Three firms with real staying power

Mark Slater, chairman of Slater Investments Ltd tells MoneyWeek where he'd put his money now.

Over the past eight weeks, most small and midcap stocks have suffered significant corrections. Investors scrambling to lock in gains and forced selling by over-geared traders, or hedge funds experiencing redemptions, have accelerated a necessary process - bearing in mind the strong run such shares have enjoyed since the spring of 2003. While "blue-sky" stocks are likely to remain dangerous, there is now a reasonable number of dynamic, fast-growing smaller companies with strong business franchises, revenue visibility and healthy cash flows trading on modest p/e multiples. Some FTSE 100 firms also offer good value.

I recommended buying shares in BT Group (BTA) at 199p in the MoneyWeek Roundtable at the beginning of May, because it had become extremely fashionable for analysts and financial journalists to hate the company. As a result, the shares were trading on a lower p/e ratio and a higher dividend yield than most water and electricity companies - yet BT has far more interesting growth prospects. This was confirmed last week by full-year figures that beat consensus-earnings estimates by around 6%. The shares have since jumped to 212p, but they remain an attractive risk/reward play; this is an unfashionable stock with a high, and growing, dividend yield, with the potential for positive surprises in terms of earnings-growth prospects.

The dividend has risen rapidly and there is more to come - management has pledged to raise the payout ratio to two-thirds by March 2008. This would translate into a dividend yield of 6.6%. The balance sheet is now in good shape, with debt down some £20bn to under £8bn in four years. Although BT's traditional fixed-line business will continue to decline, its "New Wave" businesses saw their revenues rise 32% last year, which ensured overall group revenues were in positive territory. Meanwhile, if the Government is serious about its broadband-rollout timetable, BT has a good chance of being given a relatively easy ride by the regulator for the next few years.

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I also mentioned XN Checkout Holdings (XNC) at the Roundtable. The shares were 226p then and have risen slightly to 235p. XN Checkout sells IT systems to chains of shops, pubs and hotels. The company has a blue-chip client base, is winning impressive orders, has net cash on its balance sheet and is making good progress with what could end up being a massive order from pub giant Punch Taverns. The shares trade on a p/e of 13 for December 2005, dropping to 11 for next year. However, earnings forecasts assume very little from Punch - a contract that could more than double XN Checkout's earnings.

Chorion (COR), the media firm that owns classic properties such as the Mr Men, Noddy and Agatha Christie, has excellent earnings-growth prospects, coupled with strong cash flow and proven management. Revenues from Noddy alone are expected to rise from £45m to £65m this year, and in subsequent years there should be very significant growth following launches in Japan and the US. The relaunch of the Mr Men brand should also boost sales, as will the success of Agatha Christie on television. A p/e of 15 does not reflect the company's growth prospects in a world where content is king, and in which rival HIT Entertainment has received bid approaches, despite being on a p/e in the mid 20s.