Investment: Prospects begin to brighten for the out-of-fashion shares

RUNNING AGAINST the herd can be a rewarding pastime, providing a little patience is exercised. The mid and small cap shares, although rallying after last year's appalling neglect, still rank as the stock market's poor relations as institutional investors continue their love affair with the 100 Footsie constituents and the 40 or so shares immediately outside the charmed circle.

With the market still to come to terms with some of the more remote aspects of Gordon Brown's budget I am avoiding offering direct share tips this week, in case of hidden perils. Instead I offer general guidance, which could be helpful to the dedicated private investor.

So it's back to the market undercard, which this year has moved ahead as the performance of the two supporting indices demonstrates. They have made remarkable progress.

The lesser lights normally start the year well. Allegedly, their progress is due to the vast raft of new year tips that often feature many out-of- the-way shares. Once the tip is published it become self-feeding until the whole process runs out of energy and profit-takers then kill what is left of the bloated new year excitement.

But this year the undercard looks more resilient; it has built on its opening flourish. Takeover bids, including management buy-outs, have helped; so has a realisation that many undercard valuations have become a poor joke.

Footsie, where valuations are stretched, is dominated by high-flying drugs, financials and telecom stars. It has, to a large extent, lost touch with the grass roots of industry where there is the greatest potential for recovery.

Engineers have been showing signs of some of their old brashness. Last week some of the perceived hidden value among the metal-bashing fraternity was underlined by the arrival of Kohlberg Kravis Roberts, the aggressive US buyout specialists, at that staid old engineer, TI Group.

Then came the better than expected results from IMI, which prompted Merrill Lynch to suggest a 350p target against the market price of 253p.

The engineers' depression, as recession has taken its toll and the strong pound blunted export endeavours, has been brutal; so has the chemical reaction. But bids among the chemical makers are rolling as their lost value is appreciated. Eleven chemical companies have fallen in 18 months.

Albright & Wilson was bumping along at 60p before bid rumours swirled. This week came a US bid of 130p, which many think is too low and the market is looking for a counter offer.

It could be argued that the market is beginning to appreciate the value lurking on the undercard engineers and chemical sectors. But it has not caught up with the out-of-favour property sector where takeovers have yet to enliven the scene. It will.

Property shares sell at a sharp discount to assets and it is the value of the bricks and mortar which will govern the value of the bids.

Oils have also been hit as the crude price evaporated. Again there are signs of revival with takeover action and a slight hardening of crude prices.

It takes a brave investor to go against the pack. But those who have dipped their toes in the neglected territory on the undercard are already reaping their rewards.

If the market as a whole continues to advance, and I believe it will, playing down among the little 'uns could offer rich pickings.