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The stock market has run out of steam for the moment, as fund managers have gone on the defensive, writes Peter Shearlock. But there should still be life in shares to which specific stories can be attached. Multimedia Corporation's association with new candidate Lynx Photonics qualifies it as one such company. So does finance group S & U's move into motor hire purchase.

Tech stocks under pressure

I'm not sure what happened to the rallySbut, right now, the market has all the upward momentum of autumn leaves. Tech stocks that were looking rather perky only a week or two ago are now looking thoroughly lacklustre. Durlacher, for example, which I was keen on at the pound level, has come back from 120p to 90p (it's now valued at no more than competitor Brewin Dolphin - which ignores Durlacher's superior private equity operation). All through the market, profit warnings and downgrades have taken centre stage. Big investors are turning to defensive sectors again - which explains the sympathetic rally in Sainsbury and Safeway in the wake of the recent Tesco figures.

Lynx float should cheer Multimedia

It is hard going picking small cap stocks, but the key (it seems to me) is to look at those where there is some news interest in the background. One such is Multimedia Corporation, currently 8.25p. I tipped the shares in last week's Growth Company Investor Weekly Digest - solely on the basis of Multimedia's involvement with a company called Lynx Photonics, which promises to be one of the big flotations of the autumn.

Lynx Photonics is an Israeli company at the forefront of optical networking technology - effectively using light to transmit data. Morgan Stanley, the investment bank, is currently finalising a last pre-float fundraising that values the business at $900 million. When it finally does come to market - probably the US high-tech Nasdaq market - Lynx Photonics is expected to be valued at several billion pounds.

That should be especially good for Multimedia, which recently invested £9.5 million for a 22 per cent stake in the Puma II fund, run by Shore Capital, the stockbroking firm that recently reversed into JellyWorks. The Puma II fund has a 3 per cent stake in Lynx Photonics.

Multimedia saw its shares run to 26p during the dotcom boom earlier this year. At the current 8p, the business is valued at £55 million. I reckon its stake in Puma II alone could be worth half to two-thirds of that. There is a lot of upside from this level.

S & U should start to motor

I am also a recent convert to the shares of S&U, the former Birmingham-based conglomerate-turned-finance business. I tipped them in the Digest last week at 313p, ahead of the figures published on Tuesday. They are now 325p - and looking to go better.

S&U's basic business these days is lending small sums to those the banking system turns its back on. It's a solid enough business, but it has not generated a lot of growth over the years, and last year's figures were depressed by management problems in the North East division.

But, in July 1999, S&U launched a new business - Advantage Finance. Advantage is a motor hire purchase business. Originally, it was not expected to make much of a contribution this year - but earlier this year chairman Derek Coombes reported that Advantage was moving into profit more quickly than anticipated.

So it has proved. Advantage contributed more than £400,000 profit to a group pre-tax tally of £3.2 million in the first half of this year - up from £2.5 million last year. All other areas of the door-to-door collected credit business also improved on rising margins. Earnings per share came out at 18.6p against 14.3p before. There was a 20 per cent rise in the dividend - which points to a yield of about 7 per cent.

Finances are sound with gearing of under 50 per cent. It looks to me as if earnings could get to around 40p this year. The shares are a pound too cheap.

Peter is editor of the weekly e-mail newsletter Weekly Digest