Uncertainty reigns among UK investors. Will this week’s Budget cuts wither the green shoots of growth? Whatever happened to safety in blue chips when BP’s dividends can vanish into an oil slick? Where’s a stock-picker to turn? If the words ‘small cap’ don’t send you rigid with fright, then there are good reasons to look towards AIM, London’s market for listed smaller companies. You’ll find businesses there that are an unusually good bet in tough times. And you’ll find some that are sufficiently global, despite their modest size, not to flinch at a prolonged UK downturn.
Long time AIM watcher Tom Bulford, author of the Red Hot Penny Shares newsletter, identifies the key time to invest in an AIM-listed company. There are the early ‘fantasy’ years of a company — when it has little more to offer than an idea for a product or service. ‘Almost without exception it takes these companies longer to bring their plans to fruition than they expect. This can mean having to raise extra finance along the way. Investors in such companies should treat all forecasts with a large pinch of salt.’
Then there’s an inflection point, after they have proved the demand for the key product. Bulford says the trick is to invest at this point, towards the end of the fantasy years, ‘when the company is on the verge of actually producing some revenue’.
He points out that while AIM-listed companies are almost universally stigmatised as high-risk, many have strong business models and solid finances. ‘They’re small, but many are well established, profitable, with steady income — like patent translator RWS or flooring manufacturer James Halstead. They’re far less risky than many big companies — just look at BP or RBS,’ he says.
So where to look on AIM? Some companies shine when the rest of the world seems dull: canny pawnbrokers, for example, have come through the recession with cash in their pockets, and should even thrive in a double dip.
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