The London Stock Exchange (LSE) has been given the green light to operate a Pisces platform, a new type of private stock market.

The Financial Conduct Authority (FCA) confirmed on 26 August that the London Stock Exchange had become the first operator to receive approval to run Pisces, the world’s first regulated private stock market.

Pisces - which stands for Private Intermittent Securities and Capital Exchange System - is a marketplace that will allow investors to buy and sell shares in private companies.

Plans to launch the market were announced by the chancellor in her Mansion House speech last November.

Emma Reynolds, economic secretary to the Treasury, said the London Stock Exchange gaining FCA approval was the “latest significant milestone” for Pisces.

She added that the government was “committed to working with the regulators and business to enhance our capital markets offering, supporting economic growth, and putting more money in working people’s pockets”.

Julia Hoggett, CEO of the LSE, commented: “We look forward to welcoming the first private companies to utilise the market when they have completed their preparations and to expanding the options they will have to realise their ambitions.”

Pisces is not open to all retail investors. We explain how the market works, when it will launch and which people will be able to buy and sell shares.

How will Pisces work?

Pisces is a new type of private stock market that gives investors more opportunities to buy stakes in growing companies.

It’s aimed at boosting liquidity in private markets and encouraging large start-ups and scale-ups to list in London.

It’s different to a public market listing, instead Pisces platforms will run “intermittent” trading events. For example, companies using a Pisces platform can control when their shares may be traded and who can buy their shares.

While the LSE is the first operator to be approved to run Pisces, we could see more Pisces platforms approved. London’s challenger stock exchange Aquis is said to be looking at launching one.

It’s not clear what fees will be involved in terms of buying and selling shares, however the government has proposed that Pisces share transactions be exempt from stamp duty.

Who can buy and sell shares on Pisces?

Pisces will generally be restricted to institutional investors, high net worth individuals and employees of participating companies.

In terms of a high net worth individual, the FCA defines this as someone who earns at least £100,000 (not including any one-off pension withdrawals) or holds net assets to the value of £250,000.

Sophisticated investors (including self-certified) may also be able to trade shares; being classified as a sophisticated investor usually requires you to have relevant investment experience and knowledge.

Companies on Pisces can restrict who can buy their shares, if these restrictions promote or protect their legitimate commercial interests, according to the FCA.

However, they are not allowed to impose any new restrictions on which investors may sell their shares.

Under Treasury rules, employees of companies with shares traded on Pisces platforms can either buy shares in the company that employs them, or sell their existing shares.

Michael Healy, UK managing director at investment and trading platform IG, comments: “It's frustrating access has been restricted to institutional investors, high net worth individuals, and employees of participating companies. This cuts out most retail investors, meaning the UK risks falling behind recent developments in the US.”

When will it launch?

The London Stock Exchange says it will launch its Pisces platform later this year.

The FCA is currently testing the design before finalising a permanent regime in 2030.

Which companies could launch on Pisces?

Revolut, Octopus Energy, ClearScore and SME lender Oaknorth have been reported as some of the companies that may be interested in listing on Pisces.

Dan Coatsworth, investment analyst at AJ Bell, tells MoneyWeek that the platform could be useful for fast-growing fintechs looking for institutional investment and also an opportunity for staff to exit their shareholdings.

He adds that Pisces won’t replace an established stock market like AIM as it will not support capital raising and it won’t be open to the general public.

However, it may “whet the appetite” of a company to then go on and seek a listing on the stock market.

“Pisces could help private companies get used to the idea of slices of their business being owned by different people.

“It might act as a stepping stone towards a public stock listing, getting them used to regular financial reporting, transparency as a business, and understanding that a company is run for the best interests of shareholders, not the board of directors,” he notes.

Good companies listed on Aim are typically expensive. This is because many shareholders own the shares to lower their inheritance tax (IHT) bill rather than to make a return and are less bothered by valuation. However, one of the most popular stocks in IHT portfolios now looks unusually cheap. James Halstead (Aim: JHD) has performed poorly over the last couple of years due to supply-chain disruptions.

Fifty years ago the company faced a similar challenge but went on to perform very well for the next five decades. Does today present a similar opportunity for patient investors, or do the rumoured changes to business property relief (BPR) on Aim-listed companies mean that this apparent cheapness is justified?

James Halstead is a multigenerational family business based in Manchester. It was founded in 1915 by James Halstead and is today run by Mark Halstead as executive chairman, the fourth generation of the family. Initially, the business was a textiles company creating rubberised waterproof fabrics used in rainwear – a particularly important industry in a city as notoriously wet as Manchester. Sometime in the 1930s, the sons of the founder began to pivot the business towards the nascent industry of polymer-based flooring. For a long time, the company also retained interests in waterproof clothing, owning Belstaff, the British producer of waxed jackets, from 1948 until it sold the brand in 2004.

Halstead's fall from grace

The shares reached an all-time high in early 2022 at a price just over 300p. Since then, they have fallen to a level below 200p now, with a peak-to-trough performance of almost -50% at the worst point. Having operated well through the Covid pandemic, the company began experiencing problems as higher inflation and supply-chain difficulties took hold in 2022. These were caused in part by the Russian invasion of Ukraine, which was responsible for a spike in the oil price. These issues were exacerbated by difficulties receiving deliveries of raw materials and sending deliveries of completed products because of bottlenecks in global supply chains. At the same time, parts of the world that had been considered safe for shipping, such as the Suez Canal, became less so. This has two effects. It increases the distance (and hence time) to ship goods since the most direct route is not always available. Additionally, the cost per mile tends to be higher because the additional miles that the global freight fleet is forced to undergo have the effect of reducing global capacity for shipping cargo. The overall effect is that it is harder to ship since there is less availability and when shipping capacity is secured, it is done so at a higher price.

The Halstead history

James Halstead has a very long history of making money for investors. However, it has not been without its problems in its 109-year history. In the early 1970s, the company was overly indebted and vulnerable to nasty surprises. Then in October 1973, oil producers in the Middle East placed an embargo on exports to countries that had supported Israel during the Yom Kippur War, including the UK. This led to a spike in the oil price, a key component in the company’s cost base, potentially threatening its survival. Drastic measures had to be taken.

Geoffrey Halstead, the grandson of the founder, was installed as the chief executive in 1974 and set about putting the business on a firmer footing. The dividend was cut and the balance sheet was repaired to the point of always holding a large amount of cash. So today, far from being vulnerable to shocks, it is in a position to benefit when difficulties arise, since the company is at a relative advantage to weaker competitors. Since then, the dividend has been raised every year with next year marking the 50th consecutive rise. This puts James Halstead in an elite group of businesses globally that have managed a half-century of rising payouts.

Strong balance sheet, shrewd management team

Such was the scope of the turnaround enacted by Geoffrey Halstead, who passed away in August at the age of 94, that today the firm is arguably one of the least-risky businesses listed in the UK from a balance sheet perspective. It has consistently generated high levels of returns on capital. It rarely has any debt at all, and the net cash on the balance sheet is usually more than a year’s profits. It also has a management team that has proved to be shrewd, using its financial strength to make astute investments at times when its competitors are struggling. This final point is particularly important since the best investments are often made at the worst times. By maintaining such a strong balance sheet, James Halstead is better able to exploit these investment opportunities.

