The Alternative Investment Market (AIM) is seen by many as a hunting ground for stocks that can generate vast returns. These are the types of fast-growth small-caps that ex-Fidelity fund manager Peter Lynch once called 10-baggers. Over the past five years they’ve included the likes of Judges Scientific, Walker Greenbank and ASOS. But despite these successes, many AIM companies are hugely speculative, pre-earnings ‘story’ stocks. That means they often go on to disappoint their shareholders. Last weekend we helped The Telegraph track down some of the best and worst quality shares that AIM currently has to offer. This is what we found...

Many investors look in the wrong place

Changes to tax rules last year made it much more appealing for investors to trade AIM stocks. But while their allure might have grown, our research shows that many investors go about finding the best AIM shares in completely the wrong way. A general rule in the stock market is that good, cheap companies tend to outperform expensive, speculative companies. But if you look at this bubble chart - it shows that the most discussed AIM stocks on bulletin boards have a completely different profile to what works.  

Focus on Quality and Value

Good quality, attractively priced companies were precisely what hedge fund manager Joel Greenblatt set out to find when he devised his Magic Formula in ‘The Little Book that Beats the Market’. His system ranks companies using just two metrics - return on capital (good) and earnings yield (cheap) - to find those with the best combination of both.

Stockopedia’s StockRanks take these ideas even further by ranking shares not only for their quality and value but also their ‘momentum’. Many studies have shown that adding share momentum to a value investing approach has historically reduced risk and improved the consistency of returns.

The aim is to highlight good, cheap and improving stocks, while shunning speculative, expensive, deteriorating stocks. The results since we launched the rankings a year ago have been quite eye-catching - with the top 20% of stocks above a £20 million market cap returning 34% while the bottom 20% returning a negative 16%. Please do join our StockRanks webinar next Wednesday to learn more.

Finding the best of AIM

Using these quality and value principles, we put together a pair of stock…

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