A Small-Cap That Beat The Market Correction

Not every small-cap suffered in this summer's market rout. Here's one tip that's gained 41% since May.

With the benefit of hindsight, May this year was not a great time to buy shares. By mid-June, the FTSE 100 had slumped more than 10% and it has taken a further four months for the index to regain its earlier high*. Sadly, many stocks popular with private investors -- such as NXT (LSE: NTX) , Stanelco (LSE: SEO) and Aminex (LSE: AEX) -- remain well below their 2006 peaks**.

Nevertheless, some shares managed to beat the market correction. Take Games Workshop (LSE: GAW) , the small-cap war-games group. I told members of the Motley Fool's Champion Shares service to buy this share at a 276p mid-price on 10 May. Since then, the mid-price has risen to 375.5p. Including 14p of due dividends, Champion Shares members have therefore earned a 41%*** return.

These points encouraged me to recommend Games Workshop:

1. The company was struggling and unloved: Back in January, Games Workshop reported a substantial decline in sales and earnings and issued a further profit warning. It was no longer benefiting from the Lords of the Rings films and the shares had already lost 70% of their value since the start of 2005.
   
   
2. But it seemed to enjoy a niche: Controlling a 336-shop network dedicated to selling its own products worldwide, Games Workshop claimed to be a leader in the role-playing games industry. Indeed, an unbroken record of dividend growth since flotation in 1994 suggested to me Games Workshop was quite a resilient company.
   
   
3. I also liked the candid management: Though Games Workshop had problems, I noted management had resolved previous difficulties in 2000. The boss also admitted recent results were "not good" and that he "failed to accurately forecast" the sales shortfall. The candour suggested management recognised what action to take.
   
   
4. And I thought the shares looked cheap: I calculated that if Games Workshop could revive profits back to 2003/4 levels, a 510p share price could be justified by 2011. Including dividends collected on the way, I felt a healthy 15% average annual return was possible from my 276p recommended buy price.

What now?

I was very satisfied when Games Workshop published its annual results in July. Importantly, the group maintained its dividend (despite being uncovered by earnings) and said the business was "returning to growth". Though a full recovery is still some way off, the early signs appeared good to me and I now expect Games Workshop to progress further. I also hope to find more opportunities like Games Workshop for Champion Shares.

Of course, I cannot promise any of my existing or future Champion Shares recommendations will perform as well as Games Workshop. In fact, of my 17 tips so far, six have gone down in value. On average, the Champion Shares portfolio is up 13%***.

The identities of all my current recommendations are just a click away through this free 30-day trial. What's more, for a limited time only, we are also offering a 33% discount off the usual annual subscription price. Sign up today for full details.

Disclosure: Maynard owns shares in Games Workshop

*The FTSE 100 index closed at 6105.6 points on May 9th, 2006, at 5506.8 points on June 14, 2006 and at 6150.4 points on October 18, 2006.

** NXT peaked at 69.5p on January 4, 2006. It closed at 28.5p on October 18, 2006. Stanelco peaked at 16p on January 9, 2006. It closed at 1.43p on October 18, 2006.Aminex peaked at 48p on April 19, 2006. It closed at 24.5p on October 18, 2005.

*** Calculated on 24 October 2006, all Champion Shares returns are based on mid-prices taken at the time of recommendation and include due dividends and exclude costs.

Risk Warning

You run the risk of losing money when investing in shares. Prices may change quickly, they may go down as well as up and you may not get back the full amount invested. You should not invest using money you cannot afford to lose. We have taken all reasonable care to ensure that all statements of fact and opinion contained in this publication are fair and accurate in all material aspects. Investors should seek appropriate professional advice from their stockbroker or other adviser if any points are unclear. Champion Shares gives general advice only, and the investments mentioned may not necessarily be suitable for any individual.

For all subscription queries please e-mail The Motley Fool atChampionShares@Fool.co.uk. Alternatively you can call us on 0845 226 3237.

Authorisedby The Mchattie Group, St Brandon's House, 29 Great George Street, Bristol BS1 5QT. The McHattie Group is authorised and regulated by the Financial Services Authority.
Tel: 01179 200 070 | Fax: 01179 200 071 | E-mail: enquiries@mchattie.co.uk