|  Dru Edmonstone is Head of Smaller Company Research at Durlacher, the research driven European technology investment bank. He is also Editor of The AIM Bulletin , Durlacher's monthly research publication dedicated to companies listed on the Alternative Investment Market, and a weekly commentator on Bloomberg TV and www.nothing-ventured.com. Investing in AIM companies Introduction Investing in AIM companies is high risk, but no more so than investing in smallcaps listed on the main market. The risk-averse mentality of the City means that fund managers leave smallcaps, and in particular AIM stocks, under-researched and overlooked. This provides an opportunity for private investors able to distinguish between leaders and laggards. -
Only invest in companies with trading records of more than three years . The value of an extended track record is that it enables you to see how the company has responded to a variety of macroeconomic conditions within a full business cycle. The perceived adroitness of management in poor economic conditions is usually a pre-cursor to above average growth in the ensuing upswing in the economy. If you are risk averse to start-up or seed companies, invest only in companies with trading records of more than three years. -
AIM stocks can suffer from lack of comparability . Many AIM stocks, particularly in the technology sector, suffer when it comes to market valuation because it is often difficult to compare them with any similar quoted business. It is quite common for stocks to trade at a significant discount to their main market cousins until their performance forces an upward market rating - often precipitated by a strong set of results relative to main market competitors . In cases where there does not appear to be quoted competition, research the company's product in terms of its perceived dominance in the market place. -
Stick to simple, short- term forecasts. Avoid rocket science valuation methods and forecasts spanning the next 3 to 5 years. Concentrate instead on the next 12 months and the plain English behind the numbers. If your investment decision rests with the forecasts, use the numbers given by the house broker, whilst ignoring their Buy recommendation. Nominated Brokers and Advisers can no longer afford to make mistakes with regards to profit projections. They know that the City is a very unforgiving place. -
Watch directors and institutional share dealings. Try to establish the level of proprietorial share activity. Generally speaking, internal investors and the large institutional shareholders whom they try to please are closer to the everyday operations of the business than external investors are ever likely to be. This does not mean that their judgement is necessarily better, but their views on the short-term future of the company will generaly be sound. Note, however, that institutional share dealings are also influenced by factors which may have nothing to do with the prospects of the company - such as portfolio weighting , compliance with corporate governance rules, and acceptable levels of profits on original cost. -
Stay away from stocks which have less than 25% of their share capital in public hands. Some companies have been floated on AIM with as much as 90% of the issued share capital kept in private hands. Restricting the number of external investors in this way results in huge disparities between the supply and demand of shares and their bid and offer prices. Getting into these stocks may be easy enough; getting out of them is likely to prove a problem, particularly in a bear market. -
Research the track record of the company's advisers. Levels of due diligence, at the expense of admission fees, have improved dramatically since the Stock Exchange conducted its first annual review of Nominated Advisers. However, some advisers, and indeed brokers, are better than others! Try to ascertain the previous succes/failure ratio of a company's advisers before investing, particularly when considering investing in a new issue. -
Consider sector prospects. Although AIM is principally a stock picker's market, at times it does demonstrate clear sector trends (the demise of the multimedia and internet sectors being good examples). An in-depth knowledge of a particular sector will assist in spreading the investment risk, and investors should therefore acquaint themselves with as much of their 'selected' AIM sector research as possible, whilst comparing the performance trend to the equivalent Official List sector. -
Detailed appraisals of the management team and their past track records are an analytical necessity. For some owner/managers the entrepreneurial drive in building up a business becomes dissipated once the business has achieved critical mass. The leap from running a private organisation to managing a public company is not always an easy adjustment and one that is often reflected in the performance of the share price. Investors should therefore evaluate whether or not the management team is ready and willing to take on the additional responsibilities associated with a quoted company. The experience and future role of the non-executive directors is also an important consideration. -
Don't expect dividends ! The dividend policy is a normal feature of AIM prospectuses, as most investors have some requirement for yield, if only in the long-term. However, AIM is not predominately an income market. Whilst some AIM companies do pay dividends, most of the rapidly growing ones will omit the dividend in favour of retained earnings and the resultant rise in the share price reflecting the growth in productive assets. -
Consider how the company is affected by the economic cycle. The correlation between the macro economic cycle and AIM companies is often very weak, as innovative companies are creating new markets, which initially are tiny relative to long established technologies and sectors. Nonetheless a weakening macro economic trend will disproportionately dampen willingness to back 'entrepreneurship' in AIM companies. Looking at the AIM market as a whole, there are some companies whose exposure to poorly performing economies, such as those in the Far East, will have a significant impact on their share price. www.durlacher.com, www.nothing-ventured.com 'Avoid technology companies with a sales-dominant corporate culture. All too often, accounting irregularities and questionable practices creep in sooner or later, ultimately leading to restated results, a loss in investor confidence and an overnight collapse in the share price.' ”Conor McCarthy | |