Geopolitical factors such as the oil shock and Covid have the potential to affect most businesses and James Halstead is not unique in going through a difficult patch. What is notable is that the share price is much weaker than it was, while the general stock market is in good health. It is probably true that James Halstead was more affected than some other businesses because of its sensitivity to oil and shipping. However, the extent of the decline in the share price would imply that the firm is in trouble. It is not.

The difficulties with input costs and shipping since 2022 certainly have echoes of the 1973-1974 oil crisis. However, precisely because James Halstead’s balance sheet was strengthened so much in the wake of that crisis, to protect from future shocks, it is in a completely different position today.

In a simple scenario where a balance sheet is merely adequate, a company can muddle through a period of difficulty. For James Halstead, the balance sheet is far stronger than needed and it is in a position to exploit opportunities that its competitors can’t. We have seen it do this before. Take the global financial crisis of 2008. During this time, when other businesses were going bankrupt, James Halstead was able to purchase additional warehouse space at incredibly attractive prices. “Buy when there’s blood in the streets, even if the blood is your own,” goes the old adage attributed to Nathan Mayer Rothschild. The truth of this attribution is debatable, but having the ability to follow the advice is surely not.

How tax helps – and hurts – Aim stocks

For a long time, James Halstead has traded at a high valuation, partly on account of its inclusion in inheritance tax (IHT) portfolios as a consequence of its Aim listing.

Aim was created to provide businesses with a less onerous route to capital markets. It did so by lowering the reporting requirements so that the annual cost of being a listed company was lowered. However, the attraction of Aim was further enhanced by allowing shareholders to claim business property relief (BPR) on inheritance. BPR exists to allow the descendants of business owners to pay considerably less IHT on business assets. BPR can be claimed on property, buildings, machinery and unlisted shares. It may seem confusing, but stocks listed on Aim are classified as unlisted for the purposes of inheritance tax. This means that any shareholders in many Aim-listed firms can benefit from BPR.

As a consequence of this arrangement, a sub-section of the investment management industry sprang up to help wealthy clients lower their IHT liability by investing in a portfolio of Aim-listed stocks. However, there are several conditions attached to these portfolios that exclude many businesses, which narrows down the sphere of potential investments considerably. The tax rules state that a qualifying stock must be a trading company that carries on the majority of its business in the UK. It must not be a business that primarily deals in securities, land or buildings, or earns most of its income from making or holding investments. Once bought, the stock must be held for a minimum of two years before they qualify.

From a practical perspective, for a wealth manager constructing an IHT portfolio for a client, the stocks will also need to be high-quality firms and relatively large and liquid by Aim standards. Once these criteria have been met, the collection of 609 Aim-listed stocks (as at time of writing) will be whittled down to less than 50. This means that certain firms, such as James Halstead, are very popular in these portfolios and in great demand. Consequently, the valuations at which they trade often reflect their scarcity and tax advantages, as well as their business prospects.

However, there is growing speculation that the special treatment given to Aim-listed firms regarding BPR could be removed. This has been a potential risk for a long time, but it may now be a more immediate one. The new government wants to increase the tax take and there are reports that chancellor Rachel Reeves is eyeing sweeping changes to IHT rules when she unveils her first Budget on 30 October. Outside of the Halstead family and the employees' trust, much of the shareholder base for James Halstead is made up of IHT portfolios. Should BPR be removed, these portfolios will start to sell. There wouldn’t necessarily be an exodus from the shares since there would probably be a grace period. But, as cheap as James Halstead may appear, selling pressure from IHT portfolios could force the shares even lower.

Still on track for long-term growth

If one were to ignore the question mark over BPR, the case to buy James Halstead seems straightforward. It is an excellent business that is strong, cheap and pays a generous dividend. Despite going through a difficult period, the firm has recently reported a year of profitable growth. Revenues were down just under 10%, but that was a function of the pass-through of lower input costs to customers. Volumes of product sold were higher. Pre-tax profits grew by almost 8%. Net profit was actually slightly down, but this was because of a slightly higher effective tax rate – something all businesses deal with in good times and bad. Furthermore, the always-conservative board said it was confident of a positive “out-turn” this year, which is code for continued volume and profit growth.

Further ahead, the board remains confident in the long-term strategy, which has served the business and shareholders well for close to 50 years. The reality is that the last couple of years have been somewhat difficult, but that needs to be put in context. Over the long term, James Halstead has managed modest, but unspectacular growth in profits on a consistent operating margin in the high-teens. In the last two years, margins have tended closer to mid-teens – ie, still very profitable – and growth has faltered slightly. Yet the decline in valuation is akin to a business that is going through a much worse period. At a current share price of around 190p, James Halstead is trading on 18 times forecast earnings – a much lower valuation than its average over most of the last 25 years. As a result of a fantastic dividend record, shareholders also earn more than a yield of 4.5% per year. For the patient investor willing to look through the potential for weakness due to any changes to BPR rules, the shares look like a good investment right now. For those more cautious, there is no harm in waiting until after the dust settles on the tax question.

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Clean-energy funds and related equities have taken a hammering this year. The Global Clean Energy ETF (exchange-traded fund) with $3.5bn in assets is the biggest, most liquid green-energy ETF. It has fallen by 26% since 1 January 2023. 

UK-focused investors will have noticed an echo of this pain in the investment trust sector. The battery storage industry has been especially badly hit. The three listed funds in this area have suffered huge falls in their share prices: 

• Harmony Energy Income Trust (LSE: HEIT) is down by 40% to 75p
• The Gore Street Energy Storage Fund (LSE: GSF) has fallen by 40% to 68p
• The Gresham House Energy Storage Fund (LSE: GRID) has declined by nearly 50% to 88p. (I am a nonexecutive director at GRID.)

This sector had been a market darling as the market for short-duration battery energy storage system (BESS) projects boomed in the UK. According to industry news site Energy Storage News, in recent years the UK market had “ become the largest in Europe with over 3.5GW now online, with projects benefiting from high ancillary service market prices, particularly in 2022”. 

That growth resulted in market saturation, which also coincided with falling revenues, partly because the operator of the electricity grid, National Grid, hasn’t opened up as many opportunities as expected in a segment of the market called the balancing mechanism (designed to maintain the stability of power supply). While efforts are being made to give battery storage a more prominent role in the balancing mechanism, investors haven’t stuck around. 

Other emerging parts of the clean-energy spectrum are having a better 2023, notably nuclear energy, and especially uranium prices. Over the last few weeks uranium prices have breached the important $60 and $70 a pound barriers. So far this year spot prices have risen by 46% (they are up by 400% since 2019). Unsurprisingly, share prices for uranium miners (and to a lesser degree the small handful of uranium processors) have shot up. 

