Reed beats Pearson in this defensive climate

The see-saw tipped again yesterday. Media sector analysts are often issuing exhortations to "switch from Pearson into Reed Elsevier" or vice versa, and a US brokerage, Sanford Bernstein, caused a bit of a stir with its downgrade of Reed yesterday morning on worries over the US school textbook market, which encouraged some investors into Reed's rival.

It is a bit of a laboured comparison (whisper it: perhaps investment bankers are trying to generate share trading business). The pair only compete directly in the US school textbook market, which accounts for 18 per cent of Pearson's business and 12 per cent of Reed's, and they are both under equal pressure from the problems that the market is facing. But as the two publishing stocks in the FTSE 100, active fund managers do tend to want to pick one over the other. Should a retail investor bother with either of them at the moment?

The US schools market is a genuine concern, because falling tax receipts (which will continue well beyond the bottom of the economic slowdown) have pushed many states to the point of bankruptcy and forced delays to textbook buying. Hopes that the market, down 6 per cent in 2002, will rebound by 5 per cent in 2003 may still be too optimistic. Reed at least is more diversified, as its education interests include the UK (poor in 2002 but expected to be better this year) and elsewhere in the Commonwealth. Last year, the number of areas where Pearson could not compete for textbook orders exposed its patchy offering, so it loses out to Reed on this area.

Economic optimists sometimes argue Pearson is a recovery play because of its ownership of the Financial Times, whose profits have collapsed in the advertising downturn. The paper (only one part of the FT Group, remember) is a relatively small cog in the Pearson machine. Both Reed and Pearson, over the cycle, average 10 per cent of sales from advertising. Though Pearson has taken out costs to make it more highly-geared to economic recovery, enough of this is already in the price.

Both stocks trade on about 17 times current year earnings, but the more defensive Reed deserves a premium. Buy Reed; avoid Pearson.

Alexon cheap enough to hold

Did you have a good Christmas and New Year? It is not just return-to-work small talk for the investment community, but the nervous inquiry being put, over the coming days, to all the stock market's big retail groups. Anecdotal evidence suggests that trading in the festive period has been disappointing, and may even have fallen short of that seen the previous year. Yesterday, Alexon became the first clothing retailer to open its cash tills to public scrutiny – and the news was about what had been expected.

The little group – which runs a portfolio of department store concessions and high street stores, including Bay Trading, Envy and Dolcis – said sales over the six weeks to 4 January were up 2 per cent on the year before. At Bay Trading and Envy sales in fact fell, albeit after a stonking performance in 2001.

This is a well run company, which has expanded through acquisition over the past few years and spent 2002 making sure the right kind of stores are in the right places: Envy, a lads fashion store, needs to be in prominent high street locations, while the budget Bay Trading stores are more flexible. Many Dolcis stores have been switched to other formats in favour of putting shoe concessions in Envy and Bay Trading stores. Dolcis has long been a disappointment, but a turnaround appears to be gathering pace and analysts reckon this part of the group will make £1m this year.

That the management knows broadly what it is doing was evidenced yesterday by the news that it has not been left with excess stock from the Christmas period. Also, operating profits will beat market expectations thanks to supply chain and head office efficiencies.

The group has been frustrated in attempts to use its cash to expand the Envy and Bay Trading chains, but a chill in consumer spending might bring new sites on to the market. At less than 7 times current year earnings, the shares, up 4p at 199p, are cheap enough to hold despite the fears of a downturn.

Nice surprise in store at Big Yellow

Big Yellow has a big problem when it comes to convincing the market that its shares should be re-rated. The self-storage company provides customers with secure space for all the junk they can't fit in their homes – in big, yellow warehouses, naturally – and given the economic climate it isn't doing too badly.

Despite striking the obligatory cautionary tone, a trading update showed that the group was plodding along with its aim of turning a profit by 2004. In the last three months of 2002 it had sales of £4.1m, up 5 per cent on the previous quarter, and annualised revenue of £17.3m. Its customer base expanded by 8 per cent quarter on quarter to 12,400. The shares rose 1p to 83.5p.

The group has opened 25 stores in the South-east, its target area, and has another six up its sleeve. The company's recent decision to abandon plans to conquer Paris along with London has thankfully removed a potential big drag on Big Yellow's trudge towards profitability.

With the renowned property entrepreneur Nick Vetch at the helm, the City is expecting big things from Big Yellow. His core institutional following would like a repetition of the success he had with Edge Properties, a retail warehouse specialist built from scratch and sold on for £142m. For Big Yellow, the idea is to attract a buyer from across the pond, where the self-storage market has really taken off.

With growth stories hideously out of fashion and the prospect of dividend payment still a pipe dream, there seems little to entice investors to pick up some stock and the shares look likely to drift for the next 12 months. However, if you fancy tucking some away for the longer term, you might have a pleasant surprise when you come to clear out your junk in a few years.