AIM highs and lows of 2018 - and a checklist for avoiding disasters

Tuesday, Jan 15 2019 by
38
AIM highs and lows of 2018  and a checklist for avoiding disasters

Sixteen companies were forced off the Alternative Investment Market last year because of financial stress or insolvency. That was up from nine companies that suffered the same fate in 2017. When you add them to those that hit problems but somehow managed to cling on (albeit with broken reputations and battered share prices), it’s a reminder of just how perilous the AIM market can be. So how can you try to avoid these kinds of problems?

AIM is popular with investors looking for the kind of explosive growth that happens when smaller, less well known companies come good. A lack of decent research means there can be hidden gems in AIM’s wild expanse of just over 920 mostly small-cap stocks. It’s a market that captures the essence of Jim Slater’s famous observation, that “elephants don’t gallop”. His message being that big companies don’t grow anywhere near as fast as small-caps, and neither do their share prices.

To be fair, there have been some great examples of that kind of growth in recent years. With investors risk-on and funds flowing into speculative plays, some names have seen big re-ratings. They’ve included companies like Burford Capital, Fevertree Drinks, Abcam, Boohoo and Clinigen. From a market cap-cap perspective, Burford’s £3.7bn valuation wouldn’t be out of place in the FTSE 100. Three years ago, it was worth just £400 million.

These are now some of the biggest companies quoted on AIM. Their performances through 2016 and 2017 contributed to the index outpacing all the other main UK benchmarks. But when markets slid through 2018, it was AIM that suffered most - falling 18.2 percent through the year.

Sudden shocks

While AIM has had successes, the trade-off for investing in such a fast-growth, light-touch place is that things go wrong. Unlike the main market, where corporate distress is often (although not always) flagged by analysts, AIM calamities can take everyone by surprise. Just ask investors in Patisserie Holdings.

In 2018, the group behind the Patisserie Valerie chain of cafes - which is majority owned by the chairman and entrepreneur Luke Johnson - was plunged into chaos by an accounting crisis. The full details of what could be a serious fraud still aren’t known. But the shares have been suspended for more than three months while investigations take place. For investors in…

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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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21 Comments on this Article show/hide all

mmarkkj777 15th Jan 2 of 21
8

Hi Ben,

An interesting thread.

Sometimes, even with the best will in the world (especially if there is out-and-out deception) its impossible to foretell a calamity about to unfold (even avoiding high debt isn't enough). The only possible risk mitigation then is to be well diversified, so if a major issue does occur it won't destroy the performance of your total holdings.

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herbie47 15th Jan 3 of 21
3

Ben, thanks it’s an interesting article. I don’t know if you can show the StockRank over the last few years, for each of the 5 successful AIM shares you listed, my feeling is SR don’t work that well for these type of shares, I know Burford Capital (LON:BUR) has not been highly rated, often called a momentum trap despite the profits soaring.

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Alfietrader 16th Jan 4 of 21
4

I see VANL is up near the top with a 93, while being down about 30% this morning, enough said?

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threeputt 16th Jan 5 of 21
1

In reply to post #436748

Herbie, there's a very useful tool in Stockopedia for this, if you select the drop down next to the 'print' option on any share it will give you a screen display of all the usual details as of the date selected. It's a fantastic tool

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herbie47 16th Jan 6 of 21
1

In reply to post #436923

Yes I know but it is time consuming going into every page going back years. I know Stocko can show this, I have seen charts in Ed's articles.

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iwright7 16th Jan 7 of 21
3

Ben,   Yes I agree that a high Stockrank score/Poor Earning manipulation score etc helps avoid the disaster stocks, but a High Q Score in the Top 20-25% will also put the odd of success firmly in your favour.

It was Cliff Arness that showed that if you exclude smaller companies companies with a low market value which are on the verge of death, or are a scam and pick instead companies with high profitability (i.e. High Q), it is relatively easy to beat a market index across both countries and time.

https://papers.ssrn.com/sol3/p...

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herbie47 16th Jan 8 of 21
2

In reply to post #436993

But does it on the AIM? Burford Capital (LON:BUR) has never had a high QR yet is one of the most successful shares in recent years, Van Elle Holdings (LON:VANL) has high rating but has not done well, Somero Enterprises Inc (LON:SOM) high rating but not done well in the last year. Fevertree Drinks (LON:FEVR) quite high QR but has fallen considerably. Boohoo (LON:BOO) very high QR but very mixed sp performance over the last 18 months. Abcam (LON:ABC) high QR and has performed quite well. ASOS (LON:ASC) high QR but has fallen badly.

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iwright7 16th Jan 9 of 21
1

In reply to post #437028

Herbie,

It's easy to find exceptions to rule - I initiated a discussion about Burford Capital (LON:BUR) lowly Stockrank back in 2017. Somero Enterprises Inc (LON:SOM) has not done well in the last 6 months, but I made a lot of money from it in the preceding 3 years.

Mainly High Q (and QM) with just a few few stinkers in largely AIM 20+ company portfolio has worked very well for me and has enabled me to build a large house extension from the proceeds!

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herbie47 16th Jan 10 of 21

In reply to post #437033

Yes of course but I'm trying to find the overall performance, from the ones I can think of the high QR has not seemed to performed that well, note Patisserie Holdings (LON:CAKE) and Utilitywise (LON:UTW) both had high QRs, I was hoping Ben could produce some performance figures. I was a bit late into Somero Enterprises Inc (LON:SOM) so have not done so well. But yes a lot did well for a while but the last year many have fallen back considerably, even quality shares such as Fevertree Drinks (LON:FEVR).

