These minnows have great potential

By Ben Laurance for MailOnline
Updated: 06:11 EDT, 27 August 2006

OVER the past few weeks, Midas has been recommending shares only in large companies with a strong and long pedigree because this has felt like the right approach in this uncertain economic climate.

Even when we are looking for a more adventurous investment opportunity, we tend to avoid small companies where Midas's backing of the share is itself likely to spark a big jump in its price. There is no point in tipping a share at one price if you, the readers, can buy only after it has risen.

But for this week and next, we are going to look at a handful of shares that we reckon are interesting for investors who do not mind a bit of risk.

And in most cases, these are smaller companies where investors must be prepared for a degree of price volatility.

Our first choice is StatPro, a company that produces software for asset managers and is valued at just £33.8m. It offers a range of products for tasks such as risk management and producing portfolio reports.

Under the leadership of founder and chief executive Justin Wheatley, StatPro now has offices in eight countries.

StatPro's challenge is to turn one-off customers into long-term clients. So far, it has succeeded in this quest as most clients pay a licence fee for the use of the company's products. The fees recur year after year so StatPro does not depend on securing new orders to maintain its sales.

StatPro could make profits of £3.8m in 2007, giving earnings per share of 7½p. In the following 12 months, earnings approaching 9p a share are within grasp. With the shares at 87½p, StatPro's growth potential looks undervalued.

Our second choice this week is Churchill China. The company, whose share price of 222½p values the group at just £24m, has two lines of business. One part makes crockery for hotels, pubs and restaurants.

When you stop at a Moto service station for a snack, for example, you are quite likely to eat from a plate made by Churchill.

The second part of the business imports cheaper china from the Far East for use in the home. Churchill used to manufacture in the UK for this ' dining in' market, but it simply could not compete. Hence the switch to overseas suppliers.

This range of Churchill's china sells through retailers such as Asda, Debenhams and Woolworths. So why is Churchill an intriguing investment prospect? It is not a fast-growing business and in 2005, profits fell, dragged down by losses in the 'dining in' part of the business.

But Churchill has a strong balance sheet with net cash. And it generates a lot of cash every year, which translates into a fat yield. Broker Brewin Dolphin forecasts that dividends will be maintained at 11p this year and the next.

Churchill is due to report interim results on Thursday. If they reveal nothing amiss, then you can reasonably expect earnings per share above 19p for the current full year to December and then perhaps 21p for the year after.

Churchill is a small company and as an investment is not without risks. In particular, investors may wish to wait until the interims are out before deciding whether to buy the shares. But we like the look of it.