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An early January rally by the FTSE provided cheer for investors, with the blue chip benchmark rising from 5061 in mid-December to 5190.7 in mid-January. Christmas and the New Year also provided only meagre gains for Small Cap stocks too with the Index putting on just 1.44 per cent during the month to close at 2636.05.

Despite this, investors should approach the next 12 months with a degree of optimism as some analysts believe that the New Year could prove fruitful for London-listed smaller companies. In a publication called 'Key Buys for 2002', stockbroker Numis explains that 'the environment for the UK small and mid cap investor is likely to be relatively favourable in 2002 given the domestic focus of most companies. Interest rates are low, inflation appears under control and many companies have been aggressive in removing costs'. The message then is simple: show faith in the Small Caps.

Supporting plays

Several support services plays bounced on upbeat news. Car security and audio group Toad hopped 3p higher to 12.75p after clinching a contract to sell its satellite and internet tracking tool through BT Retail, part of the telecommunications giant. Two of its directors showed some faith after the announcement, with both snapping up 83,000 shares at 12p. The share price is still crawling along compared to a 47.5p 52-week high. Shares in Danka Business Systems also surged ahead, 7.5p to 23.75p, on bullish press articles and interest in the stock from fund managers.

Menswear designer Marchpole boxed its way up by a quarter of a penny to 7.25p after revealing it is in joint venture negotiations with Lennox Lewis Merchandising and FUBU to distribute the street wear brand in the UK. The heavyweight champion will wear FUBU shorts at fights to promote the brand and the shares have pushed on to 8.25p since.

Reacting to bids

Shares in photo-booth venture Photo-Me International surrendered 4p to 34p after the board denied it had been in talks concerning an offer for the group. Recent interim figures were woeful, with sales a paltry 1.5 per cent higher at £107.3 million, and pre-tax profits almost 40 per cent lower at £8.2 million. Its share price looks a poor picture, just 3.5p off a 52-week low and some way off the 141.5p high. In contrast, an 'unsolicited approach' of 15p per share sparked life into hydraulic tubes and valves manufacturer Europower. Shares in the business firmed 5.25p to 11.5p on the news, the best performance on the market on the day.

Retailers race ahead

As can be expected, the retail sector was awash with post-Christmas trading updates. Shares in toy store Hamleys were sprinkled with Harry Potter-induced magic. The price sparkled by 2p to 118.5p after it said strong demand from consumers made up for the fall in tourists as it rolled out better than expected Christmas trading. Like-for-like sales put on 12.1 per cent in the five weeks to end-December.

Firming on festive fervour was House of Fraser. The stock hardened by 5.25p at 90.5p after reporting better than expected Christmas trading.

However, Laura Ashley shed 4.75p to 22.5p after warning of flat profits before tax and exceptional items for the full year. The board admitted retail sales had been hit by a fall in tourism after 11 September and like-for-like sales were level with last year in the six weeks to 5 January.

The tail off in hungry tourists also hit restaurant operator Groupe Chez Gerard. Its shares thinned by 9p to 67.5p after it warned that continuing first half sales were below last year's. The fledgling play also said that a restaurant closure would lead to a £500,000 write-down.

Looking forward

Transport-listed Northgate, which hires out commercial vehicles, announced a sparkling set of interim figures, sending the shares 27.5p ahead to a 52-week high of 517.5p, and is on track to double in size by 2004. Sales rose 5 per cent to £136.5 million and profits were more than 16 per cent healthier at £16.2 million. Finance director Phil Moorhouse says France or Spain will be its first point of entry for a push on Europe, probably via acquisition. Consensus forecasts suggest pre-tax profits of £31.3 million and earnings of 35.7p for the current year, rising to £34.8 million and 39.9p the year after. This puts the shares on a forward p/e of 14.5, falling to 12.9 in 2003. The shares are cheaper than the 18.6 sector average, trading appears buoyant and there could be exciting acquisition deals to follow.