Sell-off is chance to buy these AIM stars on the cheap

As the market rout claims some high-profile victims, there are also bargains to be found, according to former AIM writer of the year Andrew Hore who talks us through events of the past month. 

It has been a terrible month when it comes to the performance of AIM-quoted companies. Of course, this is part of a more general stockmarket malaise, but junior market companies are starting to fall at a faster rate than their larger peers. At the moment, there is no sign of a halt to the decline.

The FTSE AIM All-Share index peaked at 1,107.63 on 4 September and it was still 1,101.61 on 1 October. So far, this month the index has fallen by more than 12%. AIM has even declined over a 12-month period and the AIM All-Share is back to the level it was around 18 months ago. 

The FTSE AIM 50 index has declined by more than 13% in a month and the FTSE AIM 100 by nearly 14%. In contrast, the FTSE 100 index has fallen by around 8%. 

Up until this month, AIM has been outperforming the Main Market this year. The Main Market had been relatively flat and AIM had been continuing its rise of recent years. The junior market is not immune to the various uncertainties around the world, particularly concerns about a trade war between the US and China, as well as the uncertainty about the UK's position with the EU.

The initial stockmarket downturn tends to happen with the more liquid companies. This has been masked by the underlying flat performance of the Main Market, but the relative performance to AIM has been weak. 

The sharp decline appears to have happened in both markets at the same time, though. The AIM fall has been much deeper.

It is certainly the larger, more liquid AIM shares that have fallen the fastest this month. Few of the constituents of the AIM 50 and AIM 100 have managed to maintain their share price let alone post a gain this month.

Of course, many of the worst performers have specifically disappointed the market. The most recent being energy supplier Yu Group, which is the worst AIM performer during October – down 88%!

Sadly, for my 2018 recommendations, Diurnal had disappointing results from a clinical trial for its Chronocourt adrenal treatment and the share price has slumped. 

Many of the better performing smaller AIM companies are ones that have fallen sharply earlier in the year. Replacement windows installer Safestyle has come to terms with a former employee after months of disruption.  

Source: TradingView (*)      Past performance is not a guide to future performance

Online financial trading technology company TechFinancials has risen by one-fifth in October, but it has still fallen by more than three-quarters since the beginning of the year. 

Sellers target AIM 100 winners

Larger AIM companies are leading the index downwards. Not only have they had sharp falls in share price they also have a large weighting in the AIM 100. That weighting is lower in the AIM All-Share which is why it is well down but performing better than the AIM 100. It has previously been the reverse with the AIM 100 outperforming the whole of AIM.

The worst performing AIM 100 constituents are like a list of the favourite AIM companies in the past couple of years, and many of them are winners of AIM awards during that period. Because of their popularity they have achieved heady ratings.

Software company Wandisco is no stranger to volatility, and it is the worst performer in the AIM 100 having fallen by more than two-fifths. WANdisco is loss-making and there is little prospect of a profit for at least two years so there is little in the way of fundamentals to hold up the share price.

However, most of the others in the list of worst 10 performers are profitable. They include training and e-learning services company Learning Technologies, queuing technology supplier accesso Technology, video games services provider Keywords Studios, software supplier First Derivatives and mixer drinks supplier Fevertree Drinks. These companies have lost more than one-quarter of their value over the month. 

Yet these companies are still trading on forecast price/earnings (PE) ratios of more than 30 and, in the case of Fevertree, more than 50 times. 

•    Fevertree: Should you buy the correction or listen to alarm bells?

Some of the recent entrants to AIM have lost their gains since flotation. In the case of video games company Codemasters, having risen by around one-third from its May placing price of 200p, it is now trading at two-thirds of that placing price.

Direct carrier billing technology developer Boku has fallen by nearly one-quarter this month but it is still double the 59p a share flotation price of 11 months ago.

These AIM stars prove resilient

Companies that have not fallen far in the past month include IQE, which has already slumped earlier in the year. Some of the more high-profile companies have held up better than others, such as 2018 AIM transaction of the year award winner RWS and newly crowned AIM company of the year Gamma Communications. 

Interestingly, the most traded AIM company, online fashion retailer ASOS, was slightly higher until the past couple of days. As the most traded it should be easiest to sell and therefore a sharper share price decline might have been expected as shareholders cashed in.

There has certainly been an increase in trading volumes this month and that is true of many of the other major AIM companies. 

ASOS's results may have helped the share price to hold up. They were slightly better than expected and well-received. The share price is still higher than the closing price prior to the results announcement.

Six AIM 100 companies have higher share prices than at the beginning of this month and three of those are barely different. Recruitment company Impellam is the best performer in the AIM 100 with a rise of more than 14% since the beginning of October. This is a company where trading volumes are low and it has been buying back shares. 

Agriculture and engineering business Camellia and gift wrap supplier IG Design have risen by a few percentage points. Two risers Camellia has said that its figures would beat expectations while IG Design says that it had a strong first half and it is on track to meet full year earnings expectations.

Renewable energy generation investment company Greencoat Renewables has held steady. The regular nature of its income will make it less volatile than many of its AIM 100 peers. It may also be that the investors are longer-term and less prone to trading.

Patisserie Holdings has barely moved, but that is only because trading in the shares has been suspended for most of the month and – assuming trading recommences – there will be a collapse in the share price!

Optical and laser products manufacturer Gooch & Housego is one of the better performers among the larger AIM companies during October. There was a sharp fall early in the month that was recovered in the following days, but it has slipped back to just below the price at the beginning of the month.

Gooch & Housego is reporting its full-year results on Tuesday 27 November. Earlier this month, management reassured investors that trading was in line with expectations.

Watkin Jones is another company where the share price has held up well. The student accommodation and private rental housing developer is reporting its full year figures on next Wednesday (31 October). 

Again, a trading statement for the year to September 2018 has reassured investors and Watkin Jones has the comfort of a strong order book and it has pre-sold 95% of the student rooms it is due to deliver in the current financial year. New about the progress with the private rental business will be important. A small share price fall this year has to be put into the context of a 86% increase in the price last year. The dividend yield is around 4%.

Attractive opportunities

The outlook remains uncertain and it is probably still a little early to pick up some bargains, but there are attractive opportunities due to the market decline. Anyone buying now will have to take a long-term view.

Email marketing technology provider dotDigital has tended to be highly rated but the forecast multiple has fallen to around 20, which is not too high for a business with strong international growth potential. 

Source: TradingView (*)      Past performance is not a guide to future performance

Concrete floor levelling equipment supplier Somero Enterprises is another strongly cash generative international business. US-based Somero is growing in the US and many of its other international markets on the back of construction investment.

A prospective PE ratio of 11 with the potential for a special dividend in the next couple of years makes Somero attractive. The regular dividend is also growing and the forecast yield is more than 5%.

*Horizontal lines on charts represent levels of previous technical support and resistance. Red lines represent uptrends and downtrends

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