That’s a sentiment some companies might wish they had heeded before they joined the London Stock Exchange’s club for small companies, the Alternative Investment Market. AIM has performed so miserably in the past two years, any share listed there, good and bad, has suffered.
But as I’ll show you, now’s a great time to buy into certain AIM companies – so long as you do what you should always do and only go for good quality shares.
You see, members of the AIM ‘club’ are heading out of the door. The number of AIM-listed companies has fallen from 1,694 at the start of 2008 to 1,514 today. That’s a consequence not only of companies exiting the market, but also the reluctance of any new companies to join.
The City hates this. As the numbers fall, the nominated advisors (or Nomads) who make their bread and butter from advising AIM companies are seeing their fees dry up in front of their eyes. But private investors should cheer. I’ll explain why in a moment. First, though, let’s find out what has gone wrong.
Here’s what’s really gone wrong with AIM
any times people have said to me ‘the trouble with AIM is that there is too much rubbish on the market’. In other words, there are too many low quality companies with little realistic chance of rewarding investors.
I don’t see it that way…
You just can’t generalize like that. There may be some that will never make it big, but there are also some excellent companies that will see their share prices multiply. Some are relative newcomers, whilst others have been around for years. Each has its own strategy for growth.
But for most, the common denominator is that in order to pursue their strategy, they need to raise equity finance – not only when they first come to AIM but also at intervals thereafter.
This requires two things. It requires a real commitment on behalf of investors to properly understand these companies and allow for the fact that the corporate journey of small companies is never smooth. Secondly, it requires that when new shares are issued, the price strikes the proper balance between risk and reward.
Let me deal with the first point. It’s all too apparent from my regular conversations with small company executives that their City investors make only the most cursory attempt to understand their business. These investors are all too ready to abandon ship at the first sign of trouble.
The bigger problem, though, is the unrealistic valuations put on AIM shares in the first place.
I met one savvy fund manager who says that he never buys into new issues because they rarely deliver against the forecasts made at the time. Once a company admits it is falling short of expectations, a vicious circle can quickly develop. The share price falls, it becomes impossible for the company to raise further funds, analysts conclude that it is not worthwhile to write research notes and everybody just wants out. Of course, the share price plummets.
Here’s what needs to happen…
All parties need to realize that the forecasts need to be set with extreme caution. This caution then needs to be reflected in the valuation put on companies when they first come to AIM. Fund managers need to drive a much harder bargain, and the companies and their advisers need to accept a lower price for newly issued shares than they would like.
Why the AIM exodus is good for small cap investors
To put it another way, there is a price for everything. The pricing of AIM shares, especially when they first come to market, has been too high. A painful adjustment must be made and it is the companies themselves that are taking the lead…
Only last week, Bateman Engineering (ticker: BATE) decided to quit AIM. It blamed its low share price, its inability to raise equity capital, the low turnover of its shares, and the costs and responsibilities of a quotation on London’s stock market.
Institutional shareholders are now getting annoyed. They are unhappy both at the prospect of companies going back into the private sector at a low price and at the difficulty of trading shares in a private entity. But they only have themselves to blame for failing to give these companies proper attention and support in the first place.
For private investors, the good news is that the market is becoming cheaper. The hype that has at times surrounded AIM is gone. And as disillusion sets in, smart investors can pick up bargain shares.
The AIM club is becoming more select. Most of the companies that will drop out of AIM in 2009 will be those that have no commercial future. What we’re left with is a smaller pool of higher quality shares to choose from. And with their share prices having been dragged down by generally poor sentiment, now’s a great time to be buying.
Kind regards,
Tom Bulford
ForThe Right Side
P.S. This report gives you my detailed plan to get into this oversold market for PEANUTS – right now. Click here to see my three top “bounceback belters” before other market players realize what they’ve done and pile back in to the AIM market.
MARKET NOTES
Cyclicals are grabbing their share of the market
BY SHIVVY ARORA
While defensives haven’t suddenly lost their safe haven status, two other types of stocks have been outperforming them… for several months.
Defensive companies produce goods and services that people keep buying even in recession, such as healthcare, consumer staples and utilities. They tend to do well when the economy is weak. Cyclicals, such as non-food retailers or automobiles, follow the ups and downs of the economy. They perform badly in a recession. Growth stocks are those whose earnings are expected to rise at an above-average rate relative to the market. They outperform when investors are bullish.
The chart below shows the performance of cyclical and growth companies relative to defensives from March 2007 to March 2009. A down trending line shows that group performing worse than defensives, and vice versa.
You can see that defensives have had many months of outperforming cyclicals and growth stocks. But a new pattern has emerged (boxed part). Cyclicals and growth stocks are no longer losing out to defensives.
Cyclical and growth stocks outperform defensives as investors take risks again
Since the market bottomed in early December, growths and cyclicals have made a comeback. This is directly linked to a lowering of investors’ risk aversion. So long as the public feels brave enough to dip their toes back into the market, this trend is likely to continue.
But don’t write off the defensives just yet. A whiff of trouble about the economy again, and we’re likely to see investors rush back in a flight to safety.
The Daily Reckoning – The dollar’s days are numbered
BY BILL BONNER
Granada, Spain
Monday, 30 March 2009
The dollar’s days are numbered. We are beginning to feel sorry for it... as we do all lost causes.
Trouble is we don’t know whether it’s a big number or a little number that marks the dollar’s last days.
Last week, a decimal point seemed to move to the left. A UN advisory panel had suggested that maybe it was time to figure out a better way to run the world’s monetary system. Better, that is, than using the US dollar as the reference currency for the whole world.
As you recall, almost every price on the planet ultimately relates to dollars. You can buy an orange here in Granada for euros. But the global market in oranges is priced in dollars. So when people figure out how much something is worth – in global terms – they typically refer to dollars. And when countries want to make sure they have enough money on hand to settle up their debts with other countries, enough money to buy Florida oranges, or enough to purchase oil to run their factories – they lay in a supply of dollars.
But while the value of everything is referenced to dollars, what’s the dollar’s value referenced to? At the end of the day, upon what rock does the world financial system rest? Ah... that’s the weakness of it... there ain’t no rock. Look at the foundation of the world’s money system and all you find is mush.
And last week, the Chinese poked around with a stick to see how soft it was...
They, too, said it was time for a change... a new money system with the IMF operating as a sort of Super Central Bank... giving nations ‘special drawing rights on gold.
And this week, the G20 will meet in London. They are to have a ‘rendezvous with destiny,’ say the papers. The world is faced with a huge challenge. People turn their weary eyes to the politicians, hoping they will meet the challenge. Historians will record the event like they did the Council of Trent or the Treaty of Westphalia.
Blah... blah... blah... as near as we can tell. Fact is, there isn’t anything our leaders can do about the situation except make it worse. The markets need to clear... and adjust to the new post-bubble reality. The more effective governments are at preventing this from happening – that is, the more successful their bailouts are – the longer and deeper the correction will be.
At least on the subject of the dollar, the G20 group could do something worthwhile. They could renounce Nixon’s faith-based currency system... and return to a gold-backed system. But they’re not going to do that. Not yet. Not until the dollar-based system has blown itself up.
When will that happen?
Read on…
To read the Daily Reckoning in full, click here.
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