Update: read Tom Bulford's penny share tips for 2007.
In 2004, the UK's Aim index scored a neat 20% gain, which was well ahead of the FTSE 100's 8% rise. And as a new year begins, we are entering the ring with a confident spring in our step. A good small company will succeed regardless of the economic climate. All the same, it is as well to avoid the worst blows that our opponents can deliver. With this in mind, I am dodging any company that relies on consumer spending, ducking any company that relies on a strong housing market, and wary of that overcrowded and cyclical corner of the market - speculative mining plays. That still leaves plenty of firms to choose from. Here are four likely stars of 2005.
Penny share tips: Brammer (BRAM)
Brammer has one attribute that could become very popular this year: it makes two-thirds of its sales in the land of the rising euro, where it is the largest distributor of "technical components" - bearings, pulleys, and sprockets, for example to customers such as Volkswagen and GKN.
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Brammer shares hit 740p back in 1998, before the company was sunk by a disastrous acquisition. The acquisition in question, Livingstone, has now been sold and Brammer is starting to recover. Share buying by directors last autumn and a promising pre-Christmas trading statement forecast earnings of 12p in 2004 and 14p this year. But with turnover four times its market capitalisation, there is scope for Brammer to do much better than this.
Penny share tips: Croma (CMG)
Croma operates in one of today's hottest sectors: security. Without shouting about it, governments are raising spending on national security. Croma makes a range of products that tackle illegal immigration, drug smuggling and terrorism. These include long-range surveillance cameras, an acoustic sniper detection system that can pinpoint the source of gun-fire, and remarkable video enhancement technology, now fitted on all police helicopters, that can enable cameras to see through fog. Croma has been built through acquisition, and is now poised for growth. At 6.75p, the shares trade on a p/e of nine.
Penny share tips: 1st Dental (FDT)
Few industries can be as recession-proof as dentistry. Serial entrepreneur Andrew Garner has cleverly spotted an opportunity to consolidate the sleepy world of dental laboratories. The key to consolidation here is that these laboratories work with short order books, yet they are staffed to cope with occasional surges in demand. Thus on average they operate at just two-thirds of potential capacity.
By making it possible for dental laboratories to share work, Garner is taking capacity utilisation to 80%, with the result that he is achieving a dramatic increase in profitability. 1st Dental bought a major competitor in November and is already looking at further acquisitions. At 37.5p, the shares trade on a p/e of nine .
Penny share tips: Ringprop (RPP)
An innovative product can be the making of a company. Ringprop has developed a propeller with an integral ring around the open tips of the blades. Because it gives more thrust to the engine, it is already attracting the attention of motor-boat racers, but its real merit is that it prevents propeller blades from slicing off passing toes and damaging wildlife. Boat owners, clubs and manufacturers are afraid of the legal consequences of such accidents and are showing a keen interest. Five million propellers, costing about £100 each, are sold worldwide each year, so this is a huge potential market for this £18m company.
Investing in shares can lose you some or all of your investment. Never risk more than you can afford to lose. Small company shares can be illiquid and carry higher risk than other shares. Past performance is no guide to the future. Consult a financial advisor if unsure. Fleet Street Publications Ltd. 020 7633 3600
Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund.
Now working from his home in Oxfordshire, Tom Bulford helps private investors with his premium tipping newsletter, Red Hot Biotech Alert.
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