The central principle of the junior Alternative Investment Market (Aim) is to provide small growth companies with the capital they need to realise their potential. So it seems fitting that an Aim screen should focus on hunting down high-growth stocks. Another key characteristic of the Aim market is that it is off the radar of many large institutional investors and, as such, is a place where private investors can find overlooked, under-researched and undervalued situations. So it also only seems right that our Aim screen should also try to find undervalued shares. With this in mind, I've attempted to concoct a screen that brings together both factors to unearth cheap, high-growth stocks.
The screen draws on the method of famous US fund manager Peter Lynch by using EPS growth rates as the primary screening criteria. When looking for high-growth shares, Mr Lynch was interested in earnings growth rates of over 20 per cent, but was cautious about anything over 50 per cent as this is probably too high to be sustainable for long. But Mr Lynch concentrated his search for stocks on larger companies. Given that the focus of my Aim screen is on early-stage growth, I've differed from his methodology and set the limit on growth at between 20 per cent and 100 per cent as I don't want to exclude companies in a really explosive stage of their development. To test the veracity of EPS growth, I've demanded that historic revenue growth is equivalent to at least half historic EPS growth. The logic behind this test, which draws an approach advocated by another famous American fund manager, John Neff, is that sustainable EPS growth must ultimately be supported by sales growth.
As a valuation yardstick, I am using the 'genuine-value' ratio I devised earlier this year. The ratio has much in common with many well-known investors' preferred valuation metrics, including the 'dividend-adjusted' price-to-earnings-growth (PEG) ratio used by Mr Lynch. The main difference with the genuine value ratio is that it tries to take account of the debt and cash on a company's balance sheet by employing the enterprise-value-to-operating-profit ratio (EV/Ebit) in place of the ubiquitous PE ratio. The formula is:
I'm only interested in companies with genuine-value ratios lower than the median average. It is also worth noting that the mere fact that a company has brokers putting together forecasts and, in the case of the growth rate test, has a three-year EPS growth track record, acts as a basic quality check for the stocks being screened. Indeed, it was only possible to calculate a genuine-value ratio for 206 of the 829 Aim stocks that I screened. I've also eliminated all stocks that have a forward PE ratio that is among the most expensive quarter of all stocks screened, as these shares are likely to be particularly vulnerable if growth does not live up to expectations. The other criteria I've used for the screen aim to make some basic checks on balance sheet strength. The full screening criteria are:
EIGHT CHEAP, HIGH-GROWTH AIM SHARES
As well as the general weakening in sentiment towards resources companies, Circle Oil's (COP) shares have taken a hit due to political unrest in North Africa - the geographical focus of its oil exploration and production interests. But the company is showing encouraging signs of making underlying progress. Net production increased almost 50 per cent in the recently reported first half and operating cash flow was almost 70 per cent higher. The company has also recently reported some good drilling results in Egypt and more exploration work is expected to get under way in the second half. Based on the company's projects, broker Investec Securities puts a 68p value on the shares, although its EPS growth forecasts vary to those in our table, with predictions of 48 per cent underlying growth this year followed by a modest 6 per cent fall.
| Mkt cap | Price | PE | NTM PE | DY | GV | Net debt |
|---|---|---|---|---|---|---|
| £101m | 18p | 6.3 | 4.4 | - | 0.11 | -$6.6m |
| 3-yr EPS CAGR | 3-yr Rev CAGR | EPS gr + 1 | EPS gr + 2 | Rev gr + 1 | Rev gr + 2 | 3-mth mom |
|---|---|---|---|---|---|---|
| 57% | 35% | 51% | 29% | 31% | 20% | -1.4% |
Source: S&P Capital IQ
Last IC view: Buy, 20p, 5 Sep 2012
The big uncertainty currently faced by Gibraltar-based 32Red (TTR), and probably the key reason for the value on offer, is the UK government's plans to bring in a point-of-consumption gambling tax. This could hit 32Red hard given its reliance on the UK market. That said, the company is a canny operator and has a record of achieving strong growth at a player-acquisition cost that is significantly lower than rivals. The company is also expanding overseas with encouraging early signs coming from its move into Italy. The forecasts in our table may slightly over-egg the growth opportunity as Numis puts 2013 growth in the region of 54 per cent followed by 21 per cent the year after then 18 per cent in 2015. But for those that can stomach the regulatory risk, that's not that bad for a forward PE ratio of just 12.
