In my 30-year career I’ve come across pretty much every stock-market system under the sun. But the truth is, I only know one approach that really works over the long term: small company investing. And 2013 was a vintage year.
In 2013, the FTSE Small Cap index rose almost 30%. If you’d been brave enough to buy during the dark days of March 2009, you’d be close to trebling your money by now. Of course, small caps tend to get hit harder in downturns and recessions, but if you stick with them over the long haul you’ll do well.
At Red Hot Penny Shares, I’m on the lookout for those small and micro-cap companies that can deliver explosive growth. Nowadays most of these are found on Aim.
And the Aim market as a whole has had a tough time in recent years. In fact, the performance of the broader Aim (Alternative Investment Market) index has been dismal. It’s still trading below levels it reached three years ago.
I can think of a few reasons for this. The most obvious one is the excessive number of natural resources companies on Aim. There are around 270 mining and oil stocks out of almost 1,100 in total. So the bear market in resource stocks has held the overall index back.
In contrast, the Aim UK 50 index of larger Aim stocks has done very well recently, rising by 43% last year. It’s even done better than the FTSE Small Cap since the crisis, having gone up by 215% since early 2009. There’re big gains to be had, if you know where to look.
We spotted some big winners
First, let’s look at some performance stats. Last year, 133 shares rose by 100% or more. Among this number was ASOS, which is by far the largest Aim share with a value of £5.6bn. ASOS is clearly an exceptional stock, but nowadays it’s a bit outside our size range at Red Hot! However, if we look at the other 132, some interesting themes emerge.
Thirty of the stocks that doubled last year were in the technology sector. Another dozen came from biotech and healthcare. That’s why I’ve been focusing on this area of the market and why I continue to like it. We are in the middle of a giant wave of technological innovation, which is bringing new products and opportunities.
The important thing is that people are starting to pay for these new technologies, which means there’s money to be made for companies and investors. It’s the most important small-cap investing trend of the next few years in my opinion.
Off the 133 shares which managed triple digit gains, how many were mining or oil stocks? Just ten. And those sectors make up a quarter of the total shares listed on Aim.
A few of our Red Hot shares are on the list of big winners. Number six in this hit parade was blur Group (BLUR) which I wrote about in one of my first Penny Sleuths. Blur is a cloud-based exchange for business services commerce, and was up 627% in 2013. It’s risen by 260% since that Sleuth back in July, even allowing for the recent bout of profit taking.
It’s a similar story with Telit (TLT), which gained 218% last year. Telit makes cellular modules which allow machines to communicate in what has become known as the internet of things. I covered this topic in a Sleuth last summer, since then Telit has risen by about 140%.
An important message here is not to be put off if a share has already done well. An emerging growth stock with good momentum can often keep on going, as blur and Telit have shown. Some of my recent tips in Red Hot Penny Shares feature on this big risers list and I think they have a good chance in featuring again in 2014.
Finance, industrial goods and meat
It isn’t just about tech though. Financial services and industrial goods were two other sectors, which provided a lot of 2013’s big gainers. For example Sigma Capital (SGM), a financing and asset management company, was up 569%.
Hayward Tyler makes electric motors and pumps and saw its shares rise by 355%. I’d expect these economically sensitive sectors to stay in favour as conditions continue to improve. There was even money to be made down at the butchers as meat retailer Crawshaw (CRAW) gained 476%!
So while my focus will remain on tech, I will also try and cast my net wide enough to catch some of these very diverse opportunities offered by Aim.
Coincidentally, the market also produced 133 stocks which gained between 50% and 99% last year, to go alongside the 133 which at least doubled. So despite Aim’s negative image, it gave us 266 shares which were up by 50% or more in 2013!
Momentum is clearly with us and corporate news is getting better all the time. Although valuations might be higher than they were a year ago, I still expect 2014 to be another year of great opportunity on Aim.