Alternative assets advisory house Ocean Wall runs an index for the small number of stocks in this sector and it has gained 52% in 2023. The market value of global uranium equities is $50bn, made up of just 84 stocks. 

Options for UK retail investors
UK investors have two main options to play the uranium rally. 

The biggest listed play is Aim-listed Yellowcake (Aim: YCA), which owns a physical reserve – in Canada – of uranium oxide. Its market capitalisation is $1.2bn and with uranium prices above $70/lb, the investment company is trading at a 12% discount to its net asset value (NAV).

Another popular choice is uranium equities fund Geiger Counter (LSE: GCL), which has a NAV of 60p against its current share price of 49.6p, representing an 18% discount. The fund is overweight in US-sourced uranium and owns no Kazatomprom shares. The Kazakh producer is the biggest player globally but is largely state-owned and an integral part of the Russia/ China economic axis. Geiger Counter’s single biggest holding is NexGen Energy, which boasts one of the largest reserves of cheap uranium in a Western jurisdiction. The fund also owns big stakes in America’s Uranium Energy Corporation (7.6%) and Canada’s Fission Uranium Corp. (6.4%). 

Over in the ETF sector, one of the most popular ways of buying into the nuclear story is through the HANetf Sprott Uranium Miners UCITS ETF (LSE: URNM). According to HANetf’s Tom Bailey, there’s a decent chance that uranium prices could go even higher from current levels. The uranium spot price “is now only at a comparable level to the spot price right before Fukushima in 2011. In fact, if you were to increase the pre-Fukushima price by inflation, it would be in the high 90s today”. Furthermore, he says, “We are nowhere near the all-time high, which was near $140/lb”.

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In August 2013, the UK was emerging from recession, and George Osborne, the then chancellor, thought encouraging investment into smaller and newer businesses would help jumpstart the economy.

And so the Aim ISA was born. Making Aim shares ISA-eligible meant investments into Aim shares were potentially free of income tax, capital gains tax and, after two years, inheritance tax – one of the most generous sets of tax reliefs available to private investors.

On 5 August 2023, the Aim ISA celebrated its 10-year anniversary.

We look at how the ISAs work, how the Aim has changed, and which stocks have performed the best.

How do Aim ISAs work?

You can buy Aim shares within a stocks and shares ISA, or you can set up a separate Aim ISA, which sometimes has a slightly different name like Aim Inheritance Tax ISA.

Investing in Aim stocks via an ISA means you get all the same tax benefits as other ISAs, so any growth or income is tax-free. Aim shares are also exempt from stamp duty.

There are a few added benefits. Aim shares can potentially qualify for business property relief (BPR) for inheritance tax purposes. If an investor holds qualifying Aim shares for at least two years before their death, those shares may be eligible for 100% relief from the tax. 

This means they would not be included in the taxable estate for inheritance tax (IHT) purposes, effectively reducing the IHT liability.

However, not all Aim shares automatically qualify for this relief. To qualify, the shares must meet specific criteria, including being shares in a trading company or a holding company of a trading group, and the company's activities should be primarily trading (rather than investment or non-trading activities). Shares in oil and gas and mining companies do not qualify for BPR.

How much can I save in an Aim ISA?

The maximum amount you can pay into an Aim ISA in the 2023/24 tax year is £20,000. This is the adult ISA allowance, which can be spread across different ISAs. 

For example, you could pay £5,000 into a cash ISA and £15,000 into an Aim ISA - or a stocks and shares ISA that holds Aim shares.

Note that if you’d like to open a specialist Aim ISA, you usually need a large amount of money, say a minimum of £20,000; this level is set by the investment provider.

How has the Aim changed since 2013?

Set up in 1995 to help growing companies raise funds, the Aim - which stands for alternative investment market - gained the infamous reputation of the “Wild West” owing to a history of scandals and company collapses as well as accusations of lack of regulation. 

But the junior market has matured over the years. According to the investment platform Interactive Investor, the Aim has grown from 10 companies worth a total of £82.2 million to 852 companies with a combined market cap of almost £135 billion. 

The market is also a lot broader, from oil, green energy and miners through to retail giants including household names such as Boohoo, Jet2 and Fevertree. Back in 2013, 30% of the top 50 stocks were speculative oil and gas or mining companies, whereas today energy stocks account for just 6.5%, according to the investment service Wealth Club.

In 2013, six companies had a market capitalisation of more than £1 billion, and four of them were oil and gas companies. 

By 2023, nine companies were valued at over £1 billion, none of which were in the oil and gas sector.

The Wealth Club notes that of the 50 largest companies quoted on Aim in 2013, only eight are still on that list today – Jet2, EMIS, Hutchmed (China), James Halstead, Polar Capital Holdings, RWS Holdings, Smart Metering Systems and Youngs & Co Brewery.

“Aim has changed a lot over 10 years,” comments Nicholas Hyett, investment manager at Wealth Club. “While at the smaller end, the market continues to support fundraising by a wide range of young businesses, many of its early constituents have matured into bigger, more stable businesses. It’s these companies, rather than more speculative commodity stocks, that now form the backbone of the market.

“That is good news for investors, especially for those looking to benefit from the market’s potential for IHT relief.”

He adds that as well as the IHT relief, Aim investors can also enjoy decent returns plus dividends. Of the eight companies that have kept their places in Aim’s 50 largest companies since 2013, seven paid a dividend this year. “And all have delivered returns far in excess of the wider market. In fact, we think dividends are a good sign of quality when investing in smaller companies generally, and particularly on Aim. They indicate profitability, cash generation and a shareholder-centric view that is supportive of long-term returns.”

Lee Wild, head of equity strategy at Interactive Investor, notes that there are risks with investing in small, growth stocks on Aim, and “the sharp rise in interest rates is a prime example of how growth stocks are more vulnerable in a crisis.

“But the benefits, when market conditions are right, can be remarkable. At its post-2013 peak in 2021, the Aim was by far the best-performing UK index and had outperformed many of the world’s major markets.”

How has the market performed?

The FTSE Aim All-Share Index has delivered a relatively modest return of 21% over the past 10 years to the end of July, underperforming the FTSE 100 (71%) FTSE All Share (71%) and the S&P 500 (288%).

But the market has been on a rollercoaster ride, comfortably outperforming the main market at times and lagging at others.

According to Wealth Club, recent weakness and changes to the sorts of companies listed on the market mean the Aim is looking attractive valuation-wise, trading on a price-earnings ratio of 10.6x and a dividend yield of 2.4% (the highest at any point in the last 10 years).

Which Aim stocks have performed best?

Smaller companies may be more susceptible to economic downturns, market volatility, or operational challenges. Certainly, dozens of Aim stocks have collapsed over the past decade.

However, investors - and fund managers - that picked one of the top 10 performing Aim stocks would have been rewarded handsomely.

The best performer since Aim ISAs were introduced in 2013 is Victoria PLC, the flooring product company, which has returned 3,584%.

This is followed by mining company Greatland Gold (2,364%) and competition company Best of the Best (2,313%).

Source: Wealth Club

Which Aim stocks are most popular?

