AIM Companies To Continue Exiting The Index In 2009

Happy New Year to you.

2009 will certainly be an interesting year. I’ll be amazed if the small companies index is not higher in twelve months time than it is today.

That’s not because I think the economic outlook is so rosy that all companies will grow and flourish in 2009. Clearly this is not the case. It’s just that the small companies market is in such disarray and sentiment is at such a low ebb, it seems impossible for it to get any worse.
Many small caps are trading on valuations as low as I have ever seen. Even soundly profitable companies have been hit. Ones that should have little difficulty withstanding the recession. If 2009 delivers anything the right side of doomsday then some common sense will surely creep back into the small companies market. We should then see some recovery in share prices. I’m ready to help you cash in on this.

For now, though, all those involved in the small company sector are disillusioned. Investors large and small have pulled their money out of the market. At the same time, many small companies have decided that being a public company is not worth the candle.

Why the exodus from AIM is a good thing for small cap investors

Far from being the ‘most successful small company market in the world’, AIM is seeing its constituents head for the exit in droves. AIM started 2007 with almost 1700 companies, but that number fell by more than 100 in 2008. Small companies have either gone bust or failed to deliver on strategic promises. Or they’ve simply decided that being a public listed company is just not worth the effort and the expense.

This trend will undoubtedly continue. But I’m not worried about that. Of course, it’s a shame to see profitable companies such as Robert Montague’s Axis Intermodal concluding that ‘the costs and strains on management time associated with maintaining the listing are no longer commensurate with the benefits’. But most of the companies that will drop out of AIM in 2009 will be those that have no commercial future.

One of the problems of AIM has been a simple case of oversupply. From 2004 to 2007 the number of AIM quoted companies jumped from 754 to 1694. This exceeded the capacity of investors to monitor them and provide them with further finance. And that, after all, is more often than not a principal reason why small companies go onto AIM in the first place.

So the reduction in the number of companies on AIM is a good thing. But what really counts is delivering on promises. Nothing knocks a share price harder than the admission that a company will fall short of expectations. And once lost, the trust of the City is desperately hard to re-establish. Of course, at times like this the economy is likely to blow the best laid plans astray. But all too often, companies come to AIM full of brash promises and then simply do not live up to them.
Small companies need to learn to trust the market. They need to find the confidence to be honest in their description of prospects and their assessment of their own strengths and weaknesses. But it seems almost impossible for them to communicate with investors in an honest, open and straightforward manner.

Just before Christmas it came to my attention that a certain company, of which I have only ever written nice things, did not want to speak to me. Why? Because it felt that my articles had put falsely optimistic expectations into the market. This is nonsense. All that I have ever done is repeat what the company has said either publicly or privately to me. If false expectations entered the market then this company should not be blaming the messenger.

But small companies routinely allow an all-too-positive view of their future to gain currency, or else they go to the opposite extreme and overdo the caution. I recently spoke with the executive chairman of a small company that had just put out a fairly routine announcement to the stock exchange. He moaned that the final draft had only been agreed after eight previous versions had been rejected by City advisors. The result was an announcement that was so exaggeratedly cautious that it unnerved investors and sent the share price plunging.

Small companies need to tell it like it is

So my number one wish for 2009 is that companies start to tell it like it is. There is no point in trying to massage the share price upwards with over-eager promises. Reality will catch up with them in the end and the market’s retribution will be severe.

At the same time, rather than being unnecessarily coy and downbeat, they should simply tell investors what they know and what they cannot know. They should trust the market to form an educated opinion. Nobody with an iota of commercial experience expects that the voyage of a small company will always be plain sailing. But investors are far more likely to be sympathetic to companies that have engaged in an honest dialogue.

So if you are listening out there, all you small company executives, brokers, lawyers, Nomads, and PR boys and girls my New Year message is this:

Treat us like grown-ups. Tell it like it is, warts and all. We know that running a business is difficult and that things do not always go according to plan. So don’t try to manage our expectations – because the truth will always catch up with you in the end.

Here’s to a prosperous 2009 for us all.

Tom Bulford
for The Penny Sleuth

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AIM Companies To Continue Exiting The Index In 2009

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