10 AIM stocks for risk averse investors

AIM stocks are capable of explosive growth, but also carry extra risk. Stockopedia's Ben Hobson names 10 high-quality shares with appealing valuations and positive momentum.
 

Sixteen companies left the Alternative Investment Market (AIM) last year because of financial stress or insolvency. That was up from nine companies that suffered the same fate in 2017. Added together with those firms that hit problems but muddled through (with broken reputations and battered share prices), it’s a reminder of just how perilous the AIM market can be. So how can you try to avoid these kinds of problems?

AIM is popular with investors looking for the kind of explosive growth that you often only get with smaller, less well-known companies. Relatively low levels of good quality research mean that it’s possible to find gems hidden among AIM’s wild expanse of stocks.

Indeed, there have been some great examples of this kind of growth in recent years. In bullish conditions, some names have enjoyed big re-ratings. Among them have been companies like Burford Capital (LSE:BUR), Fevertree Drinks (LSE:FEVR), Abcam (LSE:ABC), Boohoo (LSE:BOO) and Clinigen (LSE:CLIN). 

But while AIM has had successes, the trade-off for investing in such a fast-growth, light-touch environment is that things can go wrong. Unlike the main market, where corporate distress is often flagged by analysts, AIM calamities can take everyone by surprise. 

Last year, a prime example of this occurred at Patisserie Holdings (LSE:CAKE). During the year, the group behind the Patisserie Valerie chain of cafes - which is majority owned by the chairman and entrepreneur Luke Johnson - was plunged into chaos by an accounting crisis. The full details of what could be a serious fraud still aren't known. But the shares have been suspended for more than three months while investigations take place. For investors in what was once highly regarded as a profitable roll-out, the future is very uncertain. 

But Patisserie Valerie wasn't the only disappointment. In 2018, there were accounting reviews launched at companies like Utilitywise (LSE:UTW) and Yu (LSE:YU.), which dragged heavily on the share prices of both firms. And for several other AIM-listed firms, financial distress actually proved to be disastrous.

Each collapse came with its own sorry story. Some were broken models, others badly managed and at least one looked criminal. Among the names were companies like Fishing Republic (LSE:FISH), Crawshaw (LSE:CRAW), Rex Bionics, Flowgroup (LSE:FLOW), Conviviality and MySQUAR (LSE:MYSQ). 

In some cases, the likelihood of collapse was flagged by analysts. But while it's possible to predict problems in some firms, it's not quite so easy in others. So how can you avoid these kinds of problems? 

One answer is to look for stocks that have high exposure to financial and business quality, appealing valuation and positive momentum. At Stockopedia, our philosophy is to look for a blend of high exposure to these factors and to diversify between industry sectors. 

To offer an idea about how that can look we've constructed a simple screen for the AIM All Share (minimum market cap: £50 million) and taken the highest-ranking share from each sector. We've included their investment 'styles' and their RiskRatings based on historic price volatility. Here's the list:

Source: Stockopedia   Past performance is not a guide to future performance

This kind of approach can offer some hints about sector leaders and stocks that are perhaps better protected from the financial distress and accounting problems that can afflict smaller firms. Focusing on quality, value and momentum can provide a steer away from more speculative, over-priced and perhaps deteriorating stocks.

So for investors considering AIM as a venue for finding exciting new growth stocks in 2019, there are a few warnings. While the market has been home to some excellent investments in recent years, there are always vulnerabilities in small-caps. Accounting errors and financial distress can be hugely damaging and sometime fatal. 

To try and avoid these problems it’s worth considering the investment profile of any stock and considering the strength of its quality, value and momentum. There are no failsafe options when it comes to protecting from disaster, but knowing how to spot the most vulnerable firms is essential.

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