How To Track Down The Best Quality High Flying Shares On AIM

26th Apr '17 by Ben Hobson

11 comments 14637 reads

The Alternative Investment Market has risen in value by around 40% since last June’s EU referendum. And while that performance is echoed right across the market, there’s evidence that AIM is starting to fight off some of the criticism often levelled against it. Specifically, there are signs of improving company quality, although it’s still the case that AIM is home to a lot of stocks worth avoiding.

Over the past 10 years, the number of companies quoted on AIM has fallen from 1,694 to around 967. Critics argue that’s a problem and that falling numbers highlight just how risky the market actually is. But it can also be argued that this decline has been a cleansing experience for AIM. It’s removed a lot of highly speculative, poor quality shares that shouldn’t have been there in the first place.

In terms of numbers, analysis of the coming and going of AIM stocks suggests that the decline might be slowing. Accountancy firm UHY Hacker Young says the number of companies leaving AIM dropped by 16% in the 12 months to the end of March, falling from 105 to 88. By contrast, the number of companies joining AIM rose by 5%, from 38 to 40. And funds raised in AIM IPOs rose from £753 million to over £919 million.

In terms of the market’s recent performance, the researchers at UHY credit positive trends in commodity prices and tech valuations for driving up the index valuation.

But there’s also evidence of more structural reasons for AIM’s positive trends. A recent survey of investors by the Quoted Companies Alliance - including the likes of Hargreave Hale, Downing and Schroders - found improving sentiment towards it. In particular, it found that fund managers see AIM as better now than it has ever been, with fewer failures and more quality.

However, it wasn’t all good news. Among the criticism, some managers claimed AIM’s performance had been “way below what a high risk market should be”, while one said that it was clogged by a large amount of “sediment” at the bottom of the market; micro caps that can’t get critical mass or the liquidity needed to attract investors. Others noted that a lot of AIM companies are dysfunctional and shouldn’t be listed and that the some AIM Nominated Advisers and Brokers are poor quality.

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Randval

26th Apr '17

One reason AIM shares are popular is for the possibility they offer to reduce Inheritance Tax.
As an additional part of the excellent reviews provided by Stockopedia it would be much appreciated if the author could give some general guidance on whether the shares qualify for Business Property Relief or not.
Even an opinion with a disclaimer would be useful.

iwright7

Ben,

Excellent article illustrating just how well % annual return wise you need to have done to beat the AIM 100 consituients over the last year. I would suggest though focusing on the Top 50 by market cap, which are virtually all 12 month winners irrespective of the screening metrics employed. I have a theory that many financial institutions have come to like the Top 50'ish segment and modest spreads have given them the confidence to invest, driving up the prices. Ian

investorschampion

A glance at the share registers of many of the larger AIM companies highlights the significance of IHT planning money in AIM. As you suggest, determining BPR/IHT qualification is a tricky area, where many have come unstuck.Investor's Champion's AIMsearch http://aimsearch.investorschampion.com/ is a unique search tool used by a growing number of IHT planning investors (including many institutions) to help identify AIM companies, an investment in which may qualify for relief from Inheritance Tax (IHT).

Rusty2

I think you right the perception of the AIM has changed. Many think it high risk smaller companies which is partly true but there are some quite large companies now ASOS (LON:ASC), Boohoo.Com (LON:BOO) and Burford Capital (LON:BUR). Looking down the AIM100 I think most are generally decent companies and I have held quite a few of them, probably outperformed my other holdings but I don't have any figures. Generally I would avoid any foreign company on the AIM but I do hold Somero Enterprises Inc (LON:SOM). Negatives can be illiquidity and wide spreads. You have to be a bit careful on spreads because they can vary considerably, £BXVP I have seen between 1% and 8%.

Remember Lord Lee has many AIM companies in his portfolio. I think for fund managers it difficult for them to trade because of size and liquidity, just look at some Hargreaves Hale is trying to exit.

Brilliant Leader

Among my own top 8 holdings, 5 are on your list Ben; Petards (LON:PEG), Bioventix (LON:BVXP), Amino Technologies (LON:AMO), Somero Enterprises Inc (LON:SOM) and SYS1 - so I guess you have just summarised my core strategy. Research is so important with these companies though because the relative lack of liquidity means that any nasty surprises are likely to get amplified when the share price falls. This, together with the "expensive" label are both pretty tough psychological barriers to deal with while also trying to manage risk effectively.

Nick Ray

Not sure that Polar Capital Holdings (LON:POLR) deserves a momentum rank of 93 tbh. I think Stocko's momentum rank is much more short term biassed than the Q and V ranks. I have pretty much switched to a simple one year risk-adjusted return calculation for momentum which seems to "chime" better with the period over which Q and V are computed.

Thank you investorschampion, I already use your search tool but additional reassurance is good to have especially when things change.

27th Apr '17

Thanks Randval. I'm pleased to hear you use AIMsearch. As you suggest, every little helps clarify things

kasim

28th Apr '17

I invested in an oil company on AIM after a tip, it did alright at first but it quickly fell to < 0.5p from 12p. At the same time, I bought a gold miner again on AIM, just to diversify my portfolio of 2 companies. As the oil company was going down, the miner was doing really well: I took profits of £700. Then a while later, it went through the roof, so I took £4000 profit and left £3500 in.

Eight months later, the oil company struck oil and the miner went bust. Although I was disappointed, I remembered that I took profits of £4700 when I only invested £3500. This meant that I got my money back plus £1200 profit - nice. What was nicer was that oil company had dilevered a hefty profit of £16,000 from an investment of £7000. After swearing at the tipster for 8 months; I realised he was right in the end.

My advice for AIM investors is to aim to take your initial stake whenever there's a substantial profit in the share. Then you won't be disappointed if the company goes bust. And they do go bust.

Mark Carter

29th Apr '17

Spotting quality can come down to a lot of common sense. Look for companies that: are profitable, have a history of paying dividends, have been floated on the market a long time, are self-funding (no, or rare, placings), and operate prosaic rather than exciting businesses.

Although more difficult to ferret out, the better-quality ones will have large insider ownership and be classified as "family businesses". Companies like Nichols (LON:NICL), James Halstead (LON:JHD), Dart (LON:DTG), etc. all of whom have been in business for decades and have produced market-beating returns.

newthugger

30th Apr '17

Does this have any comparative analytics to the United States markets? I am not familiar with this segment of investments.

How to track down the best quality high flying shares on AIM

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Ben Hobson

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