A year after Fidelity’s Anthony Bolton famously complained that it was difficult, as a fund manager, to find value ideas, the opposite now would appear to be the case: value is everywhere, or so it would seem.

A five-month-long credit crunch has left vast swaths of the London stock market sitting at what appear to be bargain-basement levels, with the likes of banks, housebuilders and retailers trading at single-digit forward price earnings ratios and offering dividend yields comfortably in excess of base rates.

The problem for a stockpicker faced with this array of apparent steals is gauging where the forecast earnings side of the ratio can be relied upon with any certainty. That is the task that troubles the selection of this year’s Tempus Ten, my first since taking over from Robert Cole, who produced an intimidating annual average return of more than 12 per cent during his eight-year tenure. I have left his objectives intact – the portfolio is assembled with the target of meeting three aims over its 12-month span: to record positive returns in absolute terms; to exceed the return that could have been achieved holding cash in a deposit account paying Bank of England rates; and to outpace the FTSE All-Share index performance.

The portfolio has obvious omissions. It does not contain a bank, housebuilder or property developer: at some time during 2008 it will be right to buy these sectors, but calling the bottom now feels churlish. Neither does it feature any natural-resources stocks or “mega-caps” – the dozen or so biggest constituents of the FTSE 100 that usually provide safe havens in troubled times. In lieu of the virtues of greater diversification, whether by sector or size, the selection is skewed to what professionals call “special situations” – companies in a state of transition. Six are under new management. The more common bonds are sound balance sheets and propitious, if not commanding, positions within their niche.

In place of a utility, telecoms operator or tobacco stock, the 2008 Tempus Ten starts off with Capita Group, a company with all the defensive attractions but with the kicker of strong double-digit earnings growth. Having won a £720 million 15-year contract last month to administer life and pensions policies for Prudential, the outsourcing blue chip has met this year’s revenue forecasts already. With half its sales drawn from government, none of its larger contracts up for rebid until 2009 and earnings forecast set to rise 17 per cent this year, Capita’s forward earnings multiple of 22 times does not feel too steep.

Defensive growth also encapsulates the case for Smith & Nephew, the orthopaedic devices maker. Demographics provide the longer-term momentum, but the more immediate impetus comes from the recent launch of its Birmingham hip resurfacing implant, which has the best clinical record in its field, in America, S&N’s biggest market.

Philip Bowman has been in the top job at Smiths Group for only three weeks, but that has not stemmed all manner of speculation as to how the former chief executive of Allied Domecq and ScottishPower might restructure this engineering conglomerate. That expectation, together with the potential of its high-growth detection systems business, is likely to underpin the shares until Mr Bowman sets out his stall. Any further strengthening of the US dollar should help as well.

Rexam is the most opportunistic pick among the Ten. Shares in the drinks can maker fell 15 per cent last month on a downbeat year-end trading update, at which it admitted to the adverse effects of currency and raw material costs. On the assumption that the bad news is now out of the way, the draw is rising operating margins and earnings growth of more than 20 per cent in each of the next two years, underpinned by burgeoning sales in Brazil and cost savings from last year’s Owens-Illinois plastics acquisition.

At less than eight times 2008 earnings, Johnston Press, the regional newspaper publisher, is sitting at its lowest multiple for seven years. As such, its selection stems from the view that anticipated weakness in advertising revenues and the drag of the increased debt burden from the acquisition of The Scotsman is now fully priced in. Sentiment on consumer media stocks remains poor, but the attractions of regional newspapers as cash-generative local monopolies requiring minimal capital expenditure should come to the fore.

The fortunes of BPP Holdings were transformed in September when it became the first private sector company in Britain to be granted degree-awarding powers, after three years of scrutiny by education regulators. However, its shares – reflecting concerns that tougher financial markets may curb demand for its law and accountancy courses – still sit at their preSeptember level. That seems harsh, given that the grant opens up a market for undergraduate and postgraduate qualifications three times the size of its present professional exams business. It has also made BPP a likely target for a clutch of American education groups looking to enter Britain, for whom it could serve as a cheap way to bypass the three-year application process.

Concerns about US construction spending have clobbered shares in Keller Group, which at 664p have fallen more than 40 per cent since October. Last month’s update from the FTSE 250 ground engineering specialist showed that underlying trading remains strong: US housing accounts for only 10 per cent of turnover and Keller’s order book is higher than at the start of 2007. A 2008 earnings multiple of six times is too low for a geographically diverse, conservatively managed company that, while the biggest player in its niche, has ample scope to consolidate a still-fragmented sector.

Tipping Northern Foods at the turn of the year is not without risk. Poor trading has prompted the maker of Fox’s biscuits and Goodfella’s pizzas to issue profit warnings in four out of the past five Christmases, so a deep intake of breath is required ahead of the company’s third-quarter update on January 15. However, Stefan Barden, the new chief executive, appears to be succeeding in passing strong commodity price rises on to customers, as well as riding the readiness of consumers to pay more for premium foods. Recent share buybacks, a return to bolton acquisitions after a seven-year hiatus and a dividend yield of nearly 5 per cent add to the interest.

It is hard to ignore the sort of boardroom buying that has characterised dealings in Wolfson Microelectronics in recent weeks. Since mid-November, three directors at the Edinburgh-based semiconductor designer have picked up nearly £1.1 million of shares between them. There are other reasons to suggest that Wolfson, best known for supplying chips for Apple’s iPhone, is cheap. At 207p, it trades at 14 times 2008 earnings against a US peer group of 20 times. The shares are volatile and partly geared to the fortunes of Apple, but those risks are outweighed by Wolfson’s scope to win big mobile handset deals and its vulnerability to a takeover.

Every portfolio should contain a minnow with massive growth potential and that is the allure of AssetCo, an AIM-listed outsourcing specialist focused on the fire and rescue services sector. The company already holds the two UK contracts already put out for tender – 20-year deals to supply and maintain equipment for the London and Lincolnshire fire authorities – giving it considerable scope to pick up work from the remaining 57 brigades. The prestige of the London deal is also drawing interest from overseas emergency services, notably in the Middle East. Earnings forecasts are slightly irrelevant, given AssetCo’s immaturity, but even so, 14 times 2009 estimates is low given the comfort of long-term contracted revenues. Bon courage!

Tempus Ten 2008

AssestCo 195p
BPP Holdings 621p
Capita Group 698p
Johnston Press 275p
Keller Group 664p
Northern Foods 94p
Rexam 418.5p
Smith & Nephew 580p
Smiths Group £10.13
Wolfson Microelectronics 207p

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