| Mkt cap | Price | PE | NTM PE | DY | GV | Net cash |
|---|---|---|---|---|---|---|
| £44m | 62p | 22 | 12 | 2.3% | 0.22 | £6.3m |
| 3-yr EPS CAGR | 3-yr Rev CAGR | EPS gr + 1 | EPS gr + 2 | Rev gr + 1 | Rev gr + 2 | 3-mth mom |
|---|---|---|---|---|---|---|
| 66% | 33% | 88% | 64% | 24% | 18% | 15% |
Last IC view: Buy, 54p, 19 Sep 2013
Brownfield regeneration specialist Inland Homes (INL) is in a real sweet spot at the moment. The company specialises in increasing the value of land by pushing it through the planning process - it currently has a land bank of about 2,300 plots - and also has a number of mixed-use developments on the go. Given the nature of the business and the high sensitivity of profits to house prices, the government's attempts to stimulate the housing market with policies such as the Help to Buy mortgage guarantee scheme are a massive boon for Inland. The company is also taking advantage of the government's efforts to make it easier to convert buildings such as offices to residential use by buying up buildings and readying them for conversion to flats. With the government seemingly heavily focused on revving up the housing market, Inland's profits could soar over coming years.
| Mkt cap | Price | PE | NTM PE | DY | GV | Net debt |
|---|---|---|---|---|---|---|
| £78m | 39p | 20 | 14 | 0.7% | 0.32 | -£3.9m |
| 3-yr EPS CAGR | 3-yr Rev CAGR | EPS gr + 1 | EPS gr + 2 | Rev gr + 1 | Rev gr + 2 | 3-mth mom |
|---|---|---|---|---|---|---|
| 43% | 23% | 42% | 35% | 25% | 38% | 30% |
Last IC view: Buy, 27.8p, 20 Mar 2013
Fund management group Polar Capital (POLR) has been enjoying strong growth in assets under management, with a rise of 42 per cent reported last year. The group has been benefiting particularly from the reputation of its Japanese funds as investors flock to buy into the region in order to benefit from 'Abenomics'. Cash generation should improve as the business grows and analysts believe the group has the infrastructure in place that will support significant growth. Polar Capital has recently announced plans to launch a global convertible bond fund, which adds to its growth prospects and will also help to further diversify the business. The shares also offer a decent yield and boast the highest payout of any of the stocks making it through the screen. Broker Cantor predicts the payout will get much better in the future, too, and has pencilled in an increase in the yield to 4.7 per cent in 2014 and a bumper 5.9 per cent in 2015.
| Mkt cap | Price | PE | NTM PE | DY | GV | Net cash |
|---|---|---|---|---|---|---|
| £366m | 450p | 34 | 19 | 2.9% | 0.32 | £62m |
| 3-yr EPS CAGR | 3-yr Rev CAGR | EPS gr + 1 | EPS gr + 2 | Rev gr + 1 | Rev gr + 2 | 3-mth mom |
|---|---|---|---|---|---|---|
| 64% | 34% | 61% | 45% | 35% | 28% | 13% |
Last IC view: Hold, 400p, 17 June 2013
Mobile software developer Globo (GBO) is benefiting from the so-called 'bring-your-own-device' (BYOD) revolution, where workers are increasingly keen on using all manner of computers - smartphones, tablets, laptops and desktops - to carry out tasks. Last month the group reported that sales of its GoEnterprise business software were up 132 per cent in the first half to €10.2m (£8.7m), helping overall sales rise 52 per cent to €32m. Management reckons the BYOD trend will continue to accelerate and the company's prospects in this competitive market are being helped by a distribution agreement in the US with Ingram Micro. Globo has also recently agreed a €20m three-year borrowing facility which should help it fund further growth.
