Are these the 10 best shares on AIM?

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Are these the 10 best shares on AIM?
The Alternative Investment Market (AIM), London's junior stockmarket for growth companies, had a mixed year in 2016. On one hand, the AIM All-Share index jumped by more than 14%, enough to beat most of the main London indices. But on the flip-side, the number of companies quoted on AIM continued to fall - often because of corporate failure. It was a reminder just how careful investors have to be when it comes to trading AIM shares.

At the end of 2016 there were 982 companies quoted on AIM, down from a high of 1,694 at the end of 2007. Research by UHY Hacker Young shows that 105 companies left the market in 2016, with 46 delistings caused by financial stress or strategy failure.

But the falling numbers don't all point to bad news. A decline in the value of sterling last year meant that UK companies were more attractive as takeover targets for foreign firms. On UHY's numbers, 34 companies were acquired from AIM in 2016, up from 28 a year earlier - and the figures rose sharply in the final quarter.

Overall, the latest statistics show that the number of AIM companies has been falling for two main reasons. Firstly, poor quality firms continue to die off at a high rate. Secondly, good quality firms that may appear cheap to trade buyers are being snapped up. For investors, it's quite clear that poor quality should be avoided.

Changing trends on AIM

The makeup of AIM has changed a lot over the past 10 years. In the mid-2000s it was dominated by oil and mining companies. At the end of 2006, there were 325 stocks across these sectors with a combined market cap of £29.9 billion - or 31% of AIM's overall market cap of £94.4 billion.

These days it's a different picture. There are still 249 stocks in the oil and basic materials sectors. But they're worth a combined £11.7 billion - or just 14.5% of AIM's current cap of £80.8 billion. In other words, the influence of the resources sectors on the performance of AIM has been slashed over the past decade.

Instead, the largest sector on AIM now is consumer services, which covers retail, media and travel. With a combined market cap of £14.7 billion, this sector is home of some of AIM's biggest and most successful stocks, like the retailers ASOS (ASC) and Boohoo.com (BOO). In turn, industrials, consumer goods and healthcare all have much greater weight in the market.

Look for decent profitability, improving financial strength and defendable business modelsSo there might be fewer stocks on AIM now, but the market is arguably better balanced as a result. But that doesn't mean that all the problems have gone away. After all, insolvencies are an investment nightmare. With that in mind, we're kicking off our series for Interactive Investor in 2017 with a look at AIM companies with some of the strongest combined quality and momentum.

These stocks are often referred to as "high flyers". For simplicity, we've used a Quality + Momentum (QM) rank which scores and ranks companies against a wide range of financial indicators.

But anyone can take this approach by looking for decent profitability, improving financial strength and signs of defendable business models. These stocks should also have the wind in their sails, with rising prices and encouraging analyst sentiment behind them.

Small-cap high flyers are not infallible, and their size can make them vulnerable to setbacks. Even so, positive quality and momentum characteristics have historically tended to drive outperformance in the stock market over the longer term.

Name Mkt Cap (£m) QM Rank P/E Ratio Yield % Sector
Brainjuicer 67.2 99 19.1 3.1 Consumer Cyclicals
Boohoo.Com 1,612 99 80.4 - Consumer Cyclicals
ULS Technology 58.5 99 18.8 2.4 Technology
Beximco Pharmaceuticals 261.6 99 9.4 2 Healthcare
Somero Enterprises 122.2 99 10.8 3.2 Industrials
iomart 331.4 99 19.5 - Technology
D4t4 Solutions 64.8 98 18.6 1.3 Technology
Craneware 354.5 98 37.4 1.4 Healthcare
Sopheon 26.9 98 17.8 - Technology
Safestyle UK 256.9 98 15.8 3.7 Consumer Cyclicals

A focus on quality and momentum picks up shares across a range of sectors and market caps on AIM.

At the top we've got a micro-cap cyclical in the form of marketing consultancy Brainjuicer (BJU), which has a yield of 3.1%, shoulder-to-shoulder with online fashion group Boohoo.Com.

In technology, the rules pick up ULS (ULS), Iomart (IOM) and D4t4 Solutions (D4T4). And in healthcare, the list includes stocks like Beximco (BXP) and Craneware (CRW).

Going for quality

It's vital to note that smaller companies with limited resilience can be hit hard by unexpected events. So detailed research into individual AIM companies is essential.

The fabric of the junior market has changed a huge amount over the past decade. In that time, the focus of attention has switched away from speculative sectors towards industries where it's easier to judge the potential quality of an investment.

While it's generated some incredible winners, AIM would certainly benefit from a few more, which would likely encourage more companies to join it.

About Stockopedia

Interactive Investor's Stock Screening series is written by Ben Hobson of Stockopedia.com, the rules-based stockmarket investing website. You can click here to read Richard Beddard's review of Stockopedia.com and learn more about the site.

●     Interactive Investor readers can enjoy a completely FREE 5-day trial of Stockopedia by clicking here.

It's worth remembering that these and other investment articles on Interactive Investor are simply for generating ideas and if you are thinking of investing they should only ever be a starting point for your own in-depth research before making a decision.

*No fee for publication is involved between Interactive Investor and Stockopedia for this column.

Ben HobsonAbout the Author

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"

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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