In April this year I wrote an article entitled Creating an Investment Universe. The purpose of the article was to describe my approach to screening the entire LSE universe of over 2000+ shares to come up with my own very limited investment universe based on strict financial criteria. That massively slimmed down universe, then forms a list of apparently financially strong stocks for further in-depth research. Of that 2000+ shares approximately half are located on the very hostile planet called AIM, a very inhospitable place with large areas reminiscent of the USA wild west with bandits, rustlers, snake oil merchants, Klondike prospectors, savages and medicine men. All in all, a difficult place for the settler venturing onto planet AIM to stake a claim and make a sustainable, risk-averse investment in his or her future.
Certainly, my approach to AIM during the period from its inception in 1995 to 2010 was simply to simply exclude AIM stocks from any screen; apart from the odd punt, I just would not consider making a serious investment in an AIM stock. My reasoning for excluding AIM was a combination of its lightly regulated market conditions, the spiv “Private Walker” type CEO’s, the abundance of “jam tomorrow” companies, the disappearing businesses and the exclusion until 2013 of AIM stocks from ISAs. From the planet AIM, there has always been the stories of the rapid 10 bagger, the resource prospectors that struck it rich mixed with a liberal sprinkling of tales of companies that are little short of fraudulent vehicles designed to make their directors very wealthy at the
I should say that within my non-ISA stocks I have had for years a sprinkling of non-AIM stocks mainly based on fairly careful selection but over the last five years, my number of AIM investments has rapidly increased to form around 50% of my ISA portfolio and 50% of my non-ISA portfolio. One of the reasons for this shift in percentage has of course been due to the eligibility of AIM stocks to be held within an ISA as from 2013. However, personally, that was very much a secondary consideration. The main reason for my increased numbers of AIM stocks was the realisation that in amongst that hostile planet AIM there existed some truly wonderful companies that are managed on a very sound financial basis. My approach is simply to screen the entire AIM community to come up with a tiny handful of stocks that meet my strict financial criteria that I apply to any stock listed on the main market. You know, sometimes I feel that investors who are reasonably successful on the main market and then take on AIM, are similar to successful businessmen who decide to become directors of football clubs. Once the successful businessman becomes that football club director, the usual common sense that has proved so sound in his business world is left behind and financial problems are not far behind. The fact is that any rules or investment philosophy that you apply on the main market must be applied “with bells on” to the AIM market and that is exactly what I try to do. I am not saying for a moment I have the perfect answer, I am sure I will get hit with the occasional profits warning, I know for near certainty that I won’t get the elusive “10 baggers” but that’s totally fine with me.
So over the past five years how have these hopefully less risky stocks performed that I have plundered from the inhospitable planet AIM? Well an analysis year by year and it’s really only a handful in fact 17 stocks from the hostile planet AIM’s population of 1000+ is given after the following notes:
2012: no new stocks identified; just two identified and these are ones also identified in 2011/12, DTG and NICL that as a basket of only two gave an annual average performance of 56.6%pa compared to the AIM all share average over the same period of 2.8%pa over the four-year period.
2013: three new stocks identified along with three stocks identified from previous years. The average annual return of this basket of six stocks was 19.5%pa compared to the AIM all share of 0.7% pa.
2014: Only one new stock identified and two previously identified stocks again confirmed as currently meeting my return on capital/cash flow criteria. The average annual performance over each of the following two years for this basket was 12.2%pa compared to the AIM all share at 1.8%pa.
2015: Three new stocks identified and a basket performance of 14.3%pa over the year compared to the AIM all share of 4.6%pa.
Over this period the strict financial screening of the inhabitants of planet AIM has worked very well for me and I have taken positions over the years in nine of the seventeen stocks identified for further consideration. I still hold legacy positions in all of the companies identified and also positions in companies identified over recent months.
The AIM stocks that I currently hold that have been identified by my return on capital/cash flow screen are DTG, TEF, AMO, NFC, CCT, IGR, SOM, ZYT & ABDP (sadly a late addition, should have bought earlier!).
One of the stocks TEF is currently going through some post-Brexit London property turbulence but I am confident enough to continue to hold.
I certainly can’t predict what the future will hold; will TEF be loved again soon, will ZYT’s unpredictable order book lead to a profits warning, I simply don’t know. What I do know is that by taking considerable care with AIM stocks I can greatly increase my chances of enjoying sustainable returns from a basket of stocks from the dangerous planet AIM.
I should also say that I do also purchase other shares on AIM that don’t strictly align with my return on capital/cashflow criteria but these themselves such as Bioventix, Tristel, Cambria will qualify for a purchase due to other criteria but good cash flow will always be a requirement.
Welcome to my Blog Page - I hope you find my whittling on to be of some interest. I am a private investor who is happy to share thoughts on the market and individual stocks. Please remember that I am definitely not offering tips or investment advice.