London's junior market is home to the shares of a giddying array of businesses but, arguably, those that best capture the spirit of the junior market are small companies that have raised money to become tomorrow's blue-chips: companies promising high growth and massive share price gains. This screen aims to find businesses that are living this Aim dream.
Not only do Aim wonder stocks hold the potential for massive upside from explosive growth, but should they at some point move to the main market, there is the potential for share prices to benefit from a whole new army of buyers coming on board - especially if the shares become a constituent of an index favoured by tracker funds, such as the FTSE 250 or even FTSE 100.
The screening methodology I'm using to hunt down dream Aim stocks is the same as the strategy I use for my annual FTSE 350 'Great Expectations' screen. The approach has been very successful in selecting large companies that have delighted the market with their expectation-beating growth. Indeed, at the time of the last update at the start of 2016, the Great Expectations screen boasted a cumulative total return of 193 per cent over four years, compared with 39 per cent from the FTSE 350.
The screen looks for companies that have seen a large increase over the past 12 months in the earnings they are expected to achieve in their current and next financial years. Brokers' forecasts can be slow to react to changes in a company's circumstances, which is one of the reasons that upward changes to forecasts can be such a good way of identifying earnings momentum. However, the danger in this slowness of forecasts to react to events is that while expectations may have ticked up over the past 12 months, they could now be due a downward adjustment. As a check against this risk, the screen uses a series of price-momentum criteria to test whether market sentiment is still strong.
Finally, while broker forecasts are frequently wide of the mark - something this screen implicitly tries to exploit - the screen does want to see that there are expectations of good earnings growth, otherwise the upgrades to forecasts may prove to be of limited value.
The screening criteria is:
■ EPS forecasts for each of the next two financial years upgraded by at least 10 per cent over the preceding 12 months. ■ EPS growth of 10 per cent or more forecast for each of the next two financial years. ■ Share price momentum at least double that of the market over the past year and better than the market over the past one, three and six months. |
Aim stocks are often not very well followed by brokers which means forecasts are often even less reliable than usual in this part of the market. Looking principally for upgrade trends rather than focusing on forecasts themselves does help reduce the problems associated with this. All the same, I've limited this screen to the biggest and most followed stocks on Aim as represented by the constituents of the Aim 100.
Only two stocks passed all of the screen's eight tests (four price momentum tests, two upgrade tests and two forecast EPS growth tests). I've provided write-ups of these stocks below. Five more stocks passed the screen's key EPS upgrade tests but failed one of the other tests. These stocks are included with the two that scored full marks in the accompanying table.
One drawback with amazing growth stocks is that they have a tendency to command amazing ratings too. The forward earnings multiples boasted by the two stocks that passed all the screen's tests are a gargantuan 52 times for Fevertree (FEVR) and 61 times for boohoo.com (BOO). That's enough to make many investors balk. But the experience of Asos over the past three years is illuminating both in offering justification for such a reaction and insight into the potential opportunities lost from an overly rigid valuation discipline (investors are usually best advised to use an approach they instinctively are comfortable with). Incidentally, while Asos (ASC) is undeniably an Aim growth darling despite the turbulence of the last three years, it did not match enough of the screen's criteria to make the list; a reminder, should one be needed, that the list of seven stocks below should not be regarded as exhaustive.
| Asos: two cautionary tales about valuation In early 2014, online fashion retailer Asos announced it would miss sales targets and a few months later revised margin guidance downwards. A massive derating of the shares from a heady multiple of 94 times forecast earnings saw the shares tank from 7,050p to hit a low of 1,785p in October 2014. This was a graphic example of the valuation risk inherent in high-priced shares. But even at the share price low, the rating commanded by the shares was an eye-popping 38 times expected earnings. Investors who steered clear at that point, waiting for 'real' value to emerge would have missed out on the subsequent recovery to today's 5,303p, which puts the shares on 69 times forecast earnings. This looks a fine example of the opportunities that can be missed by being unwilling to pay up for growth. Unfortunately, while the lessons from Asos's experience over the past three years are very interesting, they are also rather contradictory. What we can say is that investors do need to be aware of valuation risk, but steering clear of seemingly high valuations can mean missing out on huge momentum-driven gains. |
SEVEN DREAM AIM STOCKS
