Puma’s Waine: Finding the winners in the AIM

Justin Waine PumaIt might surprise you that the AIM is bigger than you first think.

Investors are often concerned about the sectors in which AIM companies reside, or think that the market is mainly made up of early-stage mining or oil and gas companies, although the recent collapse in commodity prices is in the process of thinning the herd. Others may be worried that the rest of AIM consists of high growth technology companies where you might pick the occasional winner, but this will be more than offset by the losses you make on the ones that go wrong.

However, investors should keep in mind that there are a large number of companies that fit into neither of these two categories that can provide excellent opportunities for finding long-term growth stocks.

AIM’s total market capitalisation is £73bn, making it larger than BP. It is home to more than 1,000 companies and while it is true that many of these are tiny, there are actually more than 300 companies with market capitalisations exceeding £50m, and 86 per cent of the AIM by market value is in companies with market capitalisations exceeding £50m. There are even four companies worth £1bn and the largest company, internet retailer ASOS, has a market value of £2.6bn.

Listed on AIM are a series of small, niche, businesses characterised by a clear business model, good profits and real cashflows. These companies are often family controlled and in some cases have actually deliberately transferred to AIM from the main market.

There are a number of reasons why AIM is attractive to certain types of businesses, the most obvious being it is cheaper in terms of listing costs. This is particularly well suited for some long-listed family owned companies such as flooring manufacturer James Halstead and lighting company FW Thorpe. Their strong cash flows and solid balance sheets mean it is unlikely they would want to raise money, making a full listing an unnecessary expense.

That is not to say that a company cannot raise substantial money on AIM for the right deal; though the recent departures of Paysafe and GVC to the main market following large acquisition-driven equity offerings indicate that the very largest deals often require a senior listing.

If picked up at the right price stocks such as these can be excellent long-term investments. AIM companies that also qualify for Business Property Relief carry the added benefit of exempting investors from inheritance tax, either partially or entirely, provided that they have owned the shares for two years minimum and still hold them at the time of death.

On closer inspection, not only is AIM larger in scale than it is often perceived to be, it is also a more established market featuring high-quality companies with strong growth potential.

Justin Waine is investment director at Puma Investments.