In terms of which stocks are favoured by fund managers - and looking across the UK All Companies, UK Equity Income and UK Smaller Companies sectors - here are the most popular Aim companies: 

Source: Wealth Club

In terms of private investors picking their own Aim stocks, these are the most popular on the Interactive Investor platform this year (to 5 August 2023):

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Every July I revisit my share tips from January. As I often point out, investing over a time frame as short as six months is akin to flipping a coin, especially in a market where stock prices are falling across the board (as is the case in my stomping ground of small caps). 

Harvest Minerals (Aim: HMI) 7.95p, now 3p

My first pick was Australian natural fertiliser producer Harvest Minerals. As I wrote six months ago, this stock is especially susceptible to overall market sentiment. However, cash generation is strong, with cash rising to A$2.7m from A$1.7m; A$1.2m in debt has been paid down too – taking total cash generation to A$2.2m.

This equates to £1.16m, impressive compared with a current market value of £9.8m. Still, Harvest has warned that it now expects to sell just 120,000 tonnes of fertiliser this year, down from the previous target of 200,000 tonnes. Prices have fallen too. Harvest says farmers have delayed purchases in anticipation of further price declines. Moreover, the price of soybeans (Brazil’s main crop) has reached levels close to the cost of production. The company has the cash to get through this downturn, but given the poor share-price performance I am happy to admit that, so far, I am wrong on this.

Few people are suffering more than executive chairman Brian McMaster, one of the company’s largest shareholders, but the lack of predictability in the business understandably puts many investors off. I consider this a high-risk share because of the potential for a delisting.

Altitude (Aim: ALT) 31.5p, now 38.5p

Altitude is a technology company that provides services to the promotional merchandising and print industries in North America. The company’s AIM Smarter platform connects buyers, sellers, and manufacturers of promotional merchandising. 

The group has continued to impress and since my last article broker Zeus’s expected adjusted profit before tax figure for the year to 31 March 2023 has almost doubled to £0.9m from £0.5m. 

Furthermore, continued growth is expected in 2024 with adjusted profit before tax set to total £1.3m. The shares are not cheap, but I believe the business is scaling up and there is scope for further progress. 

XP Factory (Aim: XPF), 21.5p, now 16.75p 

XP Factory was formerly known as Escape Hunt. It operates “escape rooms”, into which players are locked until they can solve a puzzle, and also acquired Boom Battle Bars in 2021, which added games such as augmented-reality darts and axe-throwing. 

In January I highlighted the risk of a slowdown in consumers’ discretionary spending. Yet the group said recently that “it has been performing ahead of management’s expectations”. Like-for-like revenue rose by 32% year on year in the first quarter. 

The threat of lower household spending hasn’t gone away, but investment bank Singer Capital Markets has pencilled in sales for 2023 of £42.6m compared with last year’s £22.8m. Margins continue to meet or beat management’s internal targets. I see no reason to change my view here. 

Brave Bison (Aim: BBSN), 2.2p, now 2.4p 

Brave Bison is a media, marketing, and technology company focused on social media. It owns and operates more than 650 channels across all major social-media networks and boasts some of the biggest brands in the world, with a client list that includes Google, Panasonic, New Balance, Currys, and more. 

Net income totalled £2.1m last year – putting the company on a price/earnings (p/e) ratio of just above ten. Given that sales are set to grow to £42.9m this year from 2022’s £31.7m, I think the price is extremely attractive. There is also plenty of cash on the balance sheet. Still, the company said in April that “trading had become more challenging in the first half of 2023 as customers’ budgets have come under pressure”. 

I remain bullish on all four stocks. Altitude hit highs of 48p; Brave Bison reached 3.1p and Harvest almost 10p. For the short-term trader, the opportunities have been plentiful. As always, you must do your own research and manage risk. Below are four more shares where I feel the upside could outweigh the downside. 

Kitwave (Aim: KITW), 285p 

Kitwave is an independent wholesale delivery business specialising in selling impulse-purchase products, such as confectionery, soft drinks, snacks, ice cream, frozen and chilled foods, alcohol, groceries, and tobacco. 

The company is a rival to Booker and other wholesalers. It uses a buy-and-build model, acquiring smaller businesses that are happy to sell and also deploying cash generated from operations (rather than constantly issuing shares). It may not sound the most exciting business model, but the group is performing strongly. The forecast for its 2023 post-tax profit has been raised to £21.2m, putting the stock on a p/e of just above ten.

Nightcap (Aim: NGHT), 9.25p 

Nightcap operates cocktail bars and is focused on acquiring and developing “wet-lead” brands (those relying on drinks only, not food) in order to roll these out across the country. It was founded by Sarah Willingham, an investor on the UK hit series Dragons’ Den and her husband (and co-founder) Michael Toxvaerd. 

After listing on Aim at 10p in January 2021 the shares shot up to 36p within six weeks. A few months later the company set out to acquire Adventure Bar with a £4m placing, and ended up raising £10m thanks to significant demand. 

Some shareholders at the time complained about the dilution. However, there is no doubt that this additional cash buffer put the business on a better financial footing as it didn’t need to raise money in 2022, when many companies were doing so at share-price lows. 

There was, though, a small placing at 12p in June 2023 to acquire the Dirty Martini brand from administration for £4.65m. Given Dirty Martini’s unaudited 2022 revenue of £23.7m and Ebitda of £3.9m, this is a very attractive acquisition. Its sales were worth more than half of Nightcap’s £35.9m in 2022. The dilution is small, with £2.35m being raised at 12p (a premium to the share price) with three investors. This puts Nightcap in a prime position to expand further. However, house broker Allenby has reduced 2023’s revenue target to £47m from a previous estimate of £49.3m despite the significant scale of the acquisition. 

This is a big reduction and reflects the ongoing rail strikes and potential for a major slowdown in consumption. However, I see this stock as a potential winner once the dust has settled. That could be some time away though.

McBride (LSE: MCB), 30.5p 

McBride is the supplier of private-label household and personal-care products: washing-up liquid, bleach, disinfectant sprays, powders and aerosols, for instance. The shares have been in decline since the start of 2018, when the price topped out at 234p. They recently hit lows of 15p.

Investors had been concerned with the company’s debt. However, in January it announced that management had managed to deliver improved profitability and that net debt was in no danger of breaching banking covenants. McBride released a trading update on 14 July claiming that “adjusted operating profit will be materially ahead of current market expectations” and that net debt had outperformed forecasts too. The upshot is that with the share price having doubled from its lows, the long-term trend could be changing and we are witnessing a turnaround. That said, the shares do still carry significant risk. Net debt has reached £166.5m, compared with a market value of £54m, so the company is carrying more than three times its value in borrowings on the balance sheet. 

However, if McBride can continue to improve operational efficiency and pay down the debt with cash flow, the share price can go higher. The company reports that there has evidently been a shift among consumers to own-brand labels in order to get better value as inflation starts to bite and pockets are squeezed. 

