There are some large companies lurking on AIM. Are they worth investing in?
The much-maligned Alternative Investment Market (AIM) is often derided as being the junior partner to the main market of the London Stock Exchange. However, I think this kind of prejudice could be holding back Fools from investing in some world-class companies.
Notwithstanding the inevitable spread issues that you sometimes get with lesser traded stocks, I think that AIM could be a rich source of research ideas.
Looking closer at the FTSE AIM 100 index reveals that many of the companies actually have a larger market cap than many FTSE 250 members!
For example, at the bottom end of the FTSE 250 spectrum the market cap of the companies, such as McBride (LSE: MCB) and Game Group (LSE: GMG) is around the £250m mark.
Here's a selected list of some of the largest companies traded on AIM, followed by some thoughts on three of them.
Gulf Keystone Petroleum
Gulf Keystone Petroleum is an interesting oil explorer whose main activities are in the Kurdistan region of Northern Iraq, where they have discovered substantial amounts of oil.
Frankly, I do not think investors should buy this stock without being able to hold a view on the internal politics of Iraq. The Iraqi Government has not awarded full recognition of the Kurdistan Regional Government oil licence agreements and, this leaves Gulf Keystone and others in a position which is subject to internal Iraqi political horse trading. There is plenty of upside here, but buyers need to be wary of the risk.
ASOS
As Seen on Screen or ASOS is a very fast growing company with an attractive business model.
Inditex (the owners of Zara) has experienced good growth over the years by releasing cheap copies of the latest designer fashions. In a similar way, ASOS takes advantages of others marketing and awareness by following celebrity fashion trends and offering them to its clientele.
It has benefited from the increasing cult of celebrity relating to footballers and C-list celebrities, plus the increasing shift to online retailing.
As attractive as its growth is, I can't help thinking that a valuation of 26 times 2012 earnings is fully up with events.
In its latest results it said: "There is no 'stand-out' competitor to ASOS -- in terms of breadth of range and fashion edge -- in either the UK or the main markets we are proposing to focus on."
This might not necessarily always be the case. I think that the larger ASOS gets, then the more likely its offering will become commoditised and there will be more pressure on its profit margins. I don't think there is no competitive moat for a business selling fashion online.
Abcam
Another fast growing online-based business is Abcam.
This company is a supplier of antibodies, kits and reagents to the life science industry. The performance of this company has been nothing less than stellar and it is great to see a UK tech company doing so well.
Abcam benefits from the strong trend towards therapeutic antibody research. The success of therapeutic antibody blockbusters like Genentech/Roche's oncology drugs Avastin, Herceptin and Rituxan are encouraging biotech to put 100's of antibody drugs into clinical trials.
It performed excellently during the recession and part of the reason was that its 'ticket item' prices are relatively low. This means that the purchasing decision makers for products are lower-level staff, so will likely fall below the radar of cost cutting initiatives. This has not been lost on the market and it is hard to argue that Abcam is not fully valued.
Despite being a big fan of this company, I would not make a purchase at this price and would prefer to monitor events. I am circumspect about the levels of Government-sponsored scientific research going forward and also think that the uncertainties created by US healthcare reforms and the recession could hold back some investment. If so, then a decent entry point could be created later on.
More from Lee Samaha:
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