Interactive Investor

AIM sell-off winners revealed

23rd January 2015 16:49

Lee Wild from interactive investor

A major sell-off shortly after the summer holidays caused panic in global stockmarkets. The selling was indiscriminate and AIM companies were hit particularly hard. We noticed a lot of good companies had been caught up in the chaos, unfairly in our view, and identified those which looked most likely to rebound sharply when normal business resumed. The results were impressive.

Firstly, how did we do it?

We picked those AIM companies that had fallen by more than 10% since 19 September. We also targeted any expected to grow earnings per share (EPS) significantly over the next two years, and favoured those trading on modest price/earnings multiples.

The initial screen threw up 73 companies, but we then weeded out any that had already been on a prolonged and significant downward trend. It is also important to exclude profits warnings, given that these muddy the results. We want companies that have been unfairly punished in the rout, not those that were in trouble anyway.

The results

Of the 12 companies thrown up by our stock screen, 11 rose in value in the three weeks between 16 October and 5 November. Eight of them delivered double-digit percentage gains, generating an average return of 21%.

Only one of the dozen - online casino, poker and bingo operator 32Red - fell in those three weeks, and, overall, the 12 returned an average of 15%, more than double the 6% gain for the FTSE All-Share index. And at today's prices the dozen continue to outperform the All-Share index, up by 15% compared with 10% for the benchmark.

Company nameTicker% Price Change *Share price 16 Oct (p)Share price on 5 Nov (p)Gain between Oct crash and 5 Nov (%)Current share price (p)Overall gain/loss (%)
iomart GroupIOM(24.3)18521516175-5
Telit Communications TCM(22.7)207232122269
The Mission Marketing GroupTMMG(20.2)42432420
Fairpoint FRP(18.0)113131161163
32RedTTR(17.9)4947.5-35512
Caretech HoldingsCTH(17,5)1972251422715
Trakm8TRAK(14.9)667188833
UtilitywiseUTW(14.3)26129714220-16
James CropperCRPR(13.5)3614201642819
Solid StateSOLI(11.3)5308746575242
Character GroupCCT(11.1)1852071235089
NorthBridge Industrial Services NBI(10.6)5355707440-18
Average gain/loss    15 15
FTSE All-Share Index  3,3083,50063,64710
Source: S&P Capital IQ *between 19 Sep 2014 and 16 Oct 2014

Winners

Two companies compete for first prize. Solid State, a maker of hardwearing computers and electronic kit, was easily the best performer during the three weeks - up 65%. Impressive half-year results sparked interest and another round of earnings upgrades, which forced major shareholders, including Bill Marsh and his son and CEO Gary, to sell shares in an effort to increase liquidity and satisfy demand from institutional investors.

After a terrible 2013, last year was far better for Character Group. An update earlier this month confirmed that sales in the run up to Christmas were better-than-expected and up 28% in the current financial year. Profit in the year to August 2015 should "at least" hit current forecasts, said the company behind kids' toys from massive hits like Peppa Pig, Minecraft, Teletubbies and Scooby Doo.

Voted Toy Supplier of the Year at the recent Toy Industry Awards, Character had Charles Stanley analyst Peter Smedley running for his calculator. After upgrading forecasts for the next three years, Character shares still trade on less than 9 times forward earnings. It should be more. Says Smedley:

We believe, however, that the company's underlying fundamental momentum is so powerful, combined with both the scope for our still conservatively framed estimates to move up even further in 2015 and the increasing likelihood of significant share buybacks, that a PT of 450p, giving 50%+ upside, is achievable.

Half-year results from Trakm8, published at the beginning of December, grabbed our attention. At 74p, shares in the telematics and data provider traded on a modest 13 times forward earnings, dropping to just nine for the year after. Now, they're worth 88p, up a third since October. It's won a £1 million contract with Saint-Gobain, an existing customer, since then.

That only serves to underpin finnCap's revenue forecasts for £18 million in the year to March 2015 and £21.3 million for the following year. The shares could be worth 100p, says the broker.

And finally, James Cropper, the speciality paper firm which provides the material for Remembrance Day poppies, doubled half-year adjusted pre-tax profit. New products, cost-cutting and capital investment underpin bullish growth forecasts, says Westhouse. Average annual forecast EPS growth of 28% over the next three years appears not to be reflected in a forward earnings multiple of just 10.4 for the year to March 2016. The shares still look undervalued and, according to Westhouse, are worth 500p.

Losers

Three of the dozen featured companies are now lower than their 16 October price - 32Red is not among them after a knockout annual update and fifth consecutive year of double-digit growth sent the shares up 37% in two days.

Energy procurement consultancy Utilitywise, down by a quarter since early December, is one of the three. So is Northbridge Industrial Services, easily the biggest faller after a terrible December as the oil price continued to plummet. However, there has been a practical recovery in recent weeks as the industrial services and van hire firm played down the potential impact. Cloud computing outfit and one-time bid target iomart makes up the trio. It had done well until half-year results prompted earnings downgrades, although broker finnCap still thinks they're worth 285p.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.