Foolish Special
[ Wednesday, November 24, 1999]
Aiming Sky High
By Christopher Spink (TMF Eagle)
Part Two
The Winners
So since only 65 companies are worth £30m or more and 24 make up half of the market's total market capitalisation, this means just a handful of AIM companies account for the explosive growth of the market overall this year.
In the past twelve months Durlacher (LSE: DUC) has been the top performer. The financial adviser to many hi-tech enterprises has seen its shares rise more than 30-fold, a quite spectacular performance. BATM Advanced Communications (LSE: BVC), which provides switches allowing the fast transmission of Internet data down fibre-optic lines has jumped to 25 times its value a year ago. And in the seven months since floating in April, shares in Affinity Internet (LSE: AIH), the web access provider, have gone up 24-fold.
These leaps in valuation are extraordinary by any measure. Stocks such as these have been responsible for the jump this year in the AIM index. But, as on the official list, it is the stunning performance of certain hot and fashionable sectors which has set the market alight. All the three businesses mentioned above are connected in some way with the Internet, one of the fastest-growing phenomena of all time. AIM just has a disproportionate amount of its large stocks in these hi-tech sectors. And the companies in such areas have found their shares in hot demand.
This is not the whole story, however. 68 companies have seen their share prices double over the past year. Amongst this illustrious group are more conventional companies. One example is fast growing pizza chain ASK Central (LSE: ASK), which has posted a 101% rise. Another is building contractor and office refurbisher Interior Services (LSE: ISG), up 133% on the year. And power provider Independent Energy (LSE: IEN) has zoomed up 203%. Nevertheless the most highly sought-after companies remain those in the buzzing and volatile hi-tech arena.
Perhaps, then, AIM's dramatic rise this year can be explained away as a temporary blip, as investors explore the depths for hi-tech gold. After all, the AIM Index may have gone up on the back of this demand by 85% this year, but since the inception of the index in January 1996, the index has only improved 52%. Over the same period of time, the FTSE 100 has gone up 77% and the All-Share has risen 70%.
Imagine share prices are frozen between now and the next millennium. That gives the AIM Index an annualised return over the last four years of 13%, compared with a 19.25% average capital return for the FTSE 100 and a 17.5% return from the All-Share.
Nevertheless over the past four years there have been some AIM stars, which have found fame and moved up to the main market regardless of the activities of their brethren on the junior market. One example is trade finance specialist Versailles (LSE: VLL). The company moved to the main market in October 1997. In the two years since then the group has more than trebled in value and is now firmly in the FTSE 250 mid cap index. Another AIM graduate Skyepharma (LSE: SKP) has had a rockier ride, but the pharmaceutical has joined the mid cap echelons as well. It also started life on the lower market.
Uncovering the Gems
How do you find the specks of gold amongst the insignificant rubbish which clouds AIM, then?
First remember that AIM is a much misunderstood and maligned market. But, deep down, there is little to differentiate a decent company on the official list from one on the AIM. A decent small business will grow larger regardless of where it is listed. As with a company on the main exchange, you must do your own research into the various companies you are interested in for investment purposes. Just remember to restrict your research to the 65 on AIM which have market caps of more than £30m.
There are only a very few rules specific to AIM, which companies must meet. Unlike on the main market AIM companies do not need to have 25% of the shares in public hands nor have a minimum size. This can mean that the founders and directors of some companies will hold the shares very tightly, thus creating an artificial squeeze in the share price with only a small percentage remaining freely available.
In addition AIM companies must have a nominated adviser and broker, who is a Wise member of the London Stock Exchange, to shepherd them along. This can be an important way of deciding on the quality of a stock. Just as if you were backing a horse, you would check its trainer, so look at the sponsor and advisors to the company. The best ones operating on AIM are Beeson Gregory and Teather & Greenwood (LSE: TEG). A broker called Ellis & Partners, in association with advisor Seymour Pierce, has brought over 20 penny shares, all price at 10p and under, to the market, sullying its reputation and giving AIM a bad name. Avoid these share issues like the plague.
Fully listed companies used to have to have a three-year trading record in order to float, but AIM companies didn't. This has been relaxed recently with the introduction of the techMARK.
Apart from that the rules are exactly the same for both AIM and the main market. In a sense you could actually say AIM is more regulated than the main market -- after all it has more regulations that govern it specifically than the main market and the nominated adviser acts as a Stock Exchange watchdog. Just be careful who that advisor is and always do your own fundamental research.
With only 300 companies on AIM it is easier for decent companies to stand out. On the main market, with over 2000 small cap companies (worth less than £250m), it is much harder for a company to be noticed. There is in reality less difference between the two markets -- they are both part of the Stock Exchange.
At the end of the day, only very few companies will be able to match Durlacher's or BATM's stellar performance. Most AIM companies will remain small, and of the over 500 which have floated on the market since it was launched in June 1995, almost a tenth have ceased trading or have seen their shares suspended.
Be very careful. AIM can be extremely risky and should only represent a small part of your overall portfolio. By avoiding the very small companies (worth under £30m and with a share price less than 50p) to start with, you are minimising the risk. But only through your own careful research will you uncover future galloping growth stocks. Tread warily, and mind how you go.
Please direct comments to individual AIM company message boards or the Growth Shares board.
Aiming Sky High - Part One
Aiming Sky High - Part Two
