Small Cap Value Report (30 Jan 2015) - BAR, AIP

Good morning! As (almost) dry January draws to a close, I was last night pondering why we invest in AIM shares, over several vodka and lemonades. Alcohol is described (by them) as compulsory when I stay with friends in Islington. The only other occasion this month that any such poison passed my lips was when I remained broadly in line with my alcohol ban on a previously-announced delicious Peroni binge on 19 January at Mello Beckenham.

February will also be alcohol-free, apart from a second-cheapest-wine-on-the-menu binge at the Savoy Grill on 4 February, for a friend's birthday.

So why do we buy shares on AIM? Surely it is akin to walking barefoot through a minefield? Why would any rational person choose to take such enormous risks, voluntarily going into such a dangerous area? The answer is partly that many investors are stupid and over-confident. Or perhaps gullible might be a better description than stupid. Or both actually. People are suckers for a story, so many investors in AIM shares do little to no proper due diligence on the facts & figures. They believe everything that sometimes dodgy management and advisers tell them, and ignore the repeated failure of story stocks on AIM.

Such people are easily parted from their money, by the whole crooked apparatus of the City, but make enough money by getting lucky in bull markets, to keep them interested.

Hopefully here on Stockopedia, with a combination of excellent data-fueled tools, and gritty commentary, we bring enough luminescent spray into the dark and murky depths to AIM. to ensure that readers have a mainly safe passage through this minefield, and pick up the occasional hidden gem along the way.

Looking at the top % fallers for the day, no limbs appear to have been lost today, other than the usual carnage in the junior resource sector, where one-by-one the hopes and dreams of deluded gamblers are being snufffed out. I am hoping that perhaps 200 or more junk companies may de-list soon, leaving AIM a bit clearer for sensible investors, instead of having to waste our time filtering out the joke companies.

Eclectic Bar (LON:BAR)

This company runs bars, and in my view the shares are not worth considering because of the structural problems in this sector - mainly that drinks are too expensive, so customers pre-load at home with cheap vodka from supermarkets, and then mainly go to bars to flirt with the opposite sex, start fights, and vomit! So the fixed assets don't last very long, and the supply chain from brewer to customer is arguably just a long list of people that are stealing from you.

It's much more relaxing to invite a few friends around, and sit at home drinking vodka, and talking nonsense, in my opinion.

This company put out a profit warning on 25 Nov 2014, but today says that trading is in line with expectations. They use the words "Overall trading for the period was in line with the Board's expectations...".

The first word in that sentence sets alarm bells ringing. Why say "Overall..."? That suggests to me that something has gone wrong, but they're possibly glossing over it on a technicality. So I imagine that the next set of figures could contain a disappointment. Anyone daft enough to be holding these shares is therefore likely to be parted with some more of their money, I reckon.

If Private Equity wants to exit, you can be 90% sure that they are flogging you something defective, and 99% sure that the price is too high. Yet people still lap-up IPOs. Why take the other side of the trade when you are almost certainly going to get fleeced?! Going back to my minefield analogy, people just seem to enjoy taking illogical risks - why else would lotteries be so popular, and casinos prosper?

Air Partner (LON:AIP)

This company charters aircraft, and has come up on my value filters recently.

The company today says that trading for y/e 31 Jan 2015 was in line with expectations.

One alarm bell is that the company says it has a strong balance sheet. Normally this is a red flag, since companies with genuinely strong balance sheets don't need to tell you that they have a strong balance sheet, so it's usually (but not always) a sign that the balance sheet is actually weak, and that management are trying to convince us, and themselves, that everything is fine.

Checking the last interim results, the balance sheet here is OK, but not strong. Net tangible assets are £11m, and the current ratio is 1.18, which isn't strong. It's OK, but towards the lower end of what I consider acceptable.

Therefore, management telling you the balance sheet is strong, has once again turned out to be a warning sign to check the figures yourself.

They do have a favourable business model though, where customers pay cash up-front, which is typical in this sector.

This company appears reasonably priced to me, and with a reassuring trading update under the belt today, I think these shares could be worth a look. The timing appears favourable too, in that these shares have been in steady decline, and look good value now. Note the excellent dividend yield too.