Stock Market Week: Bombed out small caps yield up value amid the rubble

IS SMALL becoming beautiful again? After years of neglect there are signs that the stock market is rediscovering the merits of small companies and their rock-bottom valuations are starting to improve.

This year the small cap index, although still a long way from its peak, has looked the blue-chip Footsie index in the eye and showed the sort of form it once displayed in its halcyon days.

And the new all-small index, embracing the small cap and fledgling indices, has clearly outperformed its Footsie betters so far this year with a remarkable 15 per cent advance.

For far too long many institutional investors have avoided the undercard. They have concentrated on Footsie constituents and another 50 or so of the 250 mid cap shares because of the perceived perils of trading down among the smaller fry. Institutions have to deal in size and they complain, with some justification, that they are in perennial danger of being short- changed.

Too often, they have found themselves making a big splash in a small pool and consequently unable to deal at what they regarded as a suitable price.

But, with blue-chip valuations looking increasingly stretched, more institutions are dipping their toes into what they have hitherto regarded as dangerous waters.

They are suddenly finding that the valuations among the ugly ducklings are irresistible. It has been estimated that small cap shares are undervalued by as much as 50 per cent. No wonder, then, that cash bidders, particularly from overseas, are swarming. And more and more managers want to take their companies private by making venture capital-backed cash bids at a little above the depressed market price.

Last week the Legal & General insurance giant's tolerance finally snapped. Besides having a telling swipe at the computerised share trading order book (Sets), it displayed its vexation at the absurdity of some of the small cap deals going through.

L&G reckons that 65 bids and buyouts are now being discussed. In most cases deals are only contemplated because the shares are cheap. The company's investment head, David Rough, warns that the insurance group will not stand by "like mugs" and accept rock-bottom prices for firms in which it has stakes.

L&G is one institution that has continued to play the undercard at a time when many rivals have stuck to Footsie and the bigger mid caps.

Now it is increasing its small cap presence, encouraged by the amazing value it sees lurking among the companies too small to get into Footsie or even the supporting mid cap index.

Private investors, who by and large have banked on the undercard through thick and thin and provided most of what business has taken place, must welcome the L&G initiative. It can only help to improve liquidity and provide more impetus to the revival among the small players.

Many of the results due this week are from companies not even within hailing distance of Footsie or the mid cap index.

Blue Circle Industries is the biggest, a mid cap constituent with a capitalisation of pounds 2.9bn. The building materials group is expected to produce year's profits of pounds 325m, down from pounds 342m.

RMC, the cement group, is also due to report year's figures. Here again the result will be lower, perhaps pounds 265m against pounds 307.7m. Rugby, another group known for its cement, is likely to report a pounds 2m fall to pounds 75m.

Highland Distillers, the Famous Grouse scotch whisky group that has forged a close relationship with Remy Cointreau, the French drinks group, is unlikely to be the spirit of the week with its interim figures. They may show a modest advance, say from pounds 25.1m to pounds 25.5m, as the flat spirits market and the fall-out from the Asian setback continue to inhibit growth.

The Remy link has not won universal approval. But with Highland locked into an unquoted French company, which controls Remy, and the Cognac brandy group holding 9.4 per cent, there seems little prospect of any strategic change.

On the retail pitch, Signet's sparkling revival should continue with the jeweller producing year's profits of pounds 87m, up from pounds 68.7m. The dramatic recovery since the dark days following Gerald Ratner's gaffe will be underlined by a return to the dividend list - a payment of perhaps 0.65p a share.

Selfridges, demerged from Sears, should also sprinkle a little retail cheer with profits higher by some 18 per cent to pounds 18m. T&S Stores, the convenience shops chain, should produce year's profits up from pounds 21.1m to pounds 25.5m. Save, the petrol retailer, will miss the fun; profits, before exceptionals, will be down from pounds 9m to pounds 5.5m.

Johnston Press, the newspaper publisher, is thought to be set for a year's out-turn of pounds 45m against pounds 38.1m, and engineer McKechnie's interim figure should be around pounds 29m (pounds 28.8m).

Manchester United brings a sporting touch to the run-up to Easter with interim figures. There is some doubt as to how it will treat transfer fees. Assuming they are not stripped out of the figures Man Utd, still awaiting Westminster's decision on the controversial BSkyB takeover bid, will offer around pounds 17m against pounds 17.5m.

Clubhaus will not achieve hole-in-one status but the golf club group should manage a spectacular 90 per cent profit increase to pounds 6.7m.