Over the last week, we have seen very clearly the market's reaction to good news and bad news.

Any disappointment is punished with heavy selling and any news exceeding expectations results in institutions increasing their holdings and earnings upgrades from analysts. The two companies in question are Compass Group and Next.

Compass Group announced new contracts with a value of £1.3 billion and a 95 per cent level of retention of existing ones. This looked like good news. However, the sting in the tail was profits £30 million lower than expected due to increasing costs and one of its main distributors going bankrupt. Trading conditions in Europe had been difficult, with margins squeezed.

Compass is the main contract caterer in schools and it is proving difficult to extract decent profit margins for meals costing about 50p. The shares fell from £3.20 to £2.30 in very heavy volume. However, several directors used this share price fall as a buying opportunity and it often pays to follow heavy director buying. The shares are currently priced at £2.35 where they yield 3.60 per cent. A very interesting recovery situation.

Next, the High Street clothing chain, pleased the City with better than expected results. Profits before tax rose 30 per cent to £163 million, earnings per share were up 36 per cent to 44p and the interim dividend was increased by 18 per cent to 13p. Next shares have been a darling of the stock market over the last few years. However, with Philip Green's Arcadia Empire snapping at its heels and the appointment of Stuart Rose as chief executive of Marks & Spencer, competition is set to get a lot tougher.

In addition, interest rates are beginning to bite, leading to a slowdown in consumer spending. So it may be sensible to lock in some profits. The shares are currently £15.60 where they yield 2.25 per cent.

There were more than 300 million shares (20 per cent of the company) traded in Sainsbury's on Thursday and Friday. The Sainsbury family owns nearly 40 per cent of the company and could be tempted by an offer of about £3.50. Rumours suggest a private equity group or the French supermarket chain Carrefour may be getting ready to bid. Also, the very shrewd American investment house Brandes holds a near eight per cent stake. The price is £2.76 and does not want to go down. Brace yourself for action.

For professional stock broking advice, contact Peter Rawlings on 01273 229880.

Friday September 17, 2004