Gambles that could still pay off – and those you should sell now

This column has now been running for around 18 months, so it's time for an update on my "Gambles of the week".

As the credit crunch has sent investors piling into safe havens, small caps have been mauled. The FTSE Small-Cap and Aim indices are down 2.5% and 7.5% respectively since June 2006. Our high-risk gambles have suffered too, losing an average 3.8% over the same period.

The last update was on 2 June, so I will focus on stocks where my advice has changed (see the full list here). Closing prices are as of 18 December, and the percentage change is since first tipped.

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Surgical Innovations (SUN) 3.1%

A May fund raising and softer first-half results has hurt this surgical instruments developer's share price. But the sell-off is overdone. It signed a ground-breaking $20m five-year distribution deal in July with MGM Med. The shares trade at around book value, which is too cheap.

BUY (from HOLD) at 2.38p

MTI Wireless (MWE) 29.2%

MTI is the world's leading supplier of fixed broadband antennae. Although sales have been softer in the second half after a terrific first, the firm should continue to benefit from the roll-out of WiMax systems.

HOLD (from BUY) at 34p

Vernalis (VER) 87.5%

The firm shed more than half its value on 1 October when it got a not approvable' letter from the US Food & Drug Administration over anti-migraine treatment Frova. Investors had expected the drug to be given the green light, triggering a $40m payment from its North American licensee. Recent director buying suggests the sell-off may be overdone, so hold for now.

HOLD (from BUY) at 8.3p

Triplearc (TPA) 43.0%

Triplearc is a specialist printer for businesses. It may have to raise fresh equity if its bankers play hard-ball over its £13.2m of net debt. The climate for advertising print media is deteriorating.

SELL (from BUY) at 1.88p

Asian Citrus (ACHL) +41.2%

Asian Citrus grows oranges in China to sell to wholesalers and supermarkets. Next year, orange juice production is planned along with a Hong Kong listing. Stay on board.

ADD at 250p or below

Sanderson (SND) +10.0%

Net debt has hit £11.7m after two acquisitions. There is a danger that any future weakness in the IT sector could threaten its ability to cover interest and dividend payments.

SELL (from BUY) at 49.5p

Burst Media (BRST) 59.9%

It seems too small to maximise its online advertising services and so has put itself up for sale, and the Burst Network has struggled this year due to lower than anticipated advertising revenues in the fourth quarter. Await developments.

HOLD (from BUY) at 8.63p

SmartFocus (STF) 19.4%

The firm develops online marketing software. Revenues are rising, the balance sheet is ungeared and the stock is trading on a p/e of below ten. Although core advertising markets could struggle in 2008, the stock is a hold.

HOLD (from BUY) at 12.5p

Intelek (ITK) +43.1%

Intelek designs and manufactures electronic systems for the satellite communications and aerospace markets. First-half performance was strong and management is upbeat, but net debt now stands at £5.7m, on top of a £5.2m pension deficit. Given the fears around the credit crunch, take profits.

TAKE PROFITS at 18.25p

Inter Link Foods (ITF) 100%

This was the UK's second-largest cake maker. But after four profits warnings, the shares fell to 110p from a high of 770p in March 2006. It attracted takeover interest from Ireland's McCambridge, but the bid collapsed and the firm went into administration in July 2007.

Filed for bankruptcy

Tissue Science Labs (TSL) 33.5%

This firm specialises in biological tissue replacement and repair. First-half revenues rose 21% to £6.4m. But there is concern over its cash burn until it can spin-off its early-stage non-dermal unit. If the deal comes off, then expect to see the share price rise.

HOLD (from BUY) at 56.5p

Management Consulting Group (MMC) 32.5%

In September, after robust interims, MMC announced the $125m acquisition of US consultancy Kurt Salmon Associates. This is far too risky if the economy softens and corporate customers cut back on spending, then, with proforma net debt of around £70m, it could struggle to cover interest and debt payments.

SELL (from BUY) at 33.75p

Corac (CRA) +33.8%

Corac specialises in oil-free gas compressors. Its key invention, the "Downhole Gas Compressor", uses air to lubricate rotating shafts, which is more efficient than current technology. With the oil/gas sector booming, the potential is vast. But it is still in development, and with the shares up nicely, I suggest taking profits.

TAKE PROFITS at 51.5p

Healthcare Enterprises (HCEG) 80.9%

The firm has fallen victim to the credit crunch since it ran out of cash and was forced into a fund raising in October. But investor Nigel Wray has subscribed for new shares (he has a 16.5% stake), and most of the damage is in the price.