This stock looks ugly at first glance. But it’s when other people turn their nose up at equities that outperformance becomes more likely. Popular stocks are usually priced for their popularity, and fail to achieve outsized returns. If you do what the average trader and investor does, you will end up with average results. I feel the risk-reward ratio for McBride here is firmly skewed to the upside. But I can always be wrong.

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• 5 emerging market investment trusts to buy 

We believe that equity-income investors shouldn’t purely focus on the traditional dividend stalwarts at the top of the FTSE 100.

Across the entire UK equity market there are over 550 dividend-paying companies, many of which have more attractive earnings growth characteristics than traditional income sectors such as banks, miners and tobacco. This profit growth can in turn underpin attractive levels of payout growth.

We therefore judge stocks by three key attributes: a company’s dividend yield, of course, but arguably more importantly, the company’s earnings growth, and its potential dividend growth.

Ideally, we are looking for stocks that we think can deliver on all three metrics, ahead of the wider UK equity market, through the cycle. This results in a multi-cap approach, with a bias towards faster-growing small and mid-cap firms, where we find many of the more interesting opportunities. Below we highlight three stocks we have held in the portfolio for some time, yet, we suggest, offer a potentially extremely attractive entry point for investors on a mid-term horizon.

Profitable pawnbroking

H&T Group (Aim: HAT) is Britain’s largest pawnbroker. Established in 1897, it has over 250

stores and offers customers a diversified product portfolio including pawnbroking, unsecured lending and foreign exchange. It is also the UK’s sixth-largest retailer of high-quality, pre-owned and new jewellery and watches.

The business delivered a fantastic performance last year, with profit growth of more than 140%. Looking ahead, analysts expect profits to expand at a compound annual growth rate (CAGR) of 38% to the end of 2024, with a potential dividend yield in excess of 5% this year. Despite these impressive metrics, the stock is still on a prospective price/earnings (p/e) ratio multiple of less than eight, well below its long-term average.

A diverse alternative-asset manager

Intermediate Capital (LSE: ICP) is a global alternative-asset manager. It currently manages approximately $75bn across a variety of strategies. Even though the fundraising environment has become more challenging, the business continues to make progress, recently reconfirming its ambitious fund-raising targets for the next two years.

Profit growth, underpinned by an increasingly diverse product range, has enabled the business to raise its ordinary dividend for 12 consecutive years, reporting 36% growth in the year to 31 March 2022. The group is expected to generate a dividend yield of 6.5% for the year to 31 March 2023, and on a prospective p/e of less than ten, this stock is on a discount to its long-term average valuation.

Cash in on corner shops

A leading independent wholesale business supplying the convenience-retail sector, Kitwave (Aim: KITW) operates from 29 depots across the UK and listed on Aim in 2021. The business has delivered attractive levels of growth both organically and through complementary acquisitions.

For the current financial year the stock is expected to produce revenue growth of more than 13%, adjusted profit growth of over 24%, and an attractive dividend yield of 4.3%. Despite this excellent record since listing, and these appealing metrics, the stock is again attractively valued, trading on a prospective p/e multiple of only ten.

Investors’ sentiment has fallen through the floor, and no wonder. With the Budget looming, uncertainty has shot up, and the markets hate uncertainty. Investors are looking at the economic landscape and feeling as though there is no safe haven in sight. They are, therefore, recklessly selling assets in a clumsy manner, affecting many stock prices. Sky News has reported that 140 listed companies have written to Chancellor Rachel Reeves to say that uncertainty over the future of inheritance tax relief on Aim shares “is damaging investor confidence”. I’m surprised it’s only 140.

But it’s not just the looming Budget that has the market spooked. Rachel Reeves’ policies and Labour’s stance on the economy are adding to the concern. For context, Reeves is keen to set herself apart from the Conservatives by signalling that Labour will be the party of sound money. But many in the market are sceptical. Her piece in The Sunday Times was a chance to allay some of those jitters but, instead, she produced an article that talked a lot but said nothing at all. Failing to invite Elon Musk to the much-vaunted investment summit also seems a poor decision – especially when all eyes are on SpaceX’s rocket booster making a successful landing after a test launch.

In theory, fiscal prudence is a good thing. After all, you don’t want to see government debt spiral out of control, especially with the spectre of inflation still lurking in the background. But the market didn’t like the suggestion that “this Budget will be painful”, and many feel as if any money they have lying around is likely to be hoovered up. Whether this is correct is another question and not one for me to answer. My focus is purely on what drives the market.

Ignore the Budget volatility

With the Autumn Budget, we could be in for more volatility. Certainly the market is in a “risk-off” mood at present. But perhaps the new government has decided to set expectations low and then deliver a less painful Budget than anticipated so the speech is well received? One can only hope. It’s all very well saying that the rich (whenever someone says this, they usually mean everyone who earns more than they do, of course) should pay more tax, but if you tax them too much, they will leave. What people anticipate, and what people actually do, are two different things. When, during the Raj, the British government – concerned about venomous cobras in Delhi – offered a bounty for every dead cobra, it found that all went well until people decided to breed the cobras to get the income. Perverse incentives are real.

But despite all this negativity, on a long enough time frame I remain bullish, and so I’m always looking for stocks to trade. One that springs to mind is THG (LSE: THG), formerly known as The Hut Group and owner of the Myprotein brand, among many others. It recently issued new shares to raise capital. According to founder and CEO Matt Moulding, the share placing, at 49p, was more than four times oversubscribed. And yet the closing price the day of the placing was 47.72p. That is not what you’d expect if the demand Moulding trumpeted really existed. Someone is lying, and the odds are investors exaggerated their potential appetite for the shares. But this is why what someone says isn’t as important as the price, because the share price doesn’t lie. It tells you everything you need to know.

Despite this, the raising of capital to fund Ingenuity, THG’s proprietary ecommerce platform over the medium term, with a view to spinning it off eventually, makes sense. Nobody can accurately value THG – at least not according to Moulding. Splitting it may help unlock any hidden value; Matt Moulding also says that any profits and cash made from the beauty and nutrition businesses have been “relentlessly invested into building Ingenuity”. I’ll stay on the sidelines for now but watch with interest. If profits rise following the demerger, then one imagines the share price would follow.

A company to look at

Another company I’ve watched for some time is Seeing Machines (Aim: SEE). Seeing Machines develops advanced computer vision technology that tracks eye movements, head position and other indicators to determine if a driver is distracted or fatigued. The technology essentially acts as a digital co-pilot, making sure drivers are alert and focused. If it senses a problem, it can warn the driver or even take action to prevent an accident. The technology has been shown to reduce fatigue-related incidents by more than 90%. For that reason, it’s certainly a business that you’d like to see prosper. The technology is becoming mandatory on new cars in the EU. However, as exciting as this product is, and despite the group’s renowned clients, it is investing heavily in research and development (R&D) to ensure the product remains competitive. This eats away into revenues generated and so far the business has yet to achieve any profits for shareholders.

