy?

There are plenty reasons to be fearful. Cash is tight, and the payment of a dividend this year is uncertain. Corus is due to renegotiate some significant loan facilities which could well increase its interest bill. Unions in the Netherlands may cause problems for the disposal of the aluminium business. Longer term, Corus may not match up to the competitive threat from steel imports from Eastern Europe, while its domestic market, the UK manufacturing sector, is in structural decline.

Yet, on a one-year to 18-month view, there does seem to be value at the current share price for investors able to bear the high risk. The decline of the dollar (in which Corus buys its raw materials) and strength of the euro (in which it sells much of its product) should help. A savage restructuring – which slashed capacity, shut historic steelworks and axed 10,000 jobs – is on its way to generating annual savings of £635m and restoring Corus's competitive position. And though demand in the UK and Europe is fragile, steel prices did strengthen in 2002 and, following the usual pattern, this should feed through to Corus's long-suffering bottom line this year.

Assuming these factors combine to create an even modest improvement in the group's profitability, the shares look cheap on most valuation measures. Brave investors should steel themselves for a hair-raising ride, but buy in.

Thorntons fails to whet the appetite

It might take more than the promise of a giant chocolate heart for Valentine's Day for Thorntons to win back the affections of the City.

The high street confectioner had a disappointing Christmas and news that sales were down 0.9 per cent in the seven weeks over the festive period sent shares down 10 per cent to 118p. Profits this year aren't now even going to meet the average of analysts' forecasts.

Thorntons is trying to get itself leaner and fitter after a binge on new store openings in the Nineties. It has shut a few stores and improved products, and total sales over the past 28 weeks were up 2.3 per cent to £104m. The size of yesterday's share fall, then, may have seemed an over-reaction to the Christmas blip given that, unlike some other struggling retailers, the company did not cut prices so margins stayed high.

But it is unclear how much more there is to be squeezed from its 390 stores. There is no room for expanding the chain, and it is unclear what the demand for chocolate on the high street might be as supermarkets expand their gift ranges. Thorntons itself said yesterday it had become more cautious about its prospects.

There are better long-term growth prospects in the "commercial" division, which does Marks & Spencer's own-brand chocolate and sells Thorntons chocolates, cakes and puddings in Tesco's 700 stores. Sales rose 7.4 per cent in the past 28 weeks but as yet "commercial" accounts for less than 10 per cent of group sales and does not add up to a buy case on the shares. The Tesco contract is up for renegotiation in March and is likely to be expanded.

With Valentine's Day, Mother's Day and Easter coming up, Thorntons may still prove Christmas was an aberration, but even without another disaster, the shares look expensive on 14 times current year earnings. Thorntons, like those coffee ones you always find lurking in the box, is best avoided.

Sell Colefax before it wears too thin

Colefax, purveyor of designer fabrics to the country houses of Britain, has found that nervousness at the top end of the housing market is eating into sales of its upmarket products, with patterns such as Oak Twig, Sissinghurst and Roses and Pansies. It may not exactly be curtains for the group, but expansion plans in the US are on hold, the dividend has been held, and earnings are being boosted only by the company's share buy-backs. Pre-tax profit in the six months to 31 October was £1.65m compared with £1.64m in 2001 which included the effects of 11 September.

The group's brands – which include Colefax and Fowler, Jane Churchill and Manuel Canovas – will no doubt endure, but the group is unwilling to cut into its costs too much. It is a case of keeping up appearances, and investing in the new season's designs. When the rich – including the poor bonus-less City bankers – decide to start decorating again, the profits will rebound sharply.

On balance, things are likely to get worse before they get better. Because almost 60 per cent of sales are made in the US, the decline in the dollar is adding to the misery for Colefax's shareholders. The stock languishes close to five-year lows after falling 4.5p to 70p yesterday. Underlying profits are falling sharply and, despite a 5 per cent dividend yield, the stock could yet have the rug pulled from under it. Sell.