AIM shares get ISA approval - but how do you separate the wheat from the chaff?
It’s all change for small cap investors on August 5 when they’ll finally be able to use Individual Savings Accounts to buy shares quoted on the Alternative Investment Market. The long awaited rule change means that dividends and capital growth on all AIM shares can now be earned tax-free – as is already the case for dual-listed AIM and Main Market stocks. Currently, investors can channel up to £11,520 annually via a stocks & shares ISA and the new freedom means they now have an additional 1,000 shares to choose from.
Investor groups and market participants have been calling for this change in the hope that it will not only make AIM shares more appealing to a broader range of investors but will also encourage more liquidity in the trading of those shares. It follows news in March that stamp duty on the purchase of AIM shares, currently 0.5%, will be abolished from next April.
Getting to grips with AIM
Investors looking closely at AIM for the first time will see a performance this year that’s frankly been underwhelming compared to other London markets. At the current level of 3337 points, the AIM 100 is up 5% so far this year, with little sign of the bullish conditions seen on the FTSE 350, which have driven that index up by nearly 14%.
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Over the past five years AIM has seen a dramatic fall in new money raised for companies and stubbornly high levels of de-listings that has dragged the net number of constituents from 1,694 in 2007 to 1,085. According to broker Allenby Capital, £3.4bn of AIM shares were traded in June this year – down from a high of £7.01bn in June 2007. Those figures won’t have been helped by the fact that AIM is a popular destination for small natural resources companies; oil & gas and mining stocks together represent 27% of the market by market cap. Based on relative price strength, those sectors have underperformed London markets by -26.1% and -43.5% respectively over the past year.
In search of quality
But despite the volatility and sector concentration that has characterised the perception of AIM in recent years, there are many solid companies to be found amongst the blue sky punts and basket cases (Paul Scott’s daily Small Cap Value Report is an awesome starting point). Ahead of the new ISA rules taking effect, we put Stockopedia’s StockRanks to work to see which AIM shares could be worth a closer look. We did it by using the QualityRank, which ranks every company in the market from 1-100 based on a composite score blending ratios connected to historic cashflow, profitability and margin stability. Research has found that good quality companies scoring highly on these measures often outperform – you can read more about it here.
Among those AIM stocks achieving QualityRanks of more than 90% is Nichols (LON:NICL), the soft drinks business behind brands like Vimto, Sunkist and Panda. Shares in the £380 million market cap company have enjoyed a remarkably steady incline over the past three years (see chart below) with pre-tax profits growing by 13% to £20.5 million last year despite subdued market conditions and a wet summer affecting soft drinks sales. There were no shocks in Nichols’ recent half year results, with profits up again and plans for further brand investment and market expansion. The company’s dividend yield is a modest 2%.
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Shares in flooring manufacturer James Halstead (LON:JHD) are trading below the highs they reached in 2012 (see chart below) but the past four years have undoubtedly been a success for shareholders in the Amundi SP500 US (LON:500) million market cap group (see chart). Following a record year of revenue and profit growth last year (pre-tax profits were up 11% at £42.7 million) James Halstead has recently warned that it may be difficult to maintain that growth in increasingly tough market conditions. Even so, the company appears confident of remaining competitive. With a yield of 3.7% it is also a keen dividend payer.
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Another high scoring QualityRank AIM stock at the smaller cap end of AIM is MDM Engineering (LON:MDM), a South African consultancy that helps mining companies develop their projects. An aborted merger with Australian company Sedgman recently dragged MDM’s share price back to below its trading level when the proposed deal was announced last November. That aside, the £48 million market cap company doesn’t appear to be feeling too much pain from the economic pressure affecting the mining sector at the moment, particularly for smaller operators. Post-tax profits rose by 146% to US$14.2 million last year, 50% of which will be distributed as dividends (on top of a special payout), with the forward yield standing at an impressive 6.8% (see below). MDM scores an impressive nine out of nine on the Piotroski F-Score of balance sheet health and even looks reasonably priced, with a ValueRank of 94.
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Finally, 32Red (LON:TTR) , an online casino, poker and bingo operator ranks in the top 1% of the market for its quality credentials. In 2012 the company notched up its third consecutive year of revenue growth (£32.1 million) although net profits dipped slightly to £1.9 million as it channelled funds into launching its services in Italy, where progress has been slower than expected. Even so, brokers have been upgrading their forecasts for 32Red recently (see below) and the shares have risen by 47% to 59p so far in 2013. Despite that rise, the company’s forward dividend yield is a sector-beating 4.5%. at the moment, particularly for smaller operators. Post-tax profits rose by 146% to US$14.2 million last year, 50% of which will be distributed as dividends (on top of a special payout), with the forward yield standing at an impressive 6.8% (see below). MDM scores an impressive nine out of nine on the Piotroski F-Score of balance sheet health and even looks reasonably priced, with a ValueRank of 94.
Tax free… but not risk free
While many investors will welcome changes to allow AIM shares into ISA tax wrappers, concerns have been voiced about the high risk nature of the market and the companies that trade on it. Comparatively high levels of de-listings are a notable concern, which means that investors should be scrupulous in their research of these stocks. That said, there have been impressive share price performances among good quality AIM shares this year and finding those quality companies is possible with the right tools.
To view every single stock on AIM and how each one ranks against a wide range of quality, value, growth and momentum measures, why not take a free trial?
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