Will AIM stocks recover in 2019?
London’s AIM market had its worst month in ten years in October. Selling across the spectrum has seen an indiscriminate mark-down of stocks that could provide most gains when the turnaround comes. IGTV’s Jeremy Naylor sat down with AIM portfolio manager Chris Boxall, from Fundamental Asset Management, to look at the reasons why this market, which has also been described as the best growth market in the world, has had such a bad time of it.
To put the loss into some kind of perspective, Chris Boxall says that since the AIM went over the £100 billion mark in 2017, it has now fallen back below that level in total worth. At its peak in the summer of 2018, there were 17 companies with an individual market cap of more than £1 billion. This number, he says, is now just 12. Why has this happened? Boxall reminds us that, in good times, small and fast-growing companies tend to swing to the upside with a little more enthusiasm than may otherwise be the case. Conversely, during periods of consolidation, investors tend to overplay the downside.
Boxall says this will at some point provide a lot of opportunities and, providing you follow the basic rules, it will give you confidence in picking the right companies.
Buy ‘good companies’ and focus on balance sheet strength
Here he talks about those with operations in tried and tested areas. Try, if you can, to understand the balance sheet and profit and loss accounts of the companies that you are looking at buying.
Look past the ‘noise’
Boxall argues that marketing is out to beef up the image. This won’t help your assessment, so try to avoid looking at advertising around the business. Keep on the corporate fundamentals.
Analyse the directors’ behaviour
With focused management comes dedication, and so the AIM investor must try to avoid companies with directors who hold too many other directorships on other companies. The only benefit of this would be so that management can find a better perspective of other areas of the market that may benefit them in making strategic decisions. The lessons learned from Patisserie Holdings are a good example where having interests too widely dispersed means that it is possible for senior staff to become distracted. Also watch the directors holding in the company concerned. Go for those small businesses where directors hold stock. Often called ‘skin in the game’, directors holdings will give those people an interest in the business.
Invest in what you know
Try to specialise in an area and become an expert. Along with this you will be able to time your entry and exit in stocks with more accuracy. This will benefit for long-term investing. While you may miss opportunities in other areas, the expertise will enable you to earn more from a smaller pool of opportunity over a longer period.
There is no certainty that 2019 will bring a rebound, but adopting the points that Chris Boxall talks about will help you focus your mind on the stocks that have lost most and are in the best position to rebound.