The Alternative Investment Market, most commonly referred to as the AIM, is a UK-based stock market that generally lists small-to-medium sized companies. Often cited as the ‘Wild West’, the AIM stock market can make or break an investor. The key reason for this is that the marketplace operates in a highly volatile nature, which in turn, can result in ultra-high gains or losses in a very short period of time.
Nevertheless, by having a full understanding of how the AIM works, especially with respect to the underlying risks, investors with a strong appetite for risk often decide to speculate on AIM-listed companies with the hope that they are backing the ‘Next Big Thing’.
In our ‘Top AIM Picks’ guide, we’ll start by quickly explaining why the AIM is one of the most speculative marketplaces in the investment space. To follow, we’ll list three AIM picks that we think potentially deserve further attention, as well as a brief mention of an AIM-based fund.
To ensure that you are able to make an informed decision, we’ll list both the advantages and disadvantages of each company that makes our list.
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What is the AIM and Why is it a High Risk Investment Arena?
The Alternative Investment Market (AIM) was first launched in 1995 with the view of providing a platform for smaller companies that want to go public. In what started with just 10 individual companies worth a collective £82.2 million has since grown to a marketplace with more than 1,000 listed firms.
What is the Alternative Investment Market (AIM) Read our Complete Guide
When assessing whether the AIM is right for your investment needs, you need to consider that many companies do not stand the test of time. One of the key reasons for this is that although companies are still required to go through an application process to gain listing-approval, regulatory scrutiny is substantially less stringent in comparison to larger markets such as the FSTE. As such, the AIM has at times attracted unsavory organizations that do not have the required underlying framework for long-term success.
However, it should also be noted that the AIM has been responsible for some remarkable successes. One such example of this is the online fashion retailer ASOS. When the firm went public in 2001, it raised just £2.8 million in its respective initial public offering (IPO). At the time of writing, ASOS has a total market capitalization worth more than £2.4 billion.
Furthermore, before the retailer begun issuing its recent profit warnings, ASOS managed a market capitalization all-time high of just over £5 billion, subsequently overtaking the likes of age-old Marks and Spencers.
Success Stories are a Somewhat Rarity
On the other hand, success stories like ASOS are a somewhat rarity. According to a publication released by Forbes, of the 2,877 companies that have at one point in time listed on the AIM, investors have lost 95% in at least 30% of cases. These figures should not be taken lightly.
On top of a lax in regulatory scrutiny, some companies listed on the AIM marketplace have ultra-low market capitalizations, which in turn results in low levels of liquidity, high-volatility and ultimately, investment at times can result in significant losses.
Therefore, if you are planning to make an investment in to an AIM-listed company, then you should remember that you face the prospect of losing your investment in its entirety. Only invest amounts that you can afford to lose, and ensure that your AIM investments only constitute a very small proportion of your portfolio.
So now that you know the underlying risks of investing in the AIM market, we are now going to break down our top three picks. Just remember, you should always perform your own independent research and due diligence, and never invest on the back of somebody else’s recommendation.
Pick 1: TP Group (LON: TPG)
TP Group are a UK Based organization that specialize in technology and engineering services, alongside consulting solutions. The company went through its respective IPO in 2017, subsequently raising £20.8 million at an initial price of 6.5p per share.
The idea behind the AIM fundraising campaign was to generate cash with the view of purchasing profitable companies as part of a long-term acquisition program. However, since the IPO itself, TP Group have been somewhat slow in their acquisitions.
Thus far, the organization has purchased the likes of Westek Technology (£3 million) and Polaris Consulting (£1.5 million).
As such, as of mid-2018, net cash levels at TP Group stood at £16.4 million, meaning that much of the funds raised for ascuuitising purposes still remains on the books.
Therefore, the reason that this particular AIM pick makes our list is because at the time of writing, TP Group is trading at just over 6.1p per share, meaning that you have the chance to make the plunge at a discounted figure. This could be fundamental if the company can increase its acquisition endeavours.
We also like the fact that management have since restructured their industry focus. In what previously centred on the traditional industrial engineering sector has since branched out to defence and aerospace.
On the other hand, a slight caveat in our TP Group pick is the fact that at the current market value, shares are trading at 20 times forecasted earnings for 2019.
However, if the company is able to spearhead their acquisition program in the short-to-medium term, then it is hoped that this will be reflected in the underlying share value.
Pick 2: Location Sciences Group (LON: LSAI)
Location Services are a UK based company that primarily focus on software solutions. Through the use of technologies such as artificial intelligence, the firm aims, among other objectives, to compat advertising fraud.
This is has been a major issue in years gone by, with some estimates suggesting that by the year 2025, this area of fraud will cost advertisers close to $50 billion annually.
Though a second phase of funding, Location Services raised an additional £2.95 million in late 2018, amounting to 2.25p per share. In order to generate revenues for their anti-advertising fraud services, Location Services validate the authenticity of ads on behalf on brands with a strong presence in the online space.
Much of the positivity surrounding Location Services is with respect to their 2020 revenue forecasts. If the company are able to achieve their goal of £8 million in revenues, this will subsequently result in a pre-tax profit of £1.8 million. This would be highly fundamental, especially when one considers their current market capitalization of just £7.5 million.
At the time of writing, AIM-listed Location Services are priced at 2.10p per share, which still offers a slight discount from their recent fund raising campaign.
However, it must be clarified that for Location Services to remain bullish, they must stay on track for their 2020 revenue forecasts. Any marketplace tell-tale signs that the firm might fail to achieve these goals could result in a very sudden change of fortune for the underlying share price.
Pick 3: Begbies Traynor (LON: BEG)
Begbies Traynor are a UK based firm that specialise in corporate rescue and recovery services. In layman terms, this means that they provide consultancy services to corporations with respect to insolvency, recovery and other financial areas of the business.
The firm first listed on the AIM back in 2004, which in effect makes them one of the most established businesses on the junior marketplace. Their respective IPO raised in excess of £4.9 million, with an initial share price of 40p.
At first glance, investors should recognize that Begbies Traynor recently announced a 40% pre-tax profit reduction in the months between May and October 2018, down to a mere £600,000. One such reason for the downturn was due to the less than favorable outcome of prior acquisitions.
However, it must also be noted that underlying revenues themselves were up 8% in the same period, with the firm reporting that they are experiencing “increased activity levels across both operating divisions“. With this in mind, this particular AIM stock pick is based on the theory that at the time of writing, shares can be purchased on the cheap.
As per Royston Wild of the Motley Fool, a trading forecast based on a P/E ratio of 14.6 illustrates a “brilliant buy”.
Investing in an AIM Managed Fund
Due to the sheer complexities of finding an AIM-listed gem, an alternative option available to you is to instead invest in an actively managed fund.
This is where a fund manager will perform all of the required market analysis to determine which AIM-listed companies to back.
One of the most well-known funds in this respect is that of the Marlborough UK Micro Cap Growth Fund. Although the fund does not exclusively focus on AIM stocks, insofar that it also invests in the FTSE Smaller Companies Index, the portfolio is still made up of multiple AIM companies.
The key characteristic to the Marlborough UK Micro Cap Fund is that it most commonly chooses companies that has a market capitalization of £250 million or less, which in effect, covers the vast majority of the AIM marketplace.
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