DIY Investor Magazine
/
March 2017
46
AIM HIGH IN ISA SEASON
Even with generally bullish sentiment across the
markets, the fact that the Alternative Investment Market
(AIM) has risen by 33% over the past year represents
reflects a hugely impressive performance by the UK’s
small caps.
Those that were in the market twelve months ago are
probably identifiable by their rather self-satisfied grin,
but what about those considering taking the plunge into
the junior market in ISA season? Small company shares
are now a third more expensive than in the run up to the
EU referendum, and the question is, will they run out of
steam, or is there further to go?
Rules-based
investing platform
Stockopedia believes that there are techniques that can
be employed to give you a chance of picking stocks that
are worthy of the premium rather than just enjoying the
ride.
Stockopedia reasons that a pricey share may not be
‘expensive’ as long as it delivers premium quality and
momentum.Companies including some of the market’s
best quality stocks such as JD Sports and Diageo, with
strong share price momentum and a strong historical
performance, can almost always seem expensive; this
may put some investors off, despite the fact that they
have delivered excellent returns over time.
However, whilst value investors may find little to excite
them, momentum or trend investors, can achieve great
success by ignoring the price and surfing the bow
waves of these high-flyers.
There are some key features to look for in search of high
quality companies with momentum.
Firstly, a high quality company is generally stable, high
margin, growing its sales and earnings and usually
highly profitable; strong momentum will manifest itself
in stocks trading at, or above, their 52-week high and
performing strongly within the market – a good sign
is when a company exceeds brokers’ expectation
causing them to upgrade the stock or change their
recommendation.
Stockopedia simplifies this by scoring and ranking
every company in the market with a quality rank and
a momentum rank based upon the above metrics;
according to its methodology, companies considered
‘high-flyers’ could have little to interest the value investor.
Over four years Stockopedia has tracked companies
valued at between £50m and £350m in search of high-
quality and momentum small-caps and in that time,
companies in the top 20% of the market as ranked by
their combined quality and momentum scores have
delivered a theoretical return of 110%. Companies with
the lowest scores fared considerably less well.
There are some impressive stats to back up
Stockopedia’s conclusions; its five highest ranked
companies according to its quality and momentum
characteristics have delivered an average of 63.4%
year on year increase in their share price across diverse
sectors such as telecoms, technology and healthcare.
YouGov, the data and analytics company scores 98 on
Stockopedia’s quality and momentum rank, and that is
almost matched by the 95.6% hike in its share price;
growth company AB Dynamics achieved a 94 rating
and a 94.9% increase in its share price.
Such companies are not the high flying biggest fish in
the smaller pond, they are typically growth companies
with momentum that could otherwise be considered
expensive; however, identified according to their risk
and momentum characteristics, they could be the
ones to watch if there are concerns about AIM’s ability
to maintain its recent stellar performance – after all,
companies such as ASOS and Boohoo were once small
AIM stocks.
The old adage is that ‘the trend is your friend, until the
end, when it bends’; there is always the risk that a stock,
a sector or a market will run out of puff, particularly with
small cap; however, if you are considering AIM, whether
a stock is expensive or indeed looking for a coat tail to
grab, Stockopedia’s method is one to consider.
‘THE TREND IS YOUR FRIEND, UNTIL THE END, WHEN IT BENDS’
