This little-known AIM stock is run by ‘a smart guy’, according to Warren Buffett

Could the Warren Buffett seal of approval make this AIM (INDEXFTSE:AXX) stock a smart buy?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Eagle Eye Solutions (LSE: EYE) has certainly caught my eye. Not least because its chief executive (appointed in September last year) has been described by none other than legendary investor Warren Buffett as “a smart guy”.

Listed on AIM in 2014 with a placing at 164p a share, this little-known company — which released its annual results today — is currently trading at 242p, valuing the business at £62m.

Eye on the prize

Eagle Eye is a technology company that validates and redeems digital promotions in real time for the grocery, retail and hospitality industries. Its current 233-strong customer base (up from 219 last year) includes such notable names as Tesco, Asda, J Sainsbury, John Lewis, Marks & Spencer, Ladbrokes and Pizza Express.

The company today reported a 71% increase in revenue to £11.1m for its financial year ended 30 June. It also said: “The board is excited and confident in Eagle Eye’s capabilities to exploit the considerable global market opportunities in 2018.”

The man at the helm — Warren Buffett’s smart guy — is Tim Mason. A guru of strategic marketing and customer loyalty, he was instrumental in launching Tesco’s formidable Clubcard and transforming its customer data analysis. With this pedigree, it’s hard to think of anyone better equipped to develop Eagle Eye’s business (I disregard the poisoned chalice handed to him of leading Tesco’s expansion into the US.)

Genuine growth opportunity

The company is at the early-growth stage and is currently lossmaking (a £2m operating cash outflow and £1.6m spent on investing activities) but a gross margin up 9% to an impressive 88% means operational gearing should kick in big-time as revenues grow.

Revenue growth could be tremendous, because it seems that current significant customers will only “begin to transact through the platform at scale” in the coming quarters. This, together with new contract wins and renewals, suggests there’s a very strong demand for Eagle Eye’s technology.

I’m not generally keen to invest in lossmaking companies. However, the strength of the management team, signs that this is a genuine growth opportunity, and what I view as attractive multiples of 5.6 times trailing sales and four times current-year forecast sales, lead me to rate the stock a ‘buy’ at the riskier end of the investing spectrum.

Wonderful company at a fair price

A long-established (founded 1908) and rather less speculative AIM stock I’m keen on right now is £640m cap Nichols (LSE: NICL). This soft drinks business is not only superbly managed, but also has other Warren Buffett-type qualities.

It has strong brands led by its flagship Vimto, good profit margins with an operating margin in excess of 20%, and delivers a high return on equity having averaged near to 30% over the last five years. It also has great balance-sheet strength, with £29m cash and no borrowings, and a tremendous record of double-digit earnings growth.

At a share price of 1,740p, Nichols trades on a current-year forecast multiple of 24.6 times earnings, falling to 22.6 next year. This isn’t cheap but neither is it outrageous for a quality company in a defensive sector. I rate the stock a ‘buy’ on the basis of Warren Buffett’s maxim: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »