Why the market's like a pudding

Bob Michaelson, chief investment officer, Sagitta Asset Management tells MoneyWeek where he'd put his money now.

The second quarter of 2005 proved to be a typical mid-cycle affair. Specific events dominated investor thinking, but the underlying economic picture remained quite sanguine. Investors were thrown off course early in the quarter by some disappointing earnings results and by the downgrade in May of both General Motors and Ford debt to junk' status. Despite the fact that this was quickly followed by some upbeat earnings statements, a bout of nervousness prevailed.

However, the end of the quarter saw a marked recovery in confidence in the stock and credit markets and a more optimistic outlook, which has carried through to July. The outlook for corporate profits in the US and the Far East ex-Japan remains quite satisfactory and there is a general feeling that rate rises in the US are peaking. At the same time, stock valuations are reasonable and dividends are growing.

These are typical mid-cycle phenomena, where specific stock advances take place. We are, of course, mindful that global terrorist outrages and spikes in the price of energy will test these more optimistic assertions.

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This year has also seen the predicted pick-up in mergers and acquisitions. Corporate cash had built up in many cases to excessive levels and shareholders are naturally keen to see this money put to work. The successful investment of this money is what normally propels the investment cycle to a further growth stage.

It is too early to forecast a global advance in economic activity, but the signs outside Europe and Japan are most encouraging. This is usually a time when a broad range of investment strategies works well. Any events', if they shake the markets into a downbeat, reflective mood, would serve as good buying opportunities.

At this time of the year, my Great Aunt Ruby, who was a very astute investor, would declare, "Ah, Summer Pudding, the market is just like a Summer Pudding: a bit soggy on the outside but full of delicious little fruit on the inside."

Among today's munchables would be Ransom (William) & Son (RNSM:LN), which produces liquid pharmaceuticals and natural botanical extracts for the healthcare, food, beverage and cosmetic industries. It has a market cap of £43.4m and annual revenues of £19.0m, with 15%-20% expected annual growth. Recent problems with distributors have been corrected and new production facilities are fully operational. The firm has also disposed of non-core product lines and acquisitions have added new product ranges and strengthened brands.

Adding further flavour is Domnick Hunter Group (DKH:LN), which provides filtration, purification and separation products to stabilise and sterilise liquids and gases for the pharmaceutical, food, beverage, chemicals and electronics industries. The company also supplies on-site gas generation equipment (nitrogen and hydrogen). Operations are located in 25 countries with 1,800 employees. The firm has a market cap of £148.4m, annual revenues of £15.6m and expected annual growth above 15%. Operating margins should improve above 10%.

Finally, to round off a tasty mouthful, Stedim Group (DIM:FP) makes single-use plastic bags for drug delivery and packaging. Its business model is to replace the traditional steel and glass containers used by the pharmaceutical industry from early stage development to ultimate patient use. It has a market cap of e162.5m, annual revenues of e64.1m and expected annual growth above 20%.