Since I first ran my cheap, high-growth Aim screen 12 months ago, it hasn't been the easiest time to be an investor in the junior market. Things began well enough with the Aim All-Share index delivering a 13.8 per cent total return from when the screen was published (15 Oct 2013) through to early March. However, it has been pretty much all downhill for Aim from there, with the index now sporting a sorrowful 5.4 per cent negative total return for the year as a whole. It was a challenging time for the stocks picked by my screen as well. While they have outperformed the market overall, delivering a negative return of 3.4 per cent, there were some real horror stories among the stocks selected by the screen as well as a few heroic performances from the likes of Northbridge Industrial Services (see table).
| Name | TIDM | Total Return (15 Oct 2013 - 6 Oct 2013) |
|---|---|---|
| Northbridge Ind. Serv. | NBI | 39.5% |
| Circle Oil | COP | 17.0% |
| Inland Homes | INL | 10.6% |
| Brooks MacDonald | BRK | 1.2% |
| Polar Capital | POLR | -5.6% |
| 32Red | TTR | -9.6% |
| Globo | GBO | -38.3% |
| IQE | IQE | -40.5% |
| Average | - | -3.4% |
| FTSE Aim All Share | - | -5.4% |
Source: Thomson Datastream
By its nature, Aim is a risky market to invest in and with the recovery having become more established investors seem to have become more 'risk aware' over recent months, which has put a brake on performance. In fact, while some of the disappointments from last year's portfolio encountered trading difficulties, others, such as Globo (see write up below), have largely been victims of a change in sentiment.
Source: Thompson Datastream
A positive aspect of the tough market conditions is that a lot more companies are now qualifying for this screen. What's more, given the increased volatility in the market, some comfort can be taken from the fact that a larger number of stocks have come through the screen this year than did in 2013. This greater diversity should reduce the risks. In all, 19 shares have qualified compared with the eight shares that were highlighted in 2013.
The screen itself puts a lot of onus on forecast growth. When it comes to small-caps, these forecasts can be particularly changeable on both the upside and the downside. It also looks for 'value' based on a souped-up version of the price-to-earnings (PE) growth ratio that I've christened the 'genuine value' (GV) ratio. This ratio attempts to take account of dividends paid, and a company's net debt/cash position as well as its valuation compared with earnings and expected earnings growth rate. The formula is:
Enterprise-value-to-operating-profits ratio/dividend yield plus average forecast growth for the next two fiscal years (EV/Ebit) / (DY + average EPS FY+2-yr growth) |
The full list of criteria is:
■ Average forecast EPS growth rate over the next two financial years of more than 20 per cent but less than 100 per cent; ■ Three-year revenue CAGR equal to at least half three-year EPS CAGR; ■ A genuine-value ratio of less than the median average; ■ Forward next 12-month PE ratio outside the most expensive quarter of stocks screened; ■ Net debt/cash profit (Ebitda) of less than 2.5 times; ■ A current ratio (current assets/current liabilities) of more than 1. |
In the write-ups below I have focused on four stocks showing the most extreme merits on four different measures: three-month momentum, dividend yield, GV ratio and forecast PE ratio. The other stocks to pass the screen are listed in the table that follows.
CHEAP, HIGH-GROWTH AIM SHARES
Highest three-month momentum
