Stock Picks | Into 2016 - AIM Stocks

23rd Dec '15 by GrindertraderUK

12 comments 10549 reads

As we approach the end of another year of investing and trading, it is often a good time to reflect on our own personal performances and to think about the markets in general. I was drawn to my reflection yesterday when I read Paul Scott's own summary of the markets in his Small Cap Value Report of the 22 December 2015

His message on AIM stocks is 100% correct. In this (and I use the term loosely) self regulated market, over seen by the London Stock Exchange we have seen many dubious, high risk, story stocks go bust or the share price tanking.

While many private investors have seen their portfolio value deteriorate due to investing in these high risk story stocks; I am quite happy to see these AIM stocks fail to deliver or go bust. These stocks valuations were going far too high on the promises of riches tomorrow. Many CEO's along with their PR machines are good at giving the impression of a secure, profitable and high growth story of tomorrow. They understand AIM and the power of the private investors to group together as a herd to buy in on the excitement and drive up the share prices, before the inevitable fund raising, issue of shares and subsequent dilution of the share price.

I feel even today that too many private investors are focused on AIM, and that AIM itself has far too many stocks that deserve to go bust. I know this seems harsh but it would be good for the AIM to have a clear out of the junk and the value of the index to become realistic.

I do believe we need a market for start up companies to have some method of raising cash from shareholders but the Board of Directors, PR machines should be put on a leash, with more due diligence done by the Non Execs. To me the Non Exec's should ensure that the business models of AIM companies that they are employed to shadow should be transparent, accurate, realistic and of course truthful!

But of course it is easy for us all to blame the BoD, CEO, PR machines, the NOMADS and Brokers for the failings of AIM, but we shouldn't use that as a pretext to admonish ourselves from our own responsibilities. At the…

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charlene

23rd Dec '15

Hi Ian
Merry Christmas to you and your family and a prosperous 2016! I would like to thank you for all your work on helping investors like myself, much appreciated.

Rusty2

I totally agree about Bulletin boards, if your share has a likely, noisy BB then its a red flag to me. See shares like Fitbug Holdings (LON:FITB), £QPP, Globo (LON:GBO).

Thanks for the Naked Trader valuation tip, have not seen that before.

Have a Merry Christmas.

dosh

Ian,
Totally sensible advice and an article that marries in with my own feelings both in terms of sorting the rubbish from AIM and for newbie investors to really leave the bulletin boards alone. If you see stacks and I means 1,000’s of posts on a BB for a particular share then reach for the bargepole as you do you checking or better still leave the BB’s totally alone.
I run a really tight check-list and screen with details on my blog and like yourself, I would strongly urge all PIs’ especially new inexperienced ones to adopt such a discipline. I have been investing for 25 years and the checklist & screen including Prof Piotroski score remain kings to me.
Have a good Christmas
Bill.

Yes the Prof Piotroski score canbe important but I would not just go by the score, lets take Communisis (LON:CMS) for example, if has a PF score of 7, however it does not make a profit, profit went from +£9m to -£9m, debt has also increased. In the last trading statement it looks like the profit will be again -£9m. The Alt. Z1 score is 1.54 which pretty low. So I would not just look at the scores, even with a high score there canbe serious problems, maybe that scoring needs tweaking because if you have a large loss then yes I would expect the cash to be more than the loss.

Totally right Herbie; the Piotroski score can only in my mind be viewed as one of a number of tools to try and sieve your way to stocks that both reduce or manage risk and offer some upside. I doubt any tool or ratio can be used on its own.

Yes thats true, I notice some of the high Piotroski scores also have low Alt. Z1 scores such as Debenhams (LON:DEB). I would rather invest in Taylor Wimpey (LON:TW.) which has a PF score of 5 than Debenhams (LON:DEB) to be honest. I know there are lots of other factors to consider. I thing I do think about Stockopedia it does not take into account debt enough, I know Paul has mentioned this before and other problems such as pension deficits. However some of these are overlooked in a bull market.

Park (LON:PKG) is another, high PF score of 9 but only Alt Z2 score of 0.21, how can they be healthy but nearly bankrupt?

GrindertraderUK

24th Dec '15

Hi charlene , thanks so much for the kind words and wish you the very best for next year.

Yep agree, the noisy bulletin boards is probably the biggest single indicator that trouble is ahead Herbie!

regards
Ian

The Phoenix

Some questions if I may Ian,

1) What percentage stop loss do you use ?
2) On Stockopedia do you measure free cash flow against eps reported or eps normalised ?
3) You mention pre tax profit which version is this on Stockopedia operating profit or net profit ?

Out of interest what percentage returns would you say you have averaged over the last three years no issues if you prefer not to say.

Great article and thanks for sharing have a great xmas and new year

25th Dec '15

Hi clarea,

1) I start at around 10% to 20% depending on factors like 'normal volatility'. But I want to ensure that the upward price momentum is strong first. I made a new change to my stop loss rule this year in that I no longer raise the stop loss, as the price climbs. Once I reach around 30% profit I set the stop to break even and then allow for the share price to breath, and take advantage of topping up on the dips

I am one of a minority that likes and sticks to stop losses. I did a video here to explain my reasoning

2) I am happy to use basic EPS. But I do check if there is a big difference between EPS Basic, Normalised, Adjusted etc. If there is I am usually put off. However I also like to look at EPS basic growth over several years for some sort of growth consistency.

3) I do not think Stockopedia displays Pre-Tax Profit. The reason that I like using pre-tax profit is that I find it to be one of the key headlines figures in most Final and Interim RNS. However mouse over the operating profit and net income columns will bring up the interactive bar charts so that profit growth is easily illustrated. But I always check the actual RNS for actual pre-tax profit and other factors if I am interested in the stock.

4) I constantly beat the FTSE-ALL Share. I have still to calculate my total returns across my portfolios this year. But I am on course for a 20% (ish) three year average. I put this down to a mixture of checklist discipline, luck, stop losses and shorting stocks too!

Merry Christmas and Happy New Year to you too.

26th Dec '15

Thanks Ian do you have any rules on PE ratios ie avoiding anything above 20 and below 5 ?

Cheers

clarea

I do not have a hard PE limit. I don't see the point. If a stock is PE20 but momentum is still strong I would allow it the investment to continue.

I prefer to use in Stockopedia 'rank in industry' as a way to determine if the PE is cheap or expensive.

This is the graph bars on the stock reports. You can see here while the PE is 15.6 The yellow bar is indicating that this stock's Rolling PE is higher than the average of other stocks in that industry. For PEG I use the whole market

hope this helps

Ian

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GrindertraderUK

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