How to hunt for high quality companies on the Alternative Investment Market

Tuesday, Aug 15 2017 by
29
How to hunt for high quality companies on the Alternative Investment Market

After a strong start to 2017, stock market valuations have drifted during the traditionally quiet summer months. One of the strongest index performances so far this year has been the Alternative Investment Market. AIM is home to literally hundreds of growth companies, but it presents a constant challenge to investors looking for high quality shares.

There are 963 companies on the AIM All-Share index, which has risen by around 27 percent over the past 12 months. The market has helped deliver some big success stories in recent years, including the likes of Boohoo.Com and Fevertree Drinks. But it’s also the source of plenty of disappointments, with Fairpoint and Naibu being recent examples.

The first line of defence against these sorts of disappointments is AIM’s use of Nominated Advisers. The Nomad system is part of a ‘light touch’ regulatory regime that was designed to make it easier for smaller companies to maintain a public listing. Nomads tend to be corporate brokers and investment banks, and it’s their job to advise companies on their responsibilities to the market.

One of the quirks of the system is that these Nomads can resign from their positions. Often the reasons are genuine and companies can quickly find a replacement. But under AIM rules, failure to find a replacement in time will result in them being booted off the market.

With this in mind, it’s notable that recent research shows that the number of companies leaving AIM because of the resignation of their Nomads has risen sharply during the past five years.

Accountancy group UHY found that 14 out of 82 companies that left AIM in the last year did so because their Nomad resigned. That compares to only three out of 101 companies that delisted in 2011/12.

A cancelled market listing that’s forced by a Nomad resignation can be hugely frustrating for investors. It leaves few options but to go along with the company’s terms, and it’s damaging to the reputation of the market as a whole.

According to UHY, the financial risks of failing to make sure client companies are compliant, together with limited fees available, has reduced the number of firms prepared to take on the role of Nomad.

Apparently this is being felt hardest among smaller and more complex companies, as well as those based in emerging economies (AIM has 161 international companies).

For investors, this ‘crunch’…

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Disclaimer:  

As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.


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13 Comments on this Article show/hide all

Nick Ray 15th Aug 1 of 13
3

ROCE%, ROE%, ROCE% 5yr, and ROE% 5yr all have a very strong correlation with each other so I think you might have a bit of overkill using all four in your screen here!

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Graham Codd 16th Aug 2 of 13

The only one I invested in was Central Asia Metals 18/04/17 @ £2.3875 (average incl costs £2.4052, sold on 13/06/17 at £2.1798 losing about 9.4% after costs. Yield would have been decent, about 6.4% for full year, but far better shares available. They are very much "seat of your pants" shares.

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Peter Craven 16th Aug 3 of 13
1

I liked the article and learned from it as I have little knowledge of the AIM market.
However, Stockopedia who are legendry masters of technical analysis provide no information regarding fundamental analysis of any of the companies mentioned.
The key issue for the private investor is how to research the fundamentals of AIM companies including the dividend forecasts. Anecdotally, I have discovered there is a correlation between the quality of company web sites and financial reports and the investibility of the companies shares.

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tony mchale 16th Aug 4 of 13
3

Ben interested in your comments on Nomads.I lost £5k on Fusionex when it delisted a couple of months ago.
As recently as May Stockopedia,which I use daily, had a Quality Ranking of 85 and a P score of 6. In my view
Aim needs urgently to tighten the Rules about delisting particularly for Companies overseas. I shall not be investing again in any overseas Company on Aim after my experience with Fusionex.

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alan martin 16th Aug 5 of 13
3

Interesting. I might pick up on Grahams investment in Asian Metals. The important point missed there was that Asian Metals is a play on copper and is not simple formula - following share. You must look at the strategic situation, particularly when thinking about commodity shares

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Edward Croft 16th Aug 6 of 13
2

In reply to Peter Craven, post #3

Peter - this comment: 

However, Stockopedia who are legendry masters of technical analysis provide no information regarding fundamental analysis of any of the companies mentioned.

I think you mean the other way around?   We're more renowned for fundamental analysis than technical analysis... though we're investing heavily in improving the TA offers.

Blog: Follow @edcroft on Twitter
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iwright7 17th Aug 7 of 13
1

To add to the debate as to which Quality metrics are most important in predicting out-performance there is a review published this year, looking at worldwide stockmarket returns from 1990-2016:

Survey of Quality Investing    https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2971185

Returns vary by region and the conclusion is that some Quality metrics are “more robust” than others. Their particular profitability metrics noted for “robustness” are ROE, ROA, ROIC and GP. I wouldn't argue with Ben's screening selection metrics though, which look sound. Long term growth in profitability numbers do not fare so well in this review, although I personally like to see a 5 year record of sustained returns in my hunt for a Moat. Ian

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sharw 18th Aug 8 of 13
3

So 3 days ago System1 came top of the list. Oh dear.

see http://www.stockopedia.com/content/small-cap-value-report-18-aug-sys1-mmc-209763/

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Peter171 27th Aug 9 of 13

IQE springs to mind which in my view is starting to fill its moat. I don't foresee any competitors on the horizon. Unfortunately I got out too soon at the 80p level, but can't complain as was in at 23p. What about CAP XX?

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hayashi22 27th Aug 10 of 13

Peter-I think you have honed in on two companies with very good potential for further price appreciation.

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Bushranger 27th Aug 11 of 13
3

In reply to alan martin, post #5

I would agree re Central Asia Metals (LON:CAML). being a play on copper. I bought recently at a higher price than Graham sold for and am already 11% in profit. Reason for buying when I did is copper has been hitting highs and with electric cars to be pushed by companies/ governments may still have some way to go. Also I believe copper reserves are dropping. Central Asia Metals (LON:CAML). financial statements should soon reflect the rising copper price and this should push up the share price. I am still learning regards timing a buy and sell, it makes such a difference. If hindsight was foresight we would all be rich.

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ricky65 27th Aug 12 of 13
1

In reply to sharw, post #8

That's the problem I find with purely fundamental screens - they can often turn up stocks where the technicals are showing something may be wrong. I always run Mark Minervini's Trend Template criteria on a stock I'm considering and I pass if it fails to meet it. SYS1 would have failed the criteria here.

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hawkipa 30th Aug 13 of 13

Interesting article, thanks. A slight tangent I know, but I wonder if there is any means to cross reference with Business Property Relief eligible names i.e. those stocks that are expected under current rules to be Inheritance tax free after 2 years. I appreciate Stockopedia probably can't add this given the opaque nature with which HMRC approach this topic, but any intelligence on it would be great to have and share.
To that end, IR at both Somero & Alliance Pharma have both confirmed that they currently qualify.

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About Ben Hobson

Ben Hobson

Strategies Editor at Stockopedia. My goal is to help private investors learn and invest with confidence through the articles, ebooks and other resources we publish on site. I also occasionally bunk off to interview famous investors at expensive restaurants. I studied History at Aberystwyth University, trained as a journalist and covered business news and corporate finance before settling in as one of the first staff members at Stockopedia.  Away from Stockopedia I'm a mountain bike junkie. more »

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