AIM horror show: an analysis of January’s small-cap crash

AIM shares have had a terrible January, underperforming their large-cap cousins. Award-winning AIM writer Andrew Hore explains what just happened, why it took place, and where opportunities might be.

January was a turbulent time for AIM and some of its larger companies in particular. There was a 10% fall in one month and some heavy losses by renewables and pharma companies. In contrast, the FTSE 100 index rose 1.1% during the month. It appears that investors are seeking value and recovery potential rather than more speculative investments.

The lower rated sectors and markets have been outperforming in most markets around the world this year. Companies in higher rated sectors, such as technology and pharma, are more likely to be among the highest fallers, and there have been earnings downgrades in these sectors, according to figures from analysts at Edison. In contrast, there have been substantial upgrades for fossil fuel firms.

This reflects the heady ratings that the technology and pharma shares had been trading on. It is not just AIM that has been hit by these companies going out of favour. Nasdaq has also been declining on the back of share price reversals for strongly performing companies during 2021. Any company disappointing the market will be hit by a share price slump.

• Lee Wild's AIM share for 2022
• Top 25 most-traded companies on AIM
• 10 shares to give you a £10,000 annual income in 2022

Taking a longer-term view, AIM is still outperforming the FTSE 100 in the period since the beginning of 2020. AIM is 13% higher, while the FTSE 100 is down by 0.6%. However, if dividends are taken into account, then the FTSE 100 has made a positive total return since the beginning of 2020.

The weightings of different sectors on AIM and the Main Market, and in the relevant index measurements, mean that they will move in different ways. It is not just because of the differing sizes of companies, although investors are going for shares with a stronger base business rather than for hope.

AIM trading levels remain relatively high compared with past years, but January 2022 trading was lower than one year earlier. Year-on-year, the number of trades fell from 2.16 million to 1.56 million and their value slipped from £11.2 billion to £7.8 billion. This January was still the best trading month since June 2021 and it was at a level that is better than averages for previous years other than 2021.

The FTSE AIM 100 has fallen even more than the FTSE AIM All Share. It was 12.2% lower in January, although it is still 5.6% higher than at the beginning of 2020, which is an even more significant underperformance. These larger AIM companies are generally more liquid than the smaller ones so they will be easier to trade, and some investors will have seen the gains they have made in the past couple of years and decided to take profits.

Fuel cell technology developer Ceres Power (LSE:CWR) and cell engineering services provider MaxCyte (LSE:MXCT) were both nearly 39% lower, while Avacta (LSE:AVCT), which withdrew a Covid-19 test due to doubts of its effectiveness in identifying the Omicron variant, fell by nearly one-third. Fuel cell and electrolyser companies ITM Power (LSE:ITM) and AFC Energy (LSE:AFC) were 31% and 29.5% lower respectively.

These companies have little in the way of fundamentals to shore up a share price and they have performed strongly since Covid-19 became a major factor. There is no profit and little chance of a dividend for many years. Ceres Power has forecast revenues of £30.7 million, which is more than any of the other four, and it is valued at more than £1 billion.

All of the worst five performers are still much higher than at the beginning of 2020. The share prices had all at least doubled by the end of January 2022.

• Five AIM share tips for 2022
• From AIM to Main: does moving markets make sense?

Market research firm YouGov (LSE:YOU) is the sixth worst performer in the AIM 100 and, unlike the others, it is profitable and pays a dividend. At the end of January, YouGov said that full-year results would be slightly ahead of expectations, yet the share price fell by 27.5% during January. Even after the fall the prospective multiple is more than 46 and the yield is 0.8%. Email marketing firm dotDigital (LSE:DOTD) is another profitable and growing company that has slumped by around one-quarter, but the prospective price/earnings (PE) ratio is still 35.

There were 82 fallers and 15 risers in the AIM 100 in January. Mixer drinks supplier Fevertree Drinks (LSE:FEVR), which has the largest weighting in the AIM 100, slumped by 21%.

ITM Power had the fifth-highest weighting in the AIM 100 at the end of December. It was equivalent to 2.54% of the index but it has fallen out of the top 10 since the share price slump – currently the 10th highest weighting is aggregates producer Breedon (LSE:BREE) with 2.22%.

