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Three Cheap, High-Growth Aim Shares

After a year strolling Aim's field of dreams, my Cheap, High-Growth Aim Shares screen has amassed a total return of 18.5 per cent, compared with 6.5 per cent from the Aim All-Share index
October 14, 2015

The excitement the Alternative Investment Market (Aim) evokes in many investors often centres on the huge gains it is possible to make from finding the right go-to growth stock. My Cheap, High-Growth Aim Shares screen hit upon one such situation last year when it picked Trakm8. The shares delivered a flabbergasting total return of almost 250 per cent over the 12 months. What's more, even after that amazing run the shares can hardly be seen as expensive given that they make a reappearance amongst the screen's picks for this year, too.

There were actually nine shares from Aim that produced higher returns than Trakm8 over the 12 months, all of which considerably outflanked the biggest risers from the FTSE All-Share index (see table).

 

Top 10 total returns from Aim vs FTSE All-Share

FTSE Aim All-ShareFTSE All-Share
NameTotal return (14 Oct 2014 - 7 Oct 2015)NameTotal return (14 Oct 2014 - 7 Oct 2015)
Optibiotix Health415%Betfair194%
Fitbug400%JD Sports139%
Formation Group400%XAAR132%
Daniel Stewart*364%Greggs109%
CEB Resources336%McBride104%
Kibo Mining315%Oxford BioMedica100%
AFC Energy305%Taylor Wimpey96%
Tiziana Life Sciences300%Crest Nicholson96%
Victoria261%Marshalls95%
Trakm8245%OneSavings Bank93%

Source: Thomson Datastream *Shares suspended

 

The success stories from last year's screen may present the case for Aim, but its failiures also represent a case for the opposition. Among the big fallers from the 19 shares selected were a number of companies that were hit by the falling oil price and reduced capital expenditure by the industry.

 

2014 performance

NameTIDMTotal return (14 Oct 2014 - 7 Oct 2015)
Trakm8TRAK245%
James CropperCRPR76.9%
32RedTTR57.3%
Solid StateSOLI48.2%
NewRiver RetailNRR28.0%
Hydro IntHYD27.4%
Stadium GroupSDM26.2%
Brooks MacDonaldBRK26.0%
Sprue AegisSPRP19.9%
GloboGBO4.3%
SQSSQS0.6%
Plastics CapitalPLA-4.4%
Kalibrate TechKLBT-5.3%
InternetQINTQ-13.2%
MP EvansMPE-17.2%
Escher GroupESCH-22.3%
Belgravium TechBVM-24.0%
Amerisur ResourcesAMER-48.2%
Pressure TechnologiesPRES-74.4%
Average-18.5%
FTSE Aim All-Share-6.5%

Source: Thomson Datastream

In all, almost 60 per cent of last year's share picks outperformed the 6.5 per cent total return from the FTSE Aim All-Share index. With the help of the knock-out performance from Trakm8, the overall total return came in at 18.5 per cent. The cumulative total return from the screen now stands at 4.8 per cent over the two years I've run it, compared with a negative 5.8 per cent from the index. If I factor in a 2 per cent charge to account for the high dealing costs associated with small-caps, the cumulative total return drops to 2.7 per cent.

 

Cheap, High Growth Aim Shares vs Index

 

Relative to the market, the screen's performance can be said to be decent, but I feel it has yet to really distinguish itself. That said, the methodology certainly seems capable of turning up some interesting situations - even if these do come accompanied by some less welcome investment ideas. The valuation criteria the screen uses is based on a cash and dividend-adjusted price-to-earnings-growth ratio, which I've taken to calling a genuine value (GV) ratio. It is calculated as follows:

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 rest of the criteria for the screen centre on a hunt for high forecast earnings growth, although growth that looks suspiciously high (an average of over 100 per cent for the next two financial years) is ignored. Broker forecasts for small caps can be very subjective and the screen also seeks a bit of comfort from a sound balance sheet. Where earnings growth has been achieved historically, the screen wants to see that it is supported by sales growth. The full screening criteria are:

■ 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 compound annual growth rate (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.

This year, 17 shares were highlighted by the screen. I've taken a closer look at the shares showing the best momentum, offering the highest dividend yield and trading on the lowest PEG. Fundamentals for these shares along with the other qualifying stocks are presented in the table that follows, which is ordered by three-month share price momentum.

 

Three cheap, high-growth Aim shares

Highest three-month share price momentum