For the benefit of my non-UK readers, the Alternative Investment Market (AIM) of the London Stock Exchange is a market that has many similarities to Over-the-counter stocks. It is full of small companies, often very young enterprises, that has less onerous legal requirements than the main London Stock Exchange, hence listing is cheaper.
Some of the many great things about AIM are:
- it is not an over-the-counter market, so buying/selling is much easier and cheaper
- very few analysts cover AIM stocks, and the few that are covered are the largest businesses
- there is no tax on AIM share purchases
- institutions usually don’t buy/sell the stocks, simply because they are more illiquid and small market cap
These benefits also come at a cost though, some of the drawbacks are:
- bid/ask spreads can be very wide
- liquidity and volumes are low, a problem for people with large portfolios
- regulation is light touch, so frauds and poor managements are a bit more common than on LSE main market
- information on companies is scarce, they usually dont appear in screeners or the press
In this post I’m going to address the last point, because while it is a problem for most, to the motivated investor it means that bargains are far more common as they are not easily found.
When you first begin analyzing AIM companies you will soon come across a company trading at an incredibly cheap multiple – say 3-4 time earnings. Don’t rush out and buy it though, because these types of companies are not uncommon and you can afford to be very selective.
AIM is one of the few western markets today where bargains still exist. The main markets are all inflated due to QE and record low interest rates. But most AIM companies are far too small to attract money from institutions, so small investors like us make up the market. If you share my view, that most small investors are inexperienced or ‘traders’, then you have the perfect conditions for a wildly inefficiently priced market.
There are 1,132 companies listed on AIM, and as much as a quarter of them have a P/E ratio less than 10 (based to Bloomberg data).
The main problem you have is finding these companies to begin with. Most don’t appear on screeners and a lot will not have much data on popular websites like Morningstar. So how can you find them?
The AIM Trawler
Enter the ‘AIM Trawler’, a spreadsheet I threw together with a list of all AIM shares along with basic valuation ratios from 3 popular websites – Yahoo, ADVFN and Bloomberg. I named it the ‘Trawler’ because that’s what it does, it trawls the internet and calls all three websites to increase the chances of finding valid data (info on many AIM stocks is missing from one or all these websites).
The spreadsheet can be updated automatically, though it will take several hours because of the huge amount of web crawling it has to do to find all the information. I ran a trawl only a few days ago so the data already in the spreadsheet should be good for a while.
One final word of warning before using this – a lot of the data on these companies is inaccurate (you’ll notice ratios from the three websites almost never agree!), but should give a good enough indication of ‘cheapness’ to get you started. This data isn’t perfect but it’s the best that is available – stocks wouldn’t be cheap if they were easy to find would they?