AIM Companies Have Been Dropping Out Of The index

As Professor Roundabout and I both remarked in Monday’s Penny Sleuth, the complacency of those officials at the London Stock Exchange charged with running the Alternative Investment Market (AIM) seems quite unshakeable.

That the market has lost more than half of its value within one short year; that professional fund managers are describing AIM as ‘dysfunctional’; that private investor groups are trying to devise new and cheaper methods of trading (see www.killthespread.com) – all of these are, in the words commonly used by an old friend of mine, ‘a mere bagatelle’.

But while the LSE plans world domination of the small companies market, some of its existing constituents are slipping out of the back door – apparently unnoticed. At last week’s AIM conference the LSE’s Head of Marketing, David Pitman, argued that the number of companies listed on AIM was shrinking because some had chosen to remove themselves in favour of a quotation on the LSE’s Main Market.

AIM companies have been dropping out

I checked this out, and in fact this year only seven companies have chosen to move from AIM to the Main List and they have been replaced by nine companies moving in the other direction. And in any case these numbers pale into insignificance in relation to this year’s net drop of ninety-seven in the number of stocks quoted on AIM, a figure derived from the ninety-nine new admissions, offset by one hundred and ninety-six de-listings.

Fewer quoted companies means less fee income for the Stock Exchange, and the exodus is hardly good for the reputation of the junior market. It is about time that the LSE lifted its head from the sand and took this matter a bit more seriously. If it needs further incentive then it should consider the story of OCZ Technology.

I am not a shareholder in this business but I did manage to get along to a presentation given on Monday by OCZ for the benefit of its shareholders – of which only one bothered to turn up! I was keen to find out whether OCZ could make it on to the list of potential “bounceback” shares I’m building for the new report I told you about.

Anyway, having travelled from the USA and surrounded himself with his broker, his financial PR representative and his Nominated Adviser, OCZ’s founder and chief executive Ryan Petersen could hardly have been given starker proof that the City seems to have given up on his company.

What’s gone wrong with this share… when everything seems to be going right?

OCZ was valued at £27m when it floated on AIM two years ago at a price of 65p. Last year the share price hit a peak of 170p but today it languishes at just 11p where it values OCZ at a paltry £5m. Ryan Petersen, who is articulate, enthusiastic and intelligent, is entitled to ask what he has done wrong. I mean look at these things it has going for it…

First of all, OCZ’s revenue has grown by a healthy 1,241% in the last four years. It has clearly built market share in the hugely competitive market for computer components. It has steadily lessened its exposure to memory storage products, where competition is intense, and has impressively built sales of flash storage, thermal management and other peripheral products.

The company also has a good reputation with retailers, which have been increasing their orders, and within the gaming community. To the latter OCZ has just introduced the ‘neural impulse activator’. OK, it sounds like something off Star Trek, but it’s essentially a headband that senses electrical impulses from the brain allowing a gamer to control a character with facial movements and specific thought patterns.

OCZ has executed a move to a larger factory in Taiwan. And it has improved its payment terms with suppliers and customers even to the extent of discontinuing to supply its second largest customer on the grounds that it was not satisfied with the terms of trade. OCZ, based in California and a fully paid up member of Silicon Valley, has had an exemplary investor relations policy which can be faulted only for an excess of enthusiasm.

Trading at less than half what its assets are worth

Despite all this the shares trade at just four times earnings, and at less than half net asset value, even excluding the goodwill element. It is true that OCZ’s growth has given it an appetite for short-term finance for its working capital needs. It is true also that OCZ is heading into the important Christmas selling season for which hopes are not generally high – although I understand that so far OCZ has not felt any effect.

But if a company is a little naïve in its optimism; if its voracious growth requires working capital; and if it runs into an economic climate that is a little hostile – these are not reasons for despair. These are not reasons for the City to withdraw all support for a small company that is clearly doing plenty right.

And yet this is the position in which OCZ finds itself. And rather than sit and suffer it is planning to take action – and this is where the London Stock Exchange should sit up and take notice.

OCZ intends to apply for a listing on Nasdaq, the US market for technology companies. A few years ago this would have been the natural home for a small technology company. But the notorious Sarbanes-Oxley legislation made the cost of a listing on US stock exchanges prohibitive. This caused several, OCZ amongst them, to list in London instead. Now Nasdaq is fighting back. Partly in response to the more difficult market conditions, it has already relaxed some of its rules and regulatory compliance costs have dropped dramatically in the last twelve months.

For now, this one’s a “bounceback” maybe – not a definite

Thanks to familiarity with its products and an audience of investors who are familiar with small technology companies, Petersen believes that OCZ’s shares are far more likely to be sensibly priced on Nasdaq than they are on AIM.

The question is, when and if OCZ gets its Nasdaq listing, will it persevere with its expensive and fruitless existence on AIM? Petersen is saying that OCZ will maintain a dual listing, but I for one would not blame him for cancelling the AIM listing. That will be one less company paying fees to the LSE – and many more US-based companies now trading on AIM might follow OCZ’s example.

Will this share make it onto my “bounceback belters” report? Well, it’s too early to say yet – it’s certainly got plenty going for it and the Nasdaq move could kick-start it. But there are some challenges ahead.

For now, it’s staying on my list of candidates – I need to do some more work on it to see if it ends up in my top three. I have so many to choose from now, that it’s going to be a tricky job picking the ones I definitely think you should buy.

More on that soon… I’ll let you know when you can get hold of this exciting report

P.P.S. If you want to follow the insights of a small company investor, and uncover the hidden gems of the stock market, find out more about The Penny Sleuth by clicking here.

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