That said, the potential market is huge. Every single new car coming on the road is up for grabs, and so far there are only 2.2 million cars using Seeing Machines’ technology. Commercial vehicles such as lorries, mining equipment, haulage, aviation and rail are all potential growth sectors. There is no doubt that the TAM (total addressable market) is huge here.

At present, the shares are not far off 52-week lows. And with profits not currently projected until 2026, and a huge Ebitda loss of between $17 million$19 million forecast for the financial year 2024, my view is to remain cautious but watch with interest, and wait for a change in the trend. I’m not convinced that Seeing Machines can get to break-even without tapping shareholders for more cash. And given the recent lows in the share price, the market appears to agree. If Seeing Machines can commercialise and scale up its technology, there will be plenty of upside left if I at least wait until the big funding risk has dissipated.

An exciting opportunity

One of the most exciting businesses on the London Stock Exchange, in my opinion, is Beeks Financial Cloud (Aim: BKS). This is a company that has been listed since 2018 and operates in a niche but growing sector: cloud computing for financial markets. It provides the infrastructure that allows traders, brokers and financial institutions to connect to financial exchanges quickly and securely. Beeks makes sure that when financial transactions happen, they happen fast, reliably and without interruptions.

The group’s main product consists of ultra-low latency, high-performance connections. Latency is a word for “delay” and, in trading, even a millisecond’s delay can mean the difference between making money or losing it. Beeks helps traders execute trades as quickly as possible by hosting servers close to major financial exchanges, meaning the data has less distance to travel. For example, if you’re a hedge fund trading in New York but using a trading platform based in London, Beeks’ infrastructure ensures that your orders are executed with minimal delay. They offer these services to a range of financial institutions, from retail brokers to big investment banks.

This stock is exciting because Beeks has just signed a contract with Nasdaq – a huge market. While we don’t know how big the contract is, the potential is clear. Beeks is forecast to make a £5.5 million post-tax profit for the year to 30 June 2025, which puts it on a price/earnings (p/e) ratio of 32. It’s not cheap. But then how many companies work with some of the biggest financial exchanges in the world? I like the stock and would want to take a trading position if it were to break out of the recent highs at 290p.

Next on the list is Ceres Power Holdings (LSE: CWR), a clean-energy company focused on one of the most promising technologies of the future: fuel cells. Fuel cells generate electricity through a chemical reaction, without combustion, making them a cleaner alternative to traditional energy sources. Its focus is on developing solid oxide fuel cell (SOFC) technology. However, Ceres doesn’t just make these fuel cells, it licences the technology to manufacturers, allowing them to integrate Ceres fuel cells into their own products. This means they don’t need to build their own massive production facilities, keeping costs low while scaling up rapidly.

Michael holds no positions in any of the stocks mentioned. You can get more of Michael’s trade ideas at newsletter.buythebullmarket.com

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

If you're looking for shares to buy today, it might be worth considering investments on London's AIM market, notes Chris Boxall of Fundamental Asset Management.

Not only do these stocks offer highly attractive levels of income, but they’re also currently cheap and may help you lower your Inheritance Tax (IHT) bill.

How AIM shares can lower your IHT bill

Having performed spectacularly well over the peak of the pandemic, significantly outperforming the Main Market, London’s AIM market had a torrid 2022, but the dramatic fall in share prices of cash-generative AIM companies could present an opportunity for investors.

Indeed, as equity prices have fallen, the dividend yields of some well-established AIM companies have jumped substantially. Many stocks now offer yields in excess of 4% while some go as high as 10%.

Another attraction for owning AIM-quoted companies is the potential to save future IHT. AIM shares can provide 100% relief from IHT, through business property relief, although investing for this reason alone is not going to be sensible for everyone.

Still, with the yields on offer from AIM shares today, coupled with their growth potential, there’s scope for investors to make attractive returns, while potentially reducing future tax liabilities as well.

Here are examples of three high-yielding AIM shares to buy, all of which could qualify for IHT reliefs.

3 shares to buy for income and growth

A builder’s merchant with a 6.4% yield

Alumasc Group (AIM:ALU), a supplier of sustainable building products, systems and solutions, benefited from the post-lockdown construction boom.

In the fiscal year to the end of June 2022, revenues climbed 15% to £89.4m while underlying operating profit jumped 27% higher at £13.3m

Most of Alumasc’s sales are driven by building regulations and specifications (architects and structural engineers) because of the performance characteristics offered. It operates across three business segments of Water Management, Building Envelope and Housebuilding Products. The smallest Housebuilding Products division called Timloc looks particularly interesting with growth continuing into the first half of the current financial year and operating margins of 24%.

At present, the company is projected to pay out 10.3p per share in the current year, which gives a dividend yield of 6.4%.

The building materials sector has sold off significantly on recession and interest rate worries, but Alumasc has suffered more than others, with the shares trading at a discount to its peer group.

Income and growth

Iomart Group (AIM:IOM) is a cloud computing company which provides managed services from data centres across the UK.

It was founded in 1998 by Angus MacSween, who moved from CEO to a non-executive role in 2020 and still holds a 15.45% stake.

Iomart provides cloud and managed hosting services from its data centres, delivering the computing power, storage, and network capability. Larger customers tend to have multi-year contracts for complex cloud solutions, which are invoiced and paid monthly, while many smaller customers pay in advance. A significant proportion of revenue is therefore recurring and the combination of multi-year contracts and payment in advance provides the group with strong revenue visibility.

While revenues declined 8% in the company’s last fiscal year, this reflected a return to normality for the group from the pandemic bump. In other words, sales have returned to normal after a bumper couple of years.

Cash flow is generally excellent, supporting further investment in its data centres and an attractive dividend, with a forecast payment of 5.55p per share equating to a yield of 4.5% at the current share price. That’s why it makes it on the list of the best AIM shares to buy for income and IHT protection.

Fund manager offers income of 7%

In many respects, fund management companies like Premier Miton Group (AIM: PMI) are just supercharged plays on the general performance of the stock market. If markets rise, and their funds do well, fee income grows. On the other hand, if markets fall, Premier Miton is likely to see fee income decline.

The group's assets under management ended 2022 at £11.1bn, an increase of 5% year-on-year. That looks like a pretty good result, considering the state of the markets last year.

Encouragingly, 82% of its funds were in the top 25% or 50% of their respective sectors, implying its managers know what they’re doing.

Overall, the company generated £17.1m of cash last year, more than enough to support its £14.7m dividend outlay. Even though it’s paying out the majority of its cash flow to investors, the firm has still managed to build a large cash reserve on the balance sheet. Its bank accounts are stuffed with £45.8m, nearly a quarter of its current market capitalisation.

The forecast full-year dividend of 9p for the current year equates to a yield of 7% at the current share price.

When a company floats on the stock exchange, the buoyancy of the share price represents a tension. Management wants to set a high price for the shares existing shareholders are selling, but that high price is anchored on future expectations. But the higher the expectations, the higher the risk of disappointment following the listing.

Currency trader Argentex (LSE: AGFX) was founded in 2011 and listed on Aim in June 2019 at 106p, valuing the company at a market capitalisation of £120m. It raised £12.5m in new capital in the initial public offering (IPO), while existing shareholders sold £46m of stock. At the beginning of 2020, the shares peaked at over 200p.