The opposite has happened with budget holidays and airline operator Jet2 (LSE:JET2), which was the best performer in January with an 18% gain. It was not in the top 10 AIM weightings at the end of 2021, and it has moved up to the third highest weighting at 2.82%. Jet2 offers recovery potential with the improving outlook for international travel. FTSE 100 constituent and British Airways owner International Consolidated Airlines (LSE:IAG), also rose during January, but previous falls mean that it is one of the smaller companies in the FTSE 100.

In contrast to AIM, the better performers in the FTSE 100 are banks and oil and gas companies that offer a yield to investors. International bank Standard Chartered (LSE:STAN) rose by nearly one-fifth and HSBC (LSE:HSBA) was 17.6% ahead over the month. Shell (LSE:SHEL) and BP (LSE:BP.) are the next best performers thanks to the rising oil price and the jump in profit as a consequence. Shell is the largest company in the FTSE 100 and HSBC is the third largest while BP is the eighth largest.

Mobile telecoms group Vodafone (LSE:VOD) and tobacco manufacturer British American Tobacco (LSE:BATS) have high yields and they were the fifth and sixth best performers. Imperial Brands (LSE:IMB) is the 10th best performer, and it has a yield of 8.3%.  

• Six speculative UK share ideas for 2022
• The First & Last share I bought: Lowland's Laura Foll

Although the FTSE 100 has risen, there are 39 companies whose share price increased and 60 whose share prices fell. Silver miner Fresnillo (LSE:FRES) is the worst performer with a 30% fall, partly due to lower-than-expected silver production in Mexico although gold production was better than expected.

Banks and oil and gas companies have been out of favour in recent years, and they are still trading on relatively modest multiples. The banks have the prospect of rising interest rates over the coming year after more than a decade of low rates.

Shell and BP are two of the largest companies in the FTSE 100, so their rises will have a significant weighting in the index.

AIM has plenty of oil and gas companies, but few of them are significant producers. Jadestone Energy (LSE:JSE), which does pay a dividend, is the second best performer in the AIM 100 with a 12.4% gain. Serica Energy (LSE:SQZ) was also in the top 10 performers. The forecast yields for both companies are 1.4%, so they are much lower than the yields on BP and Shell shares, which are 4% and 3.3% respectively.

Pantheon Resources (LSE:PANR) is also in the top 10 AIM 100 risers, but it does not pay a dividend. Some of the smaller AIM explorers have jumped in price, but they do not have much of an effect on the performance of AIM as a whole and they are too small for the AIM 100.

BATS and Imperial Brands are both in the top 10 yields in the FTSE 100 and offer 6.8% and 8.3% respectively. That is attractive at a time when inflation is taking off.

It is not just about yields, though. Persimmon (LSE:PSN) and Polymetal International (LSE:POLY) have the two high highest historic yields, but they were both sharp fallers in January. Persimmon and Barratt Developments (LSE:BDEV) have both slumped because of specific concerns about the costs of replacing cladding.

• Watch our share tips here and subscribe to the ii YouTube channel for free
• AIM: new floats aplenty in 2021, and more to come in 2022
• Friends & Family: ii customers can give up to 5 people a free subscription to ii, for just £5 a month extra. Learn more

It seems clear that more speculative investments are not in favour currently, although there are always going to be opportunities for gains in selective companies. Financials and energy companies, although not the renewable energy companies that previously outperformed the market, are attractive because of their positive outlook and low ratings.

Although the FTSE 100 is outperforming AIM, the majority of its constituents have falling share prices. The lack of banks and other large financial companies, and the fact that the oil and gas companies tend to be smaller and more speculative, means that AIM does not have the exposure to the rising sectors that the Main Market does. Many AIM shares are on high ratings and the Main Market companies are catching up.

Given the current market conditions, it seems likely that the FTSE 100 will continue to outperform AIM, but that does not mean there are no opportunities on AIM, where the ratings are still attractive.  

Andrew Hore is a freelance contributor and not a direct employee of interactive investor.

Andrew was recently named Journalist of the Year at the 2021 Small Cap Awards.