The junior market (AIM) is often labelled as the Wild West of investing. While it’s probably true that many of its members aren’t particularly good businesses, there are a few that buck this trend. Accordingly, I think they deserve a place in a Stocks and Shares ISA. Floor-covering manufacturer and distributor James Halstead (LSE: JHD) is one example.
Boring but beautiful
Yes, I know — JHD’s line of work will never quicken the pulse in the same way as a blue-sky tech stock might. Then again, I find many of the best long-term investments tend to be those that never make the headlines. Despite shares up roughly 2,000% over the last 20 years, James Halstead has managed to remain a low-key operator.
Today’s interim results show the mid-cap firm is continuing to do all the right things. At £130.5m for the six months to the end of last December, revenue was pretty much identical to that achieved last year. However, it’s worth pointing this level of sales was a record for the company. That’s some feat considering how disruptive the pandemic has been. At £26m, pre-tax profit was 3.3% higher than over the same period in 2019. This was another record result.
As an investment, James Halstead ticks a lot of my boxes. It operates in many markets around the world, serving customers in many industries (retail, hospitality, healthcare). It also generates great returns on capital — a key metric for star fund managers such as Nick Train and Terry Smith. On top of this, JHD has a bulletproof balance sheet and consistently increases its dividends.
All this aside, there are a few drawbacks to investing now. For one, the shares are expensive to acquire, trading as they do on 29 times forecast earnings. While performance over the very long term has been fantastic, some may be put off by the fact that the company is now worth over £1bn. As such, big share price gains are less likely going forward.
On balance though, I’d be happy to add a stake to my Stocks and Shares ISA today.
Another quality AIM-listed stock, in my opinion, is Mortgage Advice Bureau (LSE: MAB1). Like James Halstead, the stock has shown itself to be an excellent long-term investment. Since listing in 2014, the share price has climbed over 600%.
Last week’s full-year results for 2020 suggests there’s more to come. Despite gross new mortgage lending falling 9% in the market as a whole, MAB’s revenue rose by 3% to a little over £148m.
Mortgage completions were up by 5% to £17.6bn and the firm grew its market share of new mortgage lending to 6.3%. Quickly establishing itself as an excellent source of dividends, the mid-cap also raised its total payout by 46%!
In terms of risk, MAB is clearly exposed to a any downturn in the housing market. While the Stamp Duty holiday extension and the growing availability of 95% mortgages are reasons to be optimistic about demand, we still don’t know the full economic impact of the pandemic.
Secondly, the shares are even more expensive to buy than those of James Halstead. MAB has a forecast P/E of 31.
Of course, it isn’t necessary to invest in MAB directly to get exposure. The company makes up almost 4% of CFP SDL Free Spirit — a fund I hold within my own Stocks and Shares ISA.