Could these three micro caps be destined for bigger things?
AIM has been a graveyard for many investors' dreams. But a few AIM shares go on to become much larger concerns, even joining the main market.
Here are three stocks I've picked out that offer varying degrees of high risk but also the potential for substantial rewards.
Advanced Medical Solutions
Advanced Medical Solutions (LSE: AMS) designs and manufactures products for taking care of wounds, such as dressings and glue for sealing tissue. Sounds boring I know, but its products are cutting edge.
I had the pleasure of experiencing its LiquiBand product when attending an A&E department for a head wound that once upon a time would have necessitated stitches. It worked a treat -- perhaps that's why it is used by 85% of British A&E departments. This product is now generating its first sales in the US market.
No lesser figure than Jim Slater owns a chunk of the shares and it has almost doubled in price in the past year, hitting a high of 43p recently.
In 2009, revenues grew by 19% although pre-tax profits at £2.4m were down on the previous year. This was due to two exceptional items; £0.9m for a site move and £0.8m for an abortive acquisition.
The company has no debt and the business is cash generative. Moreover, the management has stated that it intends to pay a maiden dividend in 2011, adopting a positive dividend policy thereafter.
On the minus side, it is difficult to calculate its future earnings with any degree of certainty. Therein lies the risk.
It's on a prospective PE of 11.6 for the year ending 31 December 2010. It's a share I'd consider buying should it come down a little in price.
Surgical Innovations
Surgical Innovations (LSE: SUN) designs and manufactures products for 'keyhole' surgery and engineers innovative prototypes for industry.
Full-year results for 2009 were a little disappointing though. Despite revenues increasing to £4.5m, pre-tax profits dropped to £0.26m due largely to a delayed contract (which has since come through).
This company seems to have quite a low profile although this year it signed a three-year distribution agreement with a US distributor that gives it significant access to the US laparoscopic instrumentation market (estimated to be worth approximately US$150 million a year).
Of course, being a micro-cap it carries a lot of risk and it seems to have a track record of disappointing investors. I'm a former shareholder myself but sold out earlier this year having bagged a 66% gain.
In hindsight, I sold too early but I'm tempted to go back in at a lower price as I like its long-term prospects. Again there is a lack of visibility over its earnings.
It is currently priced at 3.75p with a market cap of £14m.
Portrait Software
Portrait Software (LSE: PST), develops customer relationship management software. In simple terms it helps clients improve customer retention, product promotion and cross selling across a range of channels including the internet.
It has 300 clients, including Merrill Lynch, Dell, T-Mobile, Nationwide Building Society and Fiserv Bank Solutions. In addition, it was recently recognised as a leading company in this space by research firm Gartner.
Its next set of full-year results are due in June. Encouragingly, a trading update issued in April announced that revenues increased 10% to £15.9m and pre-tax profits would be "appreciably ahead of current market expectations."
Singer, its house broker, now expects Portrait to make a pre-tax profit of £1.4m for the year to 31 March 2010, rising to £2.3m next year. This would put it on a prospective PE ratio of 12.2 for 2011.
It is successfully cross-selling additional products to existing clients as well as winning new business. In addition, it has net cash of £1.1m. Unfortunately, in the past year it has already quadrupled in price and is now 24p.
As always, I'd advise you due your own research before investing.
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