The AIM may be widely regarded as the Wild West of investing, but growth-seekers shouldn’t dismiss these shares out of hand. Although there have certainly been massive flops, shares of companies such as fast fashion retailer ASOS (LSE: ASC), pharmaceuticals maker Hutchison China MediTech (LSE: HCM) and telecoms device specialist Telit Communications (LSE: TCM) have outperformed the FTSE 100 by 769%, 833% and 44%, respectively since their IPOs. The question becomes whether these companies can keep up this pace. If they can, investors’ retirements could be looking considerably more comfortable.
ASOS has certainly been one of the most famous AIM shares of recent years and with good reason. The online-only fast fashion retailer has carved a significant niche for itself with young shoppers. The company has taken advantage of its strong social media presence to grow revenue by leaps and bounds, with sales up a whopping 23% in the past quarter alone.
This revenue growth hasn’t turned into bumper profits because of its meagre operating margins of 4.1%. Management’s answer to this has been to bring other brands on board to the website and social media accounts, a smart move to diversify revenue.
However, I remain doubtful the company can continue living up to the high expectations it has set itself. Shares may have halved from their 2014 peak but they still trade at an astronomical 58 times forward earnings. I don’t believe its core business of low-end fast fashion will ever offer sufficient pricing power to increase profits enough to meet this sky-high valuation.
Risks and rewards
Internet of Things (IoT) device maker Telit Communications is another former high flyer whose shares have come back down to earth recently. The IoT market, which connects devices as varied as refrigerators and cars to the internet, is expected to continue growing nearly exponentially. But investors are increasingly worried that relative minnow Telit will be squeezed out by larger competitors.
This is a very valid concern, and I believe the future for Telit will hinge on its services division. The support services it offers to small companies allows them to embed IoT devices in their products, and Telit will work with them to sift through and utilise the massive amounts of data produced. Sales in the services division grew by 30% last year, but still remain a small portion of overall revenues. If the company can continue to capitalise on this success, its shares may be quite cheap at 13 times forward earnings.
Set for the big time?
Hutchison China MediTech is attempting to take advantage of China’s prodigious output of highly-educated scientists to create the country’s own homegrown global pharma giant. The company, which is controlled by Hong Kong conglomerate CK Hutchison, has so far funded high R&D costs by creating a cross-country sales network for outside prescription drugs. This strategy has paid off so far with revenue growing by 104% last year alone as the in-house innovation division begins to add to the bottom line.
The company is aiming for 25 clinical trials by mid 2016 and could send its first drug for US approval as early as later this year. And, its agreements with major global brands such as AstraZeneca and Eli Lilly bring in significant revenue each time a drug makes it to the next stage of development. If any of these myriad drugs pay off big time, shareholders could be in for great returns.
Hutchison China MediTech isn’t the only small cap pharma company out there with a slew of drugs set to hit major markets. The share detailed in the Motley Fool’s latest free report, A Top Small Cap, is several steps ahead of MediTech and has already won approval in the world’s largest markets for their new treatments.
With royalty revenues set to start rolling in, this company may offer a safer path to growth than Hutchinson China MediTech.
To discover this company for yourself, simply follow this link for your free, no obligation copy of this report.
Ian Pierce has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.