The stock market is feeling reminiscent of the secondary banking crisis of the early 1970s – banks struggling to rebuild their balance sheets, house-
building at a near halt with companies focusing on cash conservation, the stock market falling, double-figure yields with investors sitting on cash. As one stockbroker said to me: “We appear to be seeing a wave of secondary selling” with many investors “throwing in the towel”.

Some sectors such as oil services, animal feeds, niche defence contractors, mining and shipping stocks are bucking the trend, but for the most part it is a pretty depressing scene. My portfolio has shared in the misery – a negative trading statement from business/leisure services Christie Group slashed 25 per cent off its value, and anything connected with property – Daejan, Grafton, Pochins, Sovereign Reversions, Town Centre – is nervously drifting. On the other hand, many stocks have held up, such as Northbridge in load-testing equipment, Nichols in soft drinks and FW Thorpe in industrial lighting. I am still receiving divided increases from building and industrial products distributor Ensor and carpet manufacturer Victoria.

Overall, I am staying put with a robust portfolio of predominantly small caps which hopefully will deliver real value over time. However, with the St Gobain/Gibbs and Dandy takeover now unconditional, July should see a further boost to my Peps/Isa liquidity. Do I take advantage of this or hoard it? While I do not believe we face an Armageddon, we could have two to three years of stagflation. I decided to create a modest portfolio within a portfolio – buying friendless stocks at historically bargain levels which should recover well by 2012 – assuming they survive!

My criteria are: established businesses with big dividend yields which should produce an excellent tax-free return within my Peps/Isa even if they halve their “payouts”. This “bottom-fishing” has already landed Marshalls in concrete/landscaping products on an 8.8 per cent yield, and both Norcros in showers/tiles and motor retailer Pendragon on yields of approximately 20 per cent.

I doubt whether Marshalls has ever yielded nearly 9 per cent! Its shares were last at this level in 1999 but each year since it has produced modest annual dividend increases. Conservatively managed with gearing of 30 per cent and a strong “brand”, the company’s shares have to be very cheap on anything other than a short-term view. Current capitalisation of £220m is modest given steady regular pre-tax profits of £40m-plus.

Norcros is capitalised at only £28m yet owns brand-leading Triton showers and Johnson ceramic tiles. As late as April, brokers were forecasting 2009 pre-tax profits in the £12m region – even at half this level they look good value. Norcros only returned to the stock market recently and thus is relatively unknown: its shares have been as high as 89p last year.

Pendragon, with £5bn turnover, is our largest motor retailer, but is now only capitalised at approximately £100m. I paid 19.5p (should have waited a week!) – they reached 131p in 2006.

All three in my 2012 portfolio face very difficult trading and both Norcros and Pendragon have high borrowings but hopefully all should pull through – albeit with a bumpy ride. Yes, somewhat more speculative than my usual approach but then I am still maintaining a sizeable liquidity cushion.

John Lee is an active private investor writing about his own investments. He may have a financial interest in any of the companies, securities and trading strategies mentioned.

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