Derek Pain: Stagecoach still a ticket to ride

The stock market is a miserable place. Shares, despite the best efforts of Alan Greenspan, are deeply depressed although it is worth pointing out that Footsie remains comfortably above its year's low in March.

Still, that is not much consolation for investors. There had been high hopes that after last year's brutal setback, shares would have staged a strong recovery. The fact they have not is worrying, but I am cautiously optimistic the dark days may not continue for much longer. Of course, the US economic climate continues to dominate sentiment. Last week Mr Greenspan chipped US interest rates by a quarter of a percentage point. Coming after a run of five half-point reductions, the more modest cut could indicate the American authorities have become a shade more hopeful they can avoid the much-feared transatlantic recession.

A more positive display by Wall Street should have a considerable impact on the unhappy London stock market, even providing the sort of impetus shares have so sadly lacked recently. I have written before about other hovering, bearish influences. The increasingly acrimonious and unsettling debate about the euro remains a worrying threat and investors will do well to acknowledge the serious implications of the end of sterling. But the record-breaking £5.9bn BT rights issue, which threatened a long, depressing overhang, was, to gloomsters' surprise, a relative success and is clearly one of the positive developments of recent months.

The no pain, no gain portfolio continues, I am relieved to say, to hold up relatively well in an increasingly tricky stock market. Just on Friday, only two constituents were below our buying price. Three constituents have produced encouraging trading news recently. Burtonwood Brewery rolled out a sharp profits advance; Stagecoach's results were better than expected; and S&U, the finance group, offered a cheerful, if brief, AGM statement. Burtonwood was recruited at 185.5p in August 2000. The shares are now 218.5p, reflecting a 13.7 per cent profits advance to £7.2m. The year's dividend is up 12.1 per cent. Although "Brewery" is still part of its title, Burtonwood is, in reality, a pubs chain and has just a 40 per cent interest in a brewery.

S&U recorded a 27 per cent profits advance in April. At last month's shareholders meeting, chairman Derek Coombs said the first four months' trading was encouraging, and "we anticipate another very successful year". The shares joined the portfolio at 292.5p two years ago and are 412.5p.

Stagecoach, the struggling bus and train group, is one of the no pain, no gain laggards. I paid 80p for the shares in August. It was clear then that it faced an uncomfortable ride, but I felt the shares were oversold and would make headway. It was a dismal tip – I clearly got my timing wrong. The price is now 76p, after touching 51.5p. Although the last set of figures were depressing they could have been worse. And the group signalled its relaxed stance by increasing its dividend payment, and the shares are now offering a tempting near 5 per cent yield. A share buyback is also in the air.

Upsets in its US coach operation have created much of Stagecoach's difficulties. The business is the subject of a £376m goodwill write-down; there were fears the charge could have been as high as £500m. Then the train and bus operations in the UK had to contend with a variety of problems. Despite the disruption caused by the Hatfield crash, operating train profits were up 16 per cent, but the buses suffered a 9.2 per cent profits decline. Overall, Stagecoach lost £317m against a £182m profit. In the current year it is expected to achieve profits of a little over £100m.

Although Stagecoach has so far proved to be a dismal investment, I intend to stick with the shares. There is always the chance of a takeover and I would not be at all surprised if the chairman, Brian Souter, attempted a management buyout. If he did he would have to pay far more than 100p a share.

But even on trading grounds the shares are worth holding. They look an ideal recovery play and will draw added encouragement from the relatively high and seemingly safe dividend yield. Before the group was shunted into the sidings, its shares had ridden as high as 284.5p. Such a heady valuation is a long way off, but there is no reason why the gap should not narrow.