Then came the pandemic, then the departure of a co-CEO who sold his 10% shareholding, followed by earnings downgrades (see below). Investors are disappointed and the shares have tumbled 63% from their January 2020 high. That could now present an opportunity.

Beating the banks

Argentex acts as a “riskless principal”, so does not charge commission for executing trades. Instead, revenue comes from the spread it receives from each deal. That spread is not fixed – pricing depends on the client’s individual trading history and the dealer’s discretion. All the trades are over the counter (OTC) rather than centrally cleared. This might be open to abuse, with traders charging what they think they can get away with, but Argentex says that it wins clients from banks due to superior pricing and service.

Argentex’s customers are companies who need to convert between £1m and £500m annually into another currency. Its largest sector is financial services (ie, fund managers, pension funds and insurance companies) at 37% of revenue. It has signed up 239 clients in the last year to bring the total number of companies for whom it trades to 1,624. Given the bureaucratic nature of know your customer (KYC) and anti-money laundering (AML) forms, it’s unlikely that clients would go to the trouble of switching if the savings were not worth the effort.

Investing in growth

On the other side of the trade are large global banks, who price the trades keenly in return for Argentex meeting minimum trading levels. These counterparties require collateral to be posted in order to deal in forward contracts. That has been a constraint on growth in the past, and some of the £12.5m raised from the IPO in 2019 was supposed to fund growth, by allowing Argentex to increase the total volume of forwards trades with existing clients and win new ones.

The second use of proceeds was to hire a larger sales team. The plan at the IPO was to more than double sales headcount to 50 people within two years. Based on the numbers just reported, it has fallen short, which probably explains the earnings per share (EPS) disappointment. The firm hired 22 new people in sales in the two years following the IPO, but it looks like it wasn’t able to retain all of them. Headcount in sales is less than 40 people in the results to March. That’s important because management says that the longest-serving salespeople are the most productive. In the first year, a salesperson generates on average £42,000 revenue, later growing to £1.8m in year five. There is a large jump from £0.5m in the third year to £1.1m in year four.

This looks like a fixable problem, though it will take time. The firm is expanding internationally by opening offices in the Netherlands and Australia. And while Argentex started out with a similar model to a private bank – with a high-touch bespoke service – it is now also building an online trading platform for lower-value transactions. I own the shares, and despite the recent disappointment, they look like they offer good growth prospects at a reasonable price.

Tripped up by ambitious forecasts

In the two years before the IPO, Argentex’s sales and operating profit roughly doubled to £22m and £9m respectively and forecasts were for rapid growth. Management felt comfortable with ambitious forecasts by Numis (its former corporate broker) of 12p in earnings per share (EPS) for the financial year to March 2022, which implied a 15% compound annual growth rate (CAGR) in the bottom line.

But results did not meet expectations. Argentex has just reported adjusted EPS of 7p for the year ending March 2022, which is 42% below the original forecast.

Management has taken the unusual step of changing the firm’s year end from March to December, as well as changing the broker to Singer Capital Markets. Singer expects £47m of revenue in the year to December 2023, rising to £57m the following year, implying 18% growth CAGR from the level just reported. EPS is expected to drop this year, but recover to 6.4p in 2023 and 10.1p in 2024. At a share price of 75p, that puts the shares on a forward price/earnings (p/e) ratio of 11.7 for 2023, dropping to 7.4 for 2024. It’s worth noting that 2024 forecast is still 20% below the original forecast of 12p in 2022.

There are a couple of risks. Competition is one. Wise and Revolut could decide to target the corporate sector. Equals Money, a more directly comparable competitor, just reported that it is growing revenue at 84% in the first half of this year. Given the strong growth at competitors it is rather puzzling that Argentex rates itself above its peers for both price and service. A second risk is client concentration: the top 20 clients on average generate £621,000 of revenue, versus the long tail of customers who generate £14,000 on average. If one of those large clients failed to settle a forward contract, Argentex would be exposed to losses, as there is no centralised clearing.

Aim (formerly the Alternative Investment Market) is London’s market for small and medium-sized growth companies. It has a bit of a bad reputation among investors and it’s easy to understand why. Aim has greater regulatory flexibility compared to the main market, which is supposed to make it easier for companies to list and attract investor capital.

Unfortunately, this light-touch regulatory regime has been abused by bad actors over the years. As a result, Aim has developed a reputation for being a financial Wild West.

But while it’s true that there have been some notable disasters in recent years, there have also been some great success stories. The manufacturer of concrete laying laser-guided equipment, Somero Enterprises, Inc. (LSE: SOM), is a great example. Investors who were savvy enough to put £100 in this company ten years ago have seen the value of their holdings hit £3,500 today.

FTSE 100 companies are expected to return a total of £78.5 billion in 2023, compared to £76.1 billion in 2022. Aim will never be able to rival the blue-chip index for income (the aggregate market capitalisation of the index is only around £80bn), but that doesn’t mean investors should ignore what the index has to offer.

With that in mind, here are the highest yields in the Aim All-Share index (excluding stocks with a market capitalisation of below £20m at the time of writing): 

Figures based on Refinitiv analyst estimates

The list contains a broad mix of companies from different sectors, growth prospects and valuations. 

Investor sentiment towards investment and financial services companies has deteriorated amid market volatility. As a result, many companies in the sector have seen their share prices slump and dividend yields. This is not just limited to Aim, it’s happening across the market, including blue-chip FTSE 100 companies.

This price action seems to reflect the view that these asset managers will struggle in volatile markets, and may continue to lose assets to passive fund providers. For those reasons, I’m a bit sceptical about their ability to hit dividend targets.

Real Estate Investors owns a portfolio of commercial properties and is structured as a real estate investment trust (REIT). Under REIT structure rules, the company has to return most of its property rental income to investors, which is the main reason why its yield is high.

Management is trying to close this gap by selling assets and paying down debt, and it has also hinted at special dividends to return additional capital. On that basis, I think Real Estate Investors’ dividend has strong foundations.

See also:

How to find the best stocks with dividends

Five dividend stocks to beat inflation

The ten highest dividend yields in the FTSE 100

The ten highest dividend yields in the FTSE 250

The ten investment trusts with the highest dividend yields

The second half of 2022 is approaching. Six months isn’t much of a time horizon, even for a relatively short-term trader. But as I have a new batch of Aim stocks for you to consider today, let’s check in with my picks from the start of the year (‘Four speculative Aim shares for 2022’, 7 January 2022) to see if the theses still hold.

React (LSE: REAT): 1.15p – HOLD

My first pick was cleaning services firm React Group at 1.4p. Small caps can be volatile, with the stock trading above 2p only to close as low as at 1.10p recently. The company raised its market capitalisation in cash for the acquisition of LaddersFree – a capital-light business that the board believes can be integrated into React’s offering then scaled up. Shareholders may be smarting from this, but the board believes this is an incredible opportunity given LaddersFree’s service partner network and its impressive gross margins of more than 50% in the last two trading years.