HOLD (from BUY) at 0.86p

Mobile Streams (MOS) 55.3%

On the back of a disappointing first half for its mobile operator unit, the shares have slid from the tip price. With cash reserves of £2.5m dwindling, the risks have grown.

SELL (from BUY) at 17p

Venteco (VTO) 66.3%

Unfortunately, this non-toxic insect-control group suffered due to the wet summer. But with insect problems set to rise as a result of global warming, then the long-term picture should be more positive.

HOLD (from BUY) at 11p

Petards (PEG) 70.4%

The firm has continued to win advanced surveillance contracts with the likes of the MoD, but its size and limited capital resources are constraining growth. The weak share price implies a fund raising is imminent.

HOLD (from BUY) at 0.32p

Wolseley (WOS) 34.4%

The severity of the American housing slump and the weakening dollar have hit this building products group. The shares are down more than 30% since the buy tip, but now trade on a forward p/e of 9.4, and pay a 4.8% yield reason enough to hold.

HOLD (from BUY) at 724p

Infonic (IFNC) Unchanged

Infonic develops information-management software. Although new contract wins are encouraging, the outlook for its core financial services market looks uncertain in 2008. The firm raised £2.8m in December at 5.5p per share to provide it extra fire-power in case of a recession.

HOLD (from BUY) at 5.38p

Creston (CRE) 44.6%

Creston provides companies with advertising services in both digital communications and conventional marketing. Although like-for-like revenues grew 11% in the first half, net debt of £24.4m is a concern especially as there is a further £34.2m of deferred consideration to be paid (depending on performance) over the next three years relating to past acquisitions. If corporate advertising budgets start to shrink in 2008, then a fund raising may be required.

SELL (from BUY) at 74.75p

Yell (YELL) 13.3%

UK print revenues are under pressure, but the online unit is buoyant, which made first-half earnings beat expectations. Major risks include dollar weakness and the group's £3.7bn net debt, where interest payments are covered by a manageable but tight 5.1 times adjusted operating profit.

HOLD (from BUY) at 388.25p

Worthington Nicholls (WNG) 48.2%

A leading installer and servicer of air conditioning, ventilation and heating systems, Worthington was forced to increase its write-offs from £6.5m to £15.9m in December leading to a slide in the share price. New management has been recruited to turn the business around. With net funds of £9m (or about 10p a share), the stock is a hold.

HOLD (from BUY) at 14.5p

Zenith Hygiene (ZHG) +59.5%

A reassuring statement on its finances sent shares in this cleaning-products group soaring in September. But net debt at £10.2m remains high, so take profits.

TAKE PROFITS at 33.5p

TT Electronics (TTG) 27.9%

This sensor and electronics firm said in December that trading for this year had been in line with hopes, but admitted the weak dollar had hit profits. The directors believe that 2008 will also be challenging. With a worsening North American car market and net debt of £83.5m on top of a £33m pension deficit, then the stock, albeit very cheap, is regretfully a sell.

SELL (from BUY) at 113.25p

ImageSound (ISD) 14.3%

The firm is the UK's second-largest supplier of in-store music, radio and TV services to over 17,000 outlets. In a December trading update despite contract slippage with the Marriot hotel chain, and the loss of two UK leisure deals in the fourth quarter the board said it expects operating profit for 2007 to meet hopes. Wait for the preliminary results on 3 March.

HOLD (from BUY) at 12p

Appian Technology (APN) 29.8%

The firm is a leading provider of Automated Number Plate Recognition (ANPR) products used in crime reduction, counter-terrorism and traffic manage­ment. The stock has been hit by the credit crunch and was forced into a £1.5m placing at 4p a share in December. Long-term hold.

HOLD (from BUY) at 4.13p

Johnson Service (JSG) 57.9%

Johnson provides industrial laundry, dry cleaning and facilities management in the UK. Due to poor trading at its non-core units, the group has breached banking covenants, and will probably have to raise new funds. This will mean pain for shareholders.

SELL (from BUY) at 41p

Costain (COST) 38.5%

After raising £60m in a three for four rights issue at 24p in September, the firm has continued to win new business. But one concern is the performance of its relatively small property joint venture in Spain.

HOLD (from BUY) at 24.25p

Fonebak (FON) 5.8%

It should be trading well due to buoyant electrical goods and mobile phone repair/recycling markets, as a result of the introduction of new laws in July. But net debt of £10.9m needs to be watched. A trading update at the AGM is expected on 21 December.

HOLD (from BUY) at 73.5p

None of the above stocks are for the faint-hearted. I strongly recommend that, before buying, you assess your own risk tolerance and targeted returns.

Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments