Shares to buy, hold and sell

Paul Marriage is manager of the Cazenove UK Smaller Companies fund. With strong performance, up 26.6% over one year and 72.3% over three, the fund has £229.6 million under management. Holly Black finds out which shares are being bought and sold to bring this success.

BUY - Low & Bonar

Listed in the FTSE small-cap index with a market capitalisation of £157.48 million, Low and Bonar is a specialist chemical and plastics business.

Marriage says the company is underrated because people do not understand the business or how well it is improving. But it is developing its quality of earnings and has good exposure to niche markets. "We like niche market leaders as they control their own destiny in tough environments," says Marriage.

The company has a lot of euro exposure that many investors may see as a negative, with continental Europe accounting for around 55% of sales. Marriage says the euro exposure is not a problem if you believe the situation in Europe will eventually improve though. If you do, you cannot wait until after the recovery to make gains. "You're not going to make the money after things have got better," he says.

The company has a very attractive price to earnings (p/e) ratio of eight and is generating a lot of cash. Marriage expects the business to generate some £15 million of free cash flow. He adds that there is still scope for development within the company too and it is trying to reposition itself as a global leader in its industry. It yields 3.85% with a dividend of £2.10. Marriage initially bought the share at 42p and it is now trading at 54.5p.

HOLD - Brady

Marriage originally had an interest in Brady when it first floated on the Alternative Investment Market in June 2004, but it was a flat investment and the company needed to improve in many areas so he sold the shares.

Now, eight years later, Brady has addressed its problems and has a market capitalisation of £83.45 million, leading the Cazenove fund to invest in the shares 18 months ago. It is one of the fund's longer term holdings.

The company specialises in software for trading commodities such as iron ore, steel and energy and Marriage believes it to be one of the leading providers. He originally sold out of the company as, despite it having good technology, it was not so adept at selling and supporting it. However, it has since improved.

With steady recurring revenue and top-line growth across the world on top of a number of successful acquisitions, the company accounts for 1.9% of the fund's portfolio. "Brady is good at organic growth and I think it is quite an attractive target for a global player," says Marriage. "I knew what was wrong back in 2004 and I knew what was interesting, so when I saw that those issues were fixed it was a much better business to come back into."

Marriage bought shares at 77p and they are currently trading at 104p, yielding 1.45% with a p/e ratio of 29.

SELL - Mears

Mears, a FTSE small-cap company, is an outsourcing business with two arms - one conducting maintenance works for local authorities and another providing home care, such as cooking for elderly people.

"It has been a strong performer for us; we bought it on a low rating thinking it had good earnings momentum," says Marriage. But he sold out of the position in September this year, after holding the shares for just six months. He made a tidy profit, buying the shares for 240p and selling for 285p.

The current yield is 2.56%, the p/e ratio is just under 15 and the company is paying a healthy dividend of 7.5% with market capitalisation of £259.29 million.

Despite these appealing numbers, Marriage believes that Mears will begin to face headwinds in the markets it operates in. The company, he says, is reliant on local authority spending for both parts of its business, and the government is tightening the purse strings. "There are still challenges in the local authority spending market and we now think it's a fully-rated business," says Marriage.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.