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10 AIM stocks that are hitting new highs

Five years on from the UK tax revamp, Stockopedia's Ben Hobson takes a look at10 high-performing AIM stocks
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AIM has grown in value by 46% since the tax changes took effect

Last week marked the fifth anniversary of a change in UK tax rules that transformed the investment appeal of many smaller companies.

In 2013, the government gave the green light to hold Alternative Investment Market (AIM) shares in tax-efficient ISA accounts. Instantly, it put most AIM stocks on an equal footing with Main Market companies. For many investors, it meant that smaller firms were now a much more appealing prospect from a long-term buy-and-hold perspective, sheltered from the drag of capital gains taxes.

In the year or so that followed, several well-known names joined the AIM market. Among them were firms like Bonmarche, Boohoo, Pets at Home, Safestyle, XLMedia, Bioventix and Fever-Tree. Some started well but hit problems later on. Others went on to deliver seriously impressive returns that you’d struggle to find anywhere else in the UK market.

Overall, AIM has grown in value by 46% in the five years since the tax changes took effect. Back then, the market was home to 1,092 companies that were together worth £69.4bn. Today, there are 942 companies that are worth £112.8bn. For much of the past 18 months, the AIM All-Share index outpaced all the other main UK indices.

While there have been some impressive successes, AIM remains home to hundreds of small, highly speculative stocks. These firms (and they don’t even have to be that small) can be risky, difficult to trade because of poor liquidity and prone to sudden collapses. In recent years there have been examples of firms suffering from poor management, fraud, bad luck and tough competition in any combination.

But despite these risks, the tax incentives and the potential for multi-bagger performance are an understandable draw for investors. It’s also undeniable that there are some really excellent companies quoted on AIM.

Hunting for top performing small-caps

To get an idea about which stocks are currently catching the eyes of investors, a useful strategy to start with is the 52 Week Highs Screen - and this AIM-focused version of it.

I cover this screen every so often but, as the name suggests, 52 Week Highs is all about focusing on shares that are already trading around their one-year price highs. It sounds counter-intuitive, but some research suggests that it’s often these apparently fast-moving stocks that suffer the most from pricing errors.

One observation is that shares hitting new highs very often drift higher in price over the coming weeks and months. This upward trend is known as “post-earnings announcement drift”. It’s believed to be caused by investors being slow to adjust their views and bid prices higher - even when prices deserve to be higher. When new earnings news about that share is published, particularly if it’s a positive earnings surprise, the price may well be slow to respond. It’s this lag that the 52 Week High strategy seeks to profit from.

The good news, of course, is that 52 Week Highs are easy to track down - they’re printed in newspapers and websites all over the place. Of course, we can do a bit more filtering - and this screen strips out high spreads (500 bps max) as well stocks with market caps of less than £25mln.

As always, I’ve added the Value Rank and Momentum Rank to get a deeper idea of the strength of price and earnings momentum in these shares and how that may have influenced their valuations.

Name

Mkt Cap £m

% vs. 52w High

Momentum Rank

Value Rank

Sector

Murgitroyd

61.7

-

82

50

Industrials

IMImobile

240.4

-0.81

97

11

Technology

Gresham House

94.5

-0.84

97

9

Financials

IG Design

427.6

-0.99

99

19

Basic Materials

Abcam

3,115

-1.11

98

4

Healthcare

Next Fifteen Comms

469.3

-1.16

98

17

Consumer Cyclicals

Focusrite

292.9

-1.18

88

14

Technology

K3 Business Technology

103.9

-1.22

81

23

Technology

Conygar Investment

106.7

-1.26

76

17

Financials

Versarien

231.9

-1.27

96

3

Industrials

Of course, with a screen that looks for shares with strong momentum, the valuations based on the ValueRank suggest that some are verging on expensive. They include names as diverse as the intellectual property specialist Murgitroyd and the cloud computing firm IMImobile.

In turn, when you combine 52-week Highs with Stockopedia’s StockRanks-inspired framework for thinking about investment profiles, you find both High Flyers like IG Design and K3 Business Technology but also potential Momentum Traps like Gresham House and Versarien.



So while the concept of the 52 Week High strategy is pretty simple, it really is just a starting point in understanding the kinds of smaller stocks that are found on growth markets like AIM. Over the past five years, the junior market has seen some blistering successes, but occasionally these have proved to be short-lived - so it’s important to take care with fast momentum stocks.

That said, the point with this strategy is that new highs cause irrational behaviour in the minds of many investors, which may cause pricing inefficiencies. This has been an important discipline for those who’ve managed to ride some of AIM’s biggest success stories in recent years. Knowing that some investors will recoil at buying stocks hitting new highs could itself be an opportunity for others.

Originally published at www.stockopedia.com.


Disclaimer: This content should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.

 

 

 

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