That is true but the trick is to know what you are looking for and seek stocks with the potential to grow and the Alternative Investment Market (AIM) could be the place to find them. Often compared to the Wild West, The London Stock Exchange’s junior market for growth companies, is not the place to buy without due diligence.

Its risks are real. Less than a quarter of the original companies listed there are still trading. However, if you examine company fundamentals, debt, profit and management, among some cowboys, you may find yourself a cash cow.

High altitude

Altitude Group (LSE:ALT) provides technology solutions to the  promotional merchandise, marketing and print industries in the UK/North America.

The share price has mostly been on an upward trajectory this year. However, in May, it posted a pre-tax loss of £2.8m compared with a £125k profit the year before. It put 2018 losses down to increased operating costs in the US. But it has a low debt ratio of 0.25 and a strategic acquisition may be just what the company needs to propel its earnings.

Altitude purchased the Advertising Industry Mastermind Group in January for a total consideration of $5m. The purchase was part-funded by a January share placing that raised £9m (gross) and after acquisition, the subsidiary’s trading name changed to AIM Smarter. 

The buy gave Altitude access to approximately 8% of the promotional products sector in its lucrative $23bn US market.

In the first 4.5 months of 2019, over 400 members contributed sales orders worth over $31m. This increased the average from $1m per week in March to over $2m per week in April (2018 averaged $383k per week) and AIM Smarter membership numbers grew by an additional 10%.

Last week, Altitude founder Martin Valery sold £2m shares but continues to retain 14.8% of the company. This understandably caused the share price to fall.

I am still inclined to see this share favourably because the company has confirmed 51 members upgraded to one of its new tiered packages between April and May and it has negotiated fees on sales placed with 149 affiliate suppliers.

Analysts forecast sales rising from £6.6m in 2018 to £19.8m this year and to £35.2m in 2020. But this is all purely speculative until Altitude confirms the revenues it’s receiving, so I see it as one for the watch list. 

Wealth begets wealth

The Ten Lifestyle Group (LSE:TENG) share price has been steadily rising this year.

Ten sells worldwide concierge services to banks and wealthy individuals. Members use its platform to pre-book or purchase items such as restaurant reservations, holidays, tickets or treatments.

In May and June it secured new contracts with Revolut, China Merchants Bank and a global technology, media and telecom brand. The company expects these contracts to grow to be worth more than £2m each in the coming years.

Ten is not currently profitable and its share price is way off previous highs. Plus it has a book value worth only 23% of its current share price. Shareholders who purchased shares 18 months ago will still be nursing losses. Red flags? Maybe, but it has little debt, with a ratio of 0.27 and recent contract wins make me think this company has room for continued share price growth. Again, I am putting it on my watch list.

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The first new agreement is with Market Brands LLC. Under the terms of this deal, Market Brands has undertaken to recruit 100 new sales staff who will target the creation of tens of thousands of branded web stores for small businesses throughout the USA. Altitude’s technology will be used in the creation of these sites, and the company will receive a percentage of the sales value of every online order conducted with its technology. 

The second agreement appears equally promising. This deal is with a “leading Tier One manufacturer in the USA” of photo book products. Altitude has signed an agreement for the supply of print, signage and photo book products with this producer giving it access to the $100bn US print market.

Growth ahead 

It is easy to see why shares in Altitude have reacted so positively to this news. Both of today’s announced deals could be hugely transformative for the company and come off the back of a positive 2016 trading performance. Indeed, back in February management informed the market that the group’s results for 2016 would be ahead of expectations thanks to tight cost controls. 

The official full-year 2016 results are expected to be announced at the beginning of May. City analysts are expecting a small pre-tax profit of £0.5m on revenue of £4.5m. Earnings per share of 0.8p are also projected although I would not be surprised if the company beats these projections.

And it’s difficult to put together a future bear case for the enterprise. Even without giving any consideration to the two new contracts announced today, shares in Altitude look severely undervalued compared to the company’s projected forward growth. Analysts are expecting the firm to produce earnings per share growth of 300% for 2016, growing pre-tax profits by a similar amount, from £0.5m to £2m. Revenue is expected to hit £6.8m. During 2018, further growth is expected with pre-tax profits projected to hit £3.3m and earnings per share of 5.2p pencilled-in. 

As analysts dissect today’s news, I would not rule out earnings upgrades in the weeks ahead. Based on current projections, the shares are trading at a 2018 P/E of 12.5.

Own research needed 

As a small-cap, Altitude comes with a higher level of risk than larger peers, but the company appears to have none of the major red flags that usually come with a high-risk start-up. Specifically, at the end of June 2016, the firm reported a clean balance sheet with no debt and cash resources of £0.4m. With the City projecting profits for the full year, it is reasonable to assume group cash will have grown further during the last six months of 2016.

Overall then, as a growth investment Altitude does look attractive. But as with all small-cap stocks, before making a trading decision, you should conduct your own due diligence and don’t just take my word for it.

The post After gaining 550% in a year, can Altitude Group plc continue to climb? appeared first on The Motley Fool UK.

Major change

Today’s share price gain has come despite a lack of news. Similarly, in October the company’s shares rose sharply and as a result it released a statement saying that it was unaware of the reason for the share price gain. Clearly, the company is becoming increasingly popular among investors as it continues to implement a shift in strategy that’s focusing on ‘right-sizing’ the business. This seems to be the key reason for today’s as well as recent share price gains, as investors anticipate improved performance from the company.

Previously, Altitude Group had duplicated operations in multiple locations. This made the company relatively inefficient and led to the cost of implementing changes in 2013/14 failing to be sufficiently offset by revenue gains. It has since focused on improving efficiency and now controls all software maintenance and development from the UK, rather than having part of its operations in the US. Allied to this is an outsourcing strategy which seeks to reduce costs, with £1.8m of annualised operating expenses being removed in 2015.

Risks

While Altitude Group has growth potential within its end markets and now has an improved business model to capitalise on it, the company remains relatively risky. It has been lossmaking in recent years and has a negative operating cash flow. For example, in the last two years net cash flow from operating activities has averaged minus £671,000. At the end of the 2015 financial year, it had just £336,000 in cash on the balance sheet and this could lead to a requirement for additional capital over the medium term.

In addition, it remains a relatively small company which has net assets of only £993,000 and yet its market cap is £47m. This puts it on a price-to-book (P/B) ratio of over 47, which indicates that it may be overvalued at the present time. And with it being lossmaking and cash flow negative, it’s difficult to gain a sense of what the company is worth at the present time.

A less risky option

Sector peer Micro Focus (LSE: MCRO) offers far less risk as well as relatively high potential rewards. It has an excellent track record of profitability, which could be boosted by its acquisition of HPE. This is expected to generate synergies for the business and could also reduce its risk profile. The combined entity may offer greater diversification as well as improved efficiencies. This could not only have a positive impact on its bottom line, but also on investor sentiment in the stock.

While Altitude Group also has growth potential, it remains very risky. More share price gains can’t be ruled out, but due to the lower risk of Micro Focus it remains a better buy for the long term.

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