10 high-flying AIM stocks that could keep rising

Buying shares at a one-year high may sound counterintuitive, but research shows these fast-moving stocks often suffer most from pricing errors. Stockopedia's Ben Hobson reveals the best opportunities. 

This week marks the fifth anniversary of a change in UK tax rules that made smaller companies potentially much more appealing investments.

The move saw the government give the green light to hold Alternative Investment Market (AIM) shares in tax-efficient ISA accounts. This put most AIM stocks on an equal footing with Main Market companies. For investors, it now made much more sense to look at smaller shares as longer-term investments because they could be protected from capital gains taxes.

In the year or so that followed the 2013 change, several well-known company names joined the AIM market. Among them were firms like Bonmarche Holdings, Boohoo Group, Pets at Home Group, Safestyle UK, XLMedia, Bioventix and Fevertree Drinks. Some started well but hit problems later on. Others went on to deliver the sorts of seriously impressive returns that you’d struggle to find anywhere else in the UK market.

Overall, the AIM market has risen by 46% over the past five years since the rule changes took effect. Back then, AIM was home to 1,092 companies that were together worth £69.4 billion. Today the market has 942 companies that are worth £112.8 billion. In 2017 and into the first half of 2018 the AIM All-Share index outpaced all the other main UK indices.

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But while the market has produced some eye-catching performances in recent years, it’s still the case that it’s a destination for small, highly speculative stocks. These firms are often very risky, difficult to trade because of poor liquidity and prone to sudden collapses.

Hunting for top performing small-caps

Despite the risks, the potential for multi-bagger performance is an understandable draw for investors. There are many strategies that aim to find these kinds of fast-momentum stocks, but one that suits the AIM market well is the 52-Week High screen.

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 counterintuitive, but research suggests that it’s often these apparently fast-moving stocks the 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. With this in mind, here is the top 10 list of 52-Week High stocks on AIM at the moment. The screen has a minimum market cap limit of £25 million to remove the smallest firms. The table also includes each stock's Value Rank - from zero (expensive) to 100 (cheap). 

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

As you might expect in a screen that looks for shares with strong momentum, the valuations based on the ValueRank suggest that many are verging on expensive. They include names as diverse as the asset manager, Gresham Technologies, cloud computing firm IMImobile and real estate investor Conygar Investment Co (The). Some companies making the 52-Week Highs list have been on very long term runs, such as Elektron Technology and K3 Business Technology Group. Some have had very rapid recent moves, like Sosandar, while others are showing signs of recovery from sharp declines, such as Northbridge.

So, while the concept of the 52-Week High strategy is reasonably simple, it really is a starting point in understanding the kinds of smaller stocks that are found on growth markets like AIM. In each case, the drivers behind the run to a 52-week high can be very different. 

Even so, the point with this strategy is that new highs cause irrational behaviour in the minds of many investors, which may cause pricing inefficiencies. Knowing that some investors will recoil at buying stocks hitting new highs could itself be an opportunity for others.

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