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iwright7 16th Jan 11 of 21
1

Herbi

I consider above 80Q (Top 20% of market) as high profitability companies. If you look at the current table of high Ranking Q there are 100 companies to choose from with a Q score >93. There will be loads of AIM companies above my nominal 80Q cut off. Indeed collectively the biggest companies on AIM, the AIM100 did very well until the recent correction, beating all other UK indices over a long period.

https://www.stockopedia.com/stockranks

I am with Cliff Arness on the wisdom of excluding weak junk stocks and buying quality.

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herbie47 16th Jan 12 of 21
1

In reply to post #437043

Just looking at the top QR shares and a majority do seem to be AIM shares.

The reason why the AIM100 did well was because of Burford Capital (LON:BUR) and ASOS (LON:ASC), ASC was worth over £6bn, I believe the AIM100 is a weighted index.

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nquaile875 16th Jan 13 of 21
1

In reply to post #436743

A great point and I think that should be in the main article. If you're going to hunt in AIM it's best to protect your portfolio against disaster!

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ACounsell 16th Jan 14 of 21
1

On the subject of the Patisserie Holdings (LON:CAKE) accounting scandal has anyone seen the latest from the the online FT:

Cash flow and profitability 'materially below that announced in [Oct 2018] trading update'

Patisserie Holdings, the parent company of the Patisserie Valerie café chain, said that the past misstatement of its accounts was “extensive” and that as a result its profitability is below even the levels predicted in the immediate aftermath of the discovery of irregularities.

“Among other manipulations, this involved thousands of false entries into the company’s ledgers,” it said in a statement, warning that it will take “some time before a reliable trading outlook can be completed while the above work streams progress.”

The cash flow and profitability of the business are “materially below that announced in the trading update on October 12 2018, which was based on limited work carried out over a 48-hour period,” it said.

At that time, it estimated that earnings before exceptional items, interest, tax, depreciation and amortisation for the year ending September 30 2019 could be £12m. This was the only substantive financial information that investors received before they put an additional £15m into the company via a discounted share placing.

The company offered no clues as to when trading in its shares will resume, but said it would look to negotiate the standstill agreement on its banking facilities beyond January. 

As a small holder in Patisserie Holdings (LON:CAKE) with 625 shares which are now presumably worthless it looks very much like this business will join the list of businesses falling out of AIM in 2019.  As a finance person with a partner who has been a practising accountant for 40 years it leaves us incredulous as to how this could have happened without anyone noticing!  Was the whole accounting department in on the fraud with the now disgraced Finance Director?, were Grant Thornton as ex-auditors complicit and how does Luke Johnson with his cash injection of £20m (?) and the 'new' investors who put £15m into the discounted share placing feel about the likely loss of their cash if this is anything to go by.  Luke Johnson previous strong reputation must now be in tatters as he appears to have been asleep on the job.  

Finally, does anyone know of any lawyers pursuing a class action on behalf of shareholders against anyone or everyone involved in this car crash of a fraud.  Because if they do I would like to join it!

 

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Nick Ray 16th Jan 15 of 21
2

In reply to post #437043

With regard to the Arness paper, you can see this junk/size effect in the Stock Rank performance charts. The ability of stock rank to discriminate is much weaker for the >£350M group and works most strongly with the >£10M group.

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iwright7 17th Jan 16 of 21
5

Nick - Good point. I have just taken a look at the graphs for Top Decile (>90) and Bottom Decile (<10) Q Scores since Stockrank inception in 2013. The quarterly re-balanced market cap gains are :

5c3ff6f7b9f3dTable_2.jpg


So clear to me that to avoid disaster a High Q Score is helpful. Even though >£10M is tops for gain they will also be most illiquid and likely to have a horrendous spread, so are not for me. Around £100M Mrk Cap is fertile hunting ground.   Ian


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jonesj 17th Jan 17 of 21
1

Firstly, there are some very knowledgeable people commenting here and it's a privelige to learn from them.

In the case of Patisserie Valerie, my analysis got as far as looking through the window of the local store. I noticed very few customers and prices that were only slightly ahead of Costa, which was always busy.
So I couldn't figure out how they made money and didn't invest.

However, I have also failed to participate in the likes of Starbucks and Whitbread, which have had a very good long run with their coffee shop chains. So my investment process has some way to go.

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mercury61 17th Jan 18 of 21
1

In reply to post #436923

Thanks for this. I wasn't aware of this until your helpful post.

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nquaile875 17th Jan 19 of 21
2

In reply to post #437193

You can't go too far wrong by looking at the physical state of a company or product! This is a key Naked Trader approach, he often listens out for what his wife and her friends are talking about to see where the growth/decline is.

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Will Marsh 21st Jan 20 of 21

If you invest on AIM you need to look at Shareprophets to avoid the frauds. Otherwise, look for generation of real cash. Too much of whats on AIM is really not great for investors. Having invested for some time on the AIM I avoid as a general rule Chinese AIM stocks. Also, there are a number of spinners /directors on Aim that love to ramp on a serial basis avoid them too.
I like to see directors with shareholdings that are significant and I don't like to see big salaries taken out when companies are not making money which is often the case when these people are burning shareholder capital with no return in sight then the obligatory placing (again)

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JohnWigg 22nd Jan 21 of 21

In reply to post #438828

@ Will Marsh - I'd agree about SP: if they say a company is dodgy, it probably is best avoided (and they don't mince words). On the other hand, I find their positive recommendations rather underwhelming so a fair bit of caution is called for.

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