Companies: ETQ    FLO    IEN    JKX    MNT    NMT    ONL    SDM   

These days everyone is talking about recovery. Sir Eddie George, Governor of the Bank of England, recently added his powerful voice to the chorus of statisticians and pundits on both sides of the Atlantic who see signs of an economic and business upturn – international politics permitting.

Investors are likewise keen to detect signals of a revival in the fortunes and share prices of some of the bombed out stock market favourites of yesteryear. Both the FTSE 100 Share Index of top companies and FTSE Small Cap indices are down on a year ago, by eight and 15 per cent respectively. Only the Resources Index shows a modest 5.5 per cent increase.

The damage to some favourites of the previous bull market has been more severe. Erstwhile hot stocks, many in the communications and software sectors (from Energis and Redstone to Telewest and Nettec), can be picked up for a few pence or derisory fractions of their peak prices.

Not all are still on the floor. Some companies' share prices have begun to rally strongly as their markets have improved and they have set about improving their finances and prospects. But they are still massively down on their peaks.

A case in point is JKX Oil & Gas. The firm's shares have trebled from their low two years' ago to 27p, but they are nevertheless still 87 per cent below their all-time high.

Less dramatically, chocolate retailer Thorntons has risen almost 50 per cent since its 2001 low. Halfway through a recovery and debt-reduction programme following top management changes, it remains little more than half its 1999 high.

This implies that at this stage in the market cycle recovery stocks – those that are down but not out – offer potentially handsome profits. Companies that have fallen out of favour because of problems with large debts, or those whose type of business has fallen out of favour but now shows signs of coming back into fashion, can expect to be in demand from selective fund managers.

Michael O'Shea of Premier Asset Management comments: 'The US economy is recovering and that will feed through to the UK, continental Europe, and elsewhere.

'A low interest-rate environment is positive for equities; the risk is in valuations. Some equity values are already quite stretched and people now won't pay dotcom boom-era multiples. That should be a good climate for a stock-picking approach, rather than index tracking'. He believes this should focus attention on companies with recovery potential, especially where there is a chance of dividend improvement or resumption.

Bargain Basement

Robert Mitchell of Friends Ivory & Sime's Aim Trust is convinced there are plenty of bargains around: 'Some stocks, especially the technology stocks, took such a battering that some now look interesting'.

He points out that several hard-hit companies have succeeded in refinancing themselves at historically cheap valuations. This suggests they should survive to benefit from improvements in their markets and see their share price rise.

'Old economy' candidates

The trick is to spot companies which have taken a battering but are either starting to recover or can be reliably expected to recover rather than go to the wall.

JKX Oil & Gas, for example, was pounded almost into oblivion when the Ukraine authorities in 1998 stopped paying for its production. After prolonged renegotiation, the company's local subsidiary is now producing 25 million cubic ft of gas per day, at a cost of 50 cents per cubic ft, and receiving payments locally of $1.25 per cubic ft. This price could more than double if and when JKX wins the right to export it.

The firm, which says it is now debt-free, is also pursuing oil interests in the US and Italy, and looking at Azerbaijan and elsewhere.

Chief executive Paul Davies claims it has 'proved and probable' reserves of 50 million barrels of oil, worth a hypothetical $1.1 billion (£788 million) gross, against a market value of £30 million at 27p.

Minmet offers more speculative recovery potential. It recently chalked up a threefold increase in losses to £345,000. But its mellifluous boss, Jeremy Metcalfe, talks of gold production from Brazil exceeding 7,000 oz a year in the short term, with an eventual annual target of 60,000 oz, as well as diamond prospects. The shares have dropped from more than 40p to 11p in the past year and should make up lost ground.

Another mining hopeful short of friends is entrepreneur David Bramhill's Hereward Ventures. This Aim-listed venture is looking for gold in Bulgaria and recent drilling reports suggest it is encountering some encouraging ore grades. Yet the shares have slumped from 14p to 6.25p, despite a more optimistic feeling of late about the gold price. One factor could be the price collapse of fellow Bulgaria's Navan Mining – from 114p to 14.5p – because of unrelated losses in Spain.

Navan is staging a refinancing at 20p and could be a sprightlier recovery prospect than Hereward. But, until all the refinancing is complete and the Spanish legacy and other corporate nasties are sorted out, only the boldest should take such a punt.

Compared with resource stocks, engineering shares have been out in the cold for a long time. Stadium, which was trading at more than 165p a share in 1998, now languishes at 36.5p after £9.6 million annual losses, having in between taken itself down from the full list to Aim (see Company Watch Recommendation).

Bolder punters might consider Energy Technique (ES), which has spent the past few years extricating itself from a ragbag of engineering and adhesive activities to focus on heating and ventilation. After seven years' of losses, the company started making money last year and pushed interim profits up nearly 90 per cent to £229,000.

A consortium led by Ofex-listed London & Boston Investments recently put in £1.1 million and ET's 'Diffusion' arm is making encouraging returns. Four years ago the shares were nearly 30p; they have now fallen to 4p. A rebound seems well overdue.

'New Economy' Bargains

If engineering has fared badly, parts of the software market have done even worse. Aim-listed Flomerics, which provides modelling software to new product developers in the electronics business, has tumbled from more than 250p three years ago to 66p.

The company last year made £308,000 profit, dented by failed start-ups at several US electronics clients, which took about £1 million off projected sales of nearly £13 million. It was a better outcome than many feared. It is understood the firm regards the last quarter of 2001 as the nadir.

New customers have so far been elusive in a tough electronics market, but there are signs of improvement.

Another hard-hit software concern is Intelligent Environments. The company, which supplies software that enables financial companies to offer their

products over the internet, took the full force of the dotcom sell-off and its own more recent warning about trading levels. Its shares, which were close to 150p in early 2000, have this year fallen from 49.75p to 4p.

The latest in a series of fundings brought in £2.5 million at 3.5p and the company has hinted at some interesting prospects as financial customers revive their spending. This could presage a re-rating of the shares.

A more spectacular loser was On-Line Travel – a classic dotcom casualty which plummeted from a 50p share price two years ago to a mere 22p. The firm, which provides the engines for travel web sites, tried to run before it could walk. But its turnover is now rising and followers say losses will this year be replaced by profits. The price recovery could be dramatic.

Investors in NMT – the Aim-listed maker of retractable syringe needles – have suffered a similar degree of pain. The shares broke through 80p at the beginning of 2000, but losses in 1999, exacerbated by £800,000-plus of write-offs, initiated a chapter of woe.

Heads rolled, new brooms were brought on and, not so long ago, the company finally succeeded in arranging a refinancing – at all of 4p a share. The price has now edged up to 4.5p. As one institutional holder puts it: 'This is the year the company must prove itself' – a comment which applies to most of the other recovery stocks.