The Alternative Investment Market (Aim) deserves the attention of every serious investor. It's here that you'll find exciting investment opportunities with the potential for galloping growth, plus lots of sturdy small companies operating in a wide range of sectors. It's also a great way to watch companies and learn. But what should you buy? separating the winners from the losers isn't always an easy task so we've asked our Aim experts to select the best shares on the market. These are David Stevenson's picks.
Carlisle Group
Whichever way you look at it, Michael Ashcroft's personnel and recruitment specialist, Carlisle Group, is potentially cracking value. It's growing fast, yet its shares are lowly rated. Back in September, it brought out encouraging quarterly results, which showed sales of £95.4m (£86.8m in 2006) and operating profit of £1.1m (£0.7m in 2006). The main growth driver is its staffing services division, but there was even growth in the lower-margin outsourcing division. Sales there were up on the back of new contract wins and profits were stable.
None of this stops the City worrying about the low overall margin at 1.5 per cent, but the company is moving into higher-margin businesses. Carlisle certainly shouldn't be opulently valued by the City, but a forward PE ratio of lower than 6 for a company growing earnings at a steady 10 per cent to 30 per cent a year seems unreasonable, a view backed by the company's management, who have been quietly buying the shares in recent months.
European Equity Tranche Income
If the thought of investing in a hedge-fund (Ocean Capital)-run closed-end investment fund that invests in structured mortgage products fills you with horror, look away now. European Equity Tranche Income is a rather strange fish. It was brought to the market last year to capitalise on a niche investment idea - it invests in prime European mortgage packages, otherwise known residential mortgage-backed securities. The timing of the IPO wasn't great, especially when you consider that it invests in the non-investment-grade, equity-based parts of these debt packages. But the underlying assets are prime European mortgages (think French and Portuguese) and they haven't collapsed in value during this crisis - in fact, net asset value has stayed relatively stable around 98c (the assets are euro-based), equivalent to 72p a share. The board has been buying back shares yet the dividend payout looks fairly stable at 8c (5.88p) a year and, with the shares at 45p, that's equivalent to a yield of 13 per cent. This is not for widows and orphans, but potentially a great bet for contrarians and bargain hunters willing to do their own research.
Immunodiagnostic Systems Holdings
Investing in biotechs has been a rotten idea for years. Ever since the dot-com collapse, small biotechs have been hammered by the markets, downgraded as too high-risk with too few proven business models. Even worse, their older siblings - the huge pharma companies - have been almost as unpopular, dogged by concerns about the poor quality of future drug releases. But the worm may now be turning and well-run biotechs are starting to become popular, especially with acquisitive pharmaceutical companies looking for new drugs via the acquisition trail. And Immunodiagnostic Systems Holdings (IDS) is certainly well-run. It's profitable and has been quietly buying up equally profitable companies in its diagnostic testing sub-sector. Already companies such as BBI have been snapped up and IDS is fast turning into a quality, global play. Expect a takeover at above 300p a share.
Inland
You have to wonder about some people's sense of timing. The guys behind real-estate specialist Inland have a great track record in the housebuilding sector and last year they reckoned they were on to a new winner with the idea of setting up a specialist company that would bank huge amounts of development land and sell them on to desperate builders. It really is a smart idea - except when the market is drastically downgrading the whole real-estate and building sector. The shares have slumped back to NAV of around 40p and will probably carry on falling in the first half of 2008 off the back of earnings downgrades in the housebuilding sector. But don't despair - this is a smart company with a proven track record and, sooner or later, these shares will seem like brilliant long term value, especially at anything close to 30p a share.
Impax
Impax is in the right place at the right time. Interest in renewable technologies is intense and, although this sub-sector will probably cool a little bit in the first half of 2008, the momentum propelling the sector is obvious: climate change, regulatory change, and higher oil prices. That leaves Impax in the sweet spot - it has built up a brilliant reputation as an asset manager in this space and its managers are widely regarded as some of the best in the industry. There are potentially endless investment ideas in this booming sector and Impax has the brand name to deliver on them, especially as it was something of a pioneer. Its shares have nearly doubled in the past year, yet there's probably more to come - its directors certainly have faith and have been snapping up the shares. I'd bet on a takeout by a much bigger bank looking to buy expertise in the sector.
