Why AIM’s still got it

The Alternative Investment Market (AIM) is a great place to find growth stocks, says Tom Bulford. But there are still things to watch out for. Here he gives his top tips for AIM investors.

On the London Stock Exchange website, it still describes the Alternative Investment Market (AIM) as “the most successful growth market in the world”. That’s a pretty bold claim.

Now, I’ll admit to you that I don’t know how AIM’s rivals have fared. But if success is measured by the number of customers, then I’m afraid the LSE’s boast rings pretty hollow.

Back in 2007 AIM hosted 1,694 small companies. Since then, numbers have dwindled. By the end of last year, the number had dropped to 1,143 and now we are down to 1,114, a 34% decline from the peak.

In 2010, Grant Thornton was describing AIM’s virtues. “In 2009”, it said, “AIM made a substantial contribution to the UK economy of around £21 billion and supported around 570,000 full-time jobs through direct, supply chain and multiplier effects… Companies admitting to AIM experience an immediate growth spurt… AIM stimulates innovation, enterprise and productivity… AIM companies are genuine drivers of growth, creating significant levels of employment.”

So presumably AIM’s slide has been bad news for the UK economy, especially as it is small companies that are supposed to be leading us out of the economic mire.

But what the heck! I never believed all of this hype in the first place! What concerns me is whether we as investors can make money on AIM. And my answer to that is a resounding yes – AIM’s still got it!

There are still over 1,000 AIM companies to choose from. With companies from India, China, the United States, Australia and elsewhere represented on AIM, there is plenty to choose from. Not all of these companies will be successful – far from it. But as a place to find smart business ideas, ambitious management and premium investment returns, AIM is still a great place to look.

AIM is home to world-class companies

Each month, while some companies leave AIM, new ones come along. June, for example, saw six new companies join AIM, including explorer Fastnet Oil & Gas (FAST), Utilitywise (UTW), a business that helps cut energy bills, and – a wacky one, this! – New Trend Lifestyle Group (NTLG), a Singapore chain of stores where you can have your Feng Shui assessed.

Just taking the last twelve months, eighteen AIM-listed share prices have more than doubled and a further thirty-seven have made 50% or more. Leading the pack is West African Minerals (WAFM), an iron ore miner that has racked up a 569% gain.

Inevitably, the winners include some high-risk companies that happen to have got lucky with, for instance, an oil strike. But the impression that AIM is full of high-risk shares is a myth.

There are plenty of well established businesses here with great products and seasoned management. Plexus Holdings (POS) is a good example. It’s still led by its 62-year-old founder Ben Van Bilderbeek and supplies innovative engineered wellhead equipment that makes oil and gas drilling safer. Its shares are up around 150% over the past year.

 

Top tips for AIM investors

So what’s the formula for a successful AIM company? Of course, the business needs good management although this comes in all shapes and sizes. I look for a good product or service, with limited competition and a large potential market. I’m prepared to take a gamble on, for example, oil exploration or medical research so long as the pay-off on success is plenty large enough to offset the obvious risk of failure.

I’m wary of hot themes. Many investors were sucked into dot-com stocks just before they came crashing down. And although I am happy to consider some natural resource stocks, there is the smell of burnt fingers around this sector now.

I’m also wary of companies that need to raise much more money before they become profitable, although if the business case is strong enough this should not be a problem. Finally, I am wary of companies that hail from countries where shareholder rights are nowhere near the top of the priority list.

Selectivity is the name of the game. As with any sort of investment, you must do your research (see below). Only invest when you are absolutely convinced of the case for the business and then do not be in too much of a hurry to sell. Allow time for the story to unfold.

With a bit of work and, yes, a bit of luck too, AIM is still a great place for any investor who wants a chance to make great returns over the medium to long term. But to stand a chance of making these returns, you need to start investing in these stocks.

37 AIM stocks I’ve researched for you

As I said above, it’s important to do your research. But I know there are more than 1,000 AIM stocks to choose from, and that can seem daunting if you’re new to this. That’s why I conduct detailed research in Red Hot Penny Shares – to make it easier for you.

Right now, there are 37 AIM stocks in the Red Hot Penny Shares portfolio – from oil explorers, to network security providers, to medical diagnostics companies, a biotech firm creating novel cancer drugs and plenty of others besides.

Every one of these companies has a fascinating story and the potential to make big returns for bold investors. If that sounds good, here’s what to do.

Take a look at the back page portfolio in the latest Red Hot Penny Shares issue to see which stocks are rated ‘BUY’ right now. Then refer to the archives for my original recommendations.

Find a stock you like the look of, read my research, have a look at the company website if you like. If you’re comfortable with the risk/reward profile, buy some shares. Then sit back and let the story unfold.

In fact, in the July issue of Red Hot Penny Shares, I’ve got a great biotech story I’d like you to see.

It’s about a stock that’s working on a breakthrough treatment for prostate cancer – which claimed the lives of 10,721 men in Britain in 2010.

It’s a fascinating prospect. The company has been running trials on a new form of treatment for prostate cancer, which targets the DNA of our cells to prevent cancerous growth. It’s early days yet. But the signs so far are promising.

In fact I think this little AIM share has the potential to deliver you returns of almost 300% from here over the next 12 months!

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