| Mkt cap | Price | PE | NTM PE | DY | GV | Net cash |
|---|---|---|---|---|---|---|
| £285m | 84p | 15 | 13 | - | 0.35 | €11m |
| 3-yr EPS CAGR | 3-yr Rev CAGR | EPS gr + 1 | EPS gr + 2 | Rev gr + 1 | Rev gr + 2 | 3-mth mom |
|---|---|---|---|---|---|---|
| 48% | 27% | 33% | 28% | 48% | 39% | 109% |
Last IC view: Buy, 65p, 23 Sep 2013
Northbridge Industrial Services
Northbridge's (NBI) strategy of selling and hiring equipment to niche industrial markets has been producing strong growth. In late July, the company reported on a particularly strong first half aided by its investment in new fleet prior to an upsurge in demand for hiring. At the time of the half-year results, Northbridge also spent £6.6m acquiring an Asian distributor which should add to the company's growth prospects and is the first acquisition it has made in two years. Northbridge is benefiting from a number of market trends including the increased threat of power outages at the operations of customers that need to guarantee continuous supply. The forward PE ratio of 13 looks very undemanding based on both the growth record and forecasts.
| Mkt cap | Price | PE | NTM PE | DY | GV | Net debt |
|---|---|---|---|---|---|---|
| £72m | 421p | 14 | 13 | 1.3% | 0.57 | -£11m |
| 3-yr EPS CAGR | 3-yr Rev CAGR | EPS gr + 1 | EPS gr + 2 | Rev gr + 1 | Rev gr + 2 | 3-mth mom |
|---|---|---|---|---|---|---|
| 14% | 35% | 32% | 23% | 21% | 15% | 16% |
Last IC view: Buy, 423p, 16 Sep 2013
While strong growth is still in consensus 2014 forecasts for wealth management firm Brooks Macdonald (BRK), the company itself has told the market to expect a flat year due to the fact that it needs to make heavy investment in its business to support growth. In some ways, that means Brooks should be booted out of the screen. But if management is right, this is a one-year hiatus in what has otherwise been an exemplary growth record. What's more, broker Peel Hunt points out that on a cash-adjusted PE basis, the stock is now one of the cheapest in the wealth management sector with a multiple of 15 times expected earnings in the 2013 calendar year compared with a sector average of 17.8 per cent. If growth takes off again following this year's big spend, it could prove a good time to buy.
| Mkt cap | Price | PE | NTM PE | DY | GV | Net cash |
|---|---|---|---|---|---|---|
| £179m | 1,366p | 21 | 17 | 1.6% | 0.66 | £18m |
| 3-yr EPS CAGR | 3-yr Rev CAGR | EPS gr + 1 | EPS gr + 2 | Rev gr + 1 | Rev gr + 2 | 3-mth mom |
|---|---|---|---|---|---|---|
| 22% | 22% | 24% | 20% | 17% | 13% | -2.6% |
Last IC view: Hold, 1,392p, 11 Sep 2013
First-half profits soared at semiconductor wafer manufacturer IQE (IQE) this year as the group benefited from significant investment in increased capacity, technological advances and three acquisitions. Strong growth in the group's wireless division was a key driver aided by its acquisition of Kopin Wireless earlier this year. Significant savings are expected from last year's acquisition spree including £7m from Kopin alone. Meanwhile, the group's expansion has made it less vulnerable to the vagaries of its end markets. While growth in 2013 is forecast to be very impressive, the full benefit of the recent strategic activity will not be evident until 2014.
| Mkt cap | Price | PE | NTM PE | DY | GV | Net debt |
|---|---|---|---|---|---|---|
| £196m | 30p | 21 | 11 | - | 0.68 | -£38m |
| 3-yr EPS CAGR | 3-yr Rev CAGR | EPS gr + 1 | EPS gr + 2 | Rev gr + 1 | Rev gr + 2 | 3-mth mom |
|---|---|---|---|---|---|---|
| 8% | 22% | 46% | 49% | 61% | 34% | 46% |
Last IC view: Buy, 30p, 19 Sep 2013