Spaceandpeople
SpaceandPeople is a microcap (valued at £18m) that's going places fast. SpaceandPeople markets, sells and administers promotional space in a variety of high-footfall venues across the UK, including shopping centres, service stations and airports and it's recently kicked off expansion into both Germany and France. Go to a popular shopping centre and you'll probably see adverts that originate with this outfit - it boasts a huge database of contacts and it will arrange all the advertising sales for the shopping centre opener. It's certainly a niche, but it's a valuable and profitable one and SpaceandPeople is probably on the radar of much larger media and ad agency companies looking to buy a leading role in this small but fast-growing market.
Stanley Gibbons
Stanley Gibbons is riding the alternative assets boom. Rather like Noble in the coins space, Stanley Gibbons is building a strong global franchise in selling investment-grade stamps to investors looking to diversify out of equities. Whether stamps will ever be anything more than a very small global niche is open to question and there must be some concerns about a global slowdown that prompts a sell-off of all alternative assets. In the past, assets like stamps have been badly hit by this kind of bearish sentiment but at the moment business is booming and Stanley Gibbons is growing fast, with earnings for next year expected to increase by more than 30 per cent, yet the shares remain good value at 15 times 2008's projected earnings.
Advanced Frontier Markets
Advanced Frontier Markets is a fantastic play on the next great alternative asset in global investing - frontier markets. These markets are one step behind the emerging economies of the so-called 'Bric' countries (Brazil, Russia, China and India) - countries such as Saudi Arabia, Pakistan and Egypt still have a long way to go before they're properly integrated with the global economy. But the potential - even in crisis zones like Pakistan - is huge if you use fund managers who truly know the local investment markets. That's the idea behind this specialist outfit - run by Progressive - which is based on a fund-of-funds approach. Progressive's record with its existing emerging markets investment trust has been stellar and this fund has even more potential, although it could be hugely volatile. This is one for the patient long-term investment trust specialist who understands the risk.
Bond International
Bond International is the epitome of the pure growth stock. It's made many investors an awful lot of money and its fans reckon there's more good news to come. For the past four years, both sales and profits have been steadily growing - since 2003 sales have shot up from £7m to £17m and earnings have leapt up from under £500,000 to £3.6m, with £4.5m forecast for 2008 (equivalent to 12p a share). That puts this rock-solid human resources software specialist on a forward PE rating of just under 14, which seems bizarre for a company with such a great track record. It's even more bizarre when you consider that, in the past two years, it's made a series of careful acquisitions that will broaden its online recruitment offering into related but separate personnel markets such as the public sector and education. If fast-growing, well-managed small caps are destined to do well in 2008 - as many commentators predict - Bond will be a star.
India Capital Growth
India Capital Growth was one of the first specialist investment companies to float on Aim that targeted the sub-continent - and it's still one of the best. Backed by money from the Caledonia investment trust, this quality fund targets listed small caps and also acts like a venture capitalist/private equity company in the unlisted sector, targeting stakes in companies as varied as textile outfit Kumars and Indian broadband operator IOL. There are real concerns that India may eventually hit the wall (rotting infrastructure and bureaucratic interference remain key concerns) but, at the moment, there seems no evidence of a slowdown and, in the past six months, the fund’s NAV leapt by 25 per cent (to 139p). The directors have been steadily buying the shares, and investors looking for a smart way to buy into the next big success story - smaller-cap Indian stocks - might think about starting with IGC. If you're willing to take the risk, you might want to take a look at the warrants (IGCW), which will amplify returns in the next few years and could deliver explosive growth.
David Stevenson is a freelance contributor to the Investors Chronicle and many other publications, and the creator of the IC Stock Screening Newsletter.
