Hunting down the best shares on AIM
8th June 2016 14:12
by Ben Hobson from Stockopedia
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This month marks the 21st birthday of the Alternative Investment Market (AIM), London's junior exchange for growing companies. In its relatively brief life AIM has been buffeted by booms and crashes in sectors like technology and commodities, but has also produced some tearaway successes. As a venue for smaller stocks seeking to raise capital, AIM is inherently risky, but digging around can unearth some interesting investment options.
With just over 1,000 companies listed on the AIM All-Share index, it would be easy to feel overwhelmed by the sheer number of stocks to choose from. Since the financial crisis and associated market nadir in late 2008, the index has risen by around 96%, although it has traded flat in recent years.
That performance figure, however, masks some more disturbing facts. Last year, researchers from London Business School revealed that of the 3,000 companies that had listed on AIM, investors would have lost money on 72% of them.
Those dire return figures reflect what many investors already know about AIM - that many of its companies are either too small, too illiquid or simply too speculative to stomach. Among hundreds of risky micro-cap minnows there are only 171 stocks with a market cap over £100 million. The largest company on the market by some distance is online fashion retailer , which is worth £3.0 billion.
Hunting for the best shares on AIM
A slightly more encouraging statistic is that the index of the 100 largest companies on AIM has risen by 98% since 2008. In other words, on a cap-weighted basis, the top 100 stocks have been a pretty rich seam of performance in recent years.
It's unsurprising then that Giles Hargreave, who is widely regarded as one of the most successful small-cap fund managers in the UK, says that AIM has been "a fantastic place to be in the last five years". He believes that the market gets unfairly criticised, but that it's a great place for investment.
With this in mind, Stockopedia put together some strategy rules as a starting point in looking for investment ideas on AIM. In particular they look for stocks with the strongest combination of attractive value, strong quality and positive momentum, which is summarised in the StockRank - from zero (poor) to 100 (very good). They also look for above-average dividend yields that are well covered by earnings.
| Name | Market Cap (£m) | Forecast PE Ratio | Forecast Yield (%) | Forecast Dividend Cover | 1-Year Relative Strength | Stock Rank |
|---|---|---|---|---|---|---|
| H & T | 88.1 | 13.1 | 3.8 | 2 | 26.5 | 99 |
| XLMedia | 146 | 9 | 5.3 | 2.1 | 37.6 | 98 |
| Powerflute Oyj | 204.6 | 9.54 | 3.4 | 3.1 | 16.5 | 98 |
| Safestyle UK | 225.6 | 13.1 | 4.4 | 1.8 | 35.4 | 97 |
| Character | 116.5 | 11 | 3 | 3.1 | 35.5 | 97 |
| Portmeirion | 125.1 | 16.1 | 2.9 | 2.2 | 33.3 | 97 |
| Zytronic | 55.1 | 13.5 | 4 | 1.9 | 22.6 | 95 |
| Flowtech Fluidpower | 58.2 | 8.83 | 4.2 | 2.7 | 14.6 | 94 |
| Numis | 257 | 9.14 | 5.5 | 2 | -9.88 | 88 |
| Animalcare | 51.3 | 20.5 | 2.5 | 2 | 22.2 | 86 |
| James Latham | 133.6 | 14.5 | 2.2 | 3.2 | 5.3 | 86 |
We cast the net across the entire AIM universe, but analysing the AIM 100 to start with, these rules pick up companies like paper and packaging company , which is a significant holding of fund manager Gervais Williams at Miton.
Others in the top 100 include windows and doors company, , and corporate broker, (which has the highest forecast yield here at 5.5%).
Further down the capitalisation scale are companies like high street pawnbroker , children's toy distributor and table and giftware manufacturer, .
Others passing the rules include , , and .
Coming of age
At 21 years old, and despite its risks, AIM is regarded as one of the most dynamic markets in the world for growth companies. Successful recent flotations of companies like have shown that the market can work well for both companies and investors alike.
So it's no surprise that new names, such as the retailers and , keep coming. It's worth remembering that light-touch regulation and the small nature of AIM companies means that detailed research is essential.
But in the search for good quality, dividend yielding shares with the power to grow, AIM is certainly worth investigating.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
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Interactive Investor's Stock Screening series is written by Ben Hobson ofStockopedia.com, the rules-based stockmarket investing website. You canclick here to read Richard Beddard's review of Stockopedia.com and learn more about the site.
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Ben Hobson is Investment Strategies Editor at Stockopedia.com. His background is in business analysis and journalism. Ben researches and writes regularly on investment strategy performance and screening ideas for Stockopedia.com. He is the author of several ebooks including "How to Make Money in Value Stocks" and "The Smart Money Playbook"