Chair Mark Braund believes this can even grow – LaddersFree recently won a competitive tender which apparently came in “significantly below” the price of the next competitor. The deal is materially earnings-enhancing and none of the board are taking large six-figure salaries from the company (unlike many Aim shares), instead aiming to be remunerated through their options. Put simply, there is no reason to do this deal unless the board believes in the long term. So while there may be short-term pain, the investment thesis hasn’t changed.

Shoe Zone (LSE: SHOE): 160p – HOLD

This shoe retailer, which is very much bucking the “high street is dead” narrative, was my second pick at 110p, and it has already delivered a return of more than 45%. It’s also reinstated the interim dividend, which is not something management would do unless it was sure it could continue. I believe there’s more to come – if anything the investment thesis is now even stronger.

Iofina (LSE: IOF): 21.5p – SELL

My third pick was iodine producer Iofina at 18p. The stock has risen slightly but I’ve chosen to sell. The company is benefiting from a rising iodine price ($40 in October – now more than $60). Construction of its IO#9 plant was ‘in negotiations’ in the interim results in September 2021 and still in negotiations in December 2021 with the company expecting to “finalise an agreement in early Q1 2022”, and “close to finalising an agreement” in April 2022. Management has repeatedly failed to deliver, with zero acknowledgement of previous goals, nor any reason as to why Q1 turned into Q2 which will likely now turn into Q3.

Operationally, the company continues to trade in line with expectations and looks cheap, but this lack of communication, coupled with a hard-to-research commodity market, means I have chosen to sell due to my lack of trust and lack of understanding. I suspect it will perform well should the iodine market tighten. Iofina has been transformed from the debt-ridden business it was a few years ago, but it’s not for me.

Yellow Cake (LSE: YCA): 372.5p – HOLD

My final pick was Yellow Cake at 340p. It has traded as high as 485p but is currently around 372.5p. Uranium is starting to gain traction, with prime minister Boris Johnson pledging to move the UK towards nuclear power. Uranium miner Cameco noted in a recent earnings call that contracting in the first quarter was already above the 2021 total – a sign that utilities are now looking to lock in agreements. Yellow Cake is a pure play on uranium – with the investment case looking stronger, I remain a holder.

Another four Aim stocks for the second half of 2022

It just shows that even a mere six months can offer investors a wild ride in terms of volatility. This can even create opportunities – if you sold Yellow Cake at 480p you could now buy back the same shares at a discount of more than £1 – a nice turn! But it’s also a valuable reminder that share price fluctuations do not always reflect a great deal about the underlying business. The key is to do your own research and manage risk. Here are four more shares where I feel the potential upside is greater than the downside.

Digitalbox (LSE: DBOX): 9.25p

Digitalbox produces and publishes online content. It owns several publishers including Entertainment Daily, The Daily Mash, and The Tab. Its goal is to buy publishers that have great content but are struggling to monetise effectively. It has so far struggled to set the market alight, although in fairness 2020 saw ad revenue decline before starting to pick up by the end of the year. The company bought The Tab and is now seeing a return on investment, having integrated the business into Digitalbox’s proprietary Graphene platform. Digitalbox saw its first net profit in 2021 and is cash-flow positive. It bought TVguide.co.uk last month, which will immediately enhance earnings. This fits its model of buying smaller businesses then growing both the content quality and ad inventory. It’s a similar business mode to Future (MoneyWeek’s owner) but with one key differentiator: Digitalbox is primarily focused on mobile inventory.

At 9.25p the shares trade on a forecast price/earnings ratio of less than 12 but the real risk is heavy dilution should the board raise at a steep discount. That said, I’m comfortable with this risk and believe the board is aligned with shareholders. If the business keeps executing then this could be a much bigger and more profitable business.

Northbridge Industrial (LSE: NBI): 193p

Specialist industrial equipment group Northbridge Industrial Services has sold its Tasman drilling division and is now solely focused on Crestchic loadbanks (electrical testing equipment). To reflect this new strategy, the company will be changing its name (assuming the resolution is approved at its AGM) to Crestchic with the EPIC code LSE: LOAD.

Crestchic is a global business, and management believes it can be scaled up. Northbridge has completed a new loadbank production facility that will increase production capacity by 60% to meet strong levels of customer demand as well as future-proofing the business. Crestchic currently has 10% market share of the global power reliability market and the goal is to grow further in this expanding market.

The directors have been strong buyers of stock here, with Nicholas Mills, a non-executive, owning more than 24% of the stock. This is a turnaround play – the business has sold an unwanted unit and has a clear focus on growing production and capturing market share. The stock currently trades on a p/e of 15, so while it’s not cheap, the valuation is reasonable for a company now on a growth trajectory.

PCI-PAL (LSE: PCIP): 66p

PCI-PAL is a solution provider for card-not-present (CNP) transactions. PCI-PAL solves the problem of the secure handling and storage of customer data for contact centres, which are increasingly becoming omnichannel. GDPR is a problem for clients because breaches and customer data misuse can carry huge reputational and financial penalties. Companies can instead outsource this risk to PCI-PAL and get on with focusing on their core business.

This makes PCI-PAL one of the most exciting companies on the London market because of the sheer size of its potential market. Last year, it raised £5.5m at 95p to accelerate growth. This pushed losses out even further, but the board believes that going after growth is the best strategy. Annual recurring revenue (ARR) has now gone above £10m, and customer churn rates are below 3% – in other words, once customers have signed up to the service, they are reluctant to leave. Not only that, but customers add users once signed up, which gives PCI-PAL net revenue retention of 118% as of the recent trading update.

The elephant in the room here is that the company is currently the subject of a lawsuit from one of its main rivals, Semafone. The directors believe it is unfounded, and have also gone on the attack with counterclaims against Semafone. Many investors would consider PCI-PAL uninvestable due to this legal risk. This is sensible. That said, I am long as the company’s growth is increasing and I believe a settlement will be reached.

Aura Energy (LSE: AURA): 11p

Aura Energy is a uranium exploration company which owns the Tiris asset in Mauritania. It’s a leveraged play on the uranium trade and is aiming to become a producer early in this cycle in 2024. The company raised A$8.8m (£5.1m) at a price of A$0.25 per share in Australia (which was around 14p per share in London – the share is dual-listed).

This placing was heavily oversubscribed yet the shares can now be bought at 11p in the market, despite nothing changing. The funds have been raised to complete extra drilling at Tiris to expand the resource and fund the start of engineering, working towards a decision to proceed in Q2 2022.

So far Tiris has around 56 million pounds of uranium with a cut-off grade of 100 g/t. It also benefits from shallow, flat-lying surface mineralisation (a depth of one to five metres). This means that no drilling and blasting, or crushing or grinding is required. Every dollar increase in the uranium price trickles down to the bottom line, because Tiris has an all-in sustaining cost of $29.81 a pound.

Aura is a pre-producer and so carries even more risk than your average mining stock. There is no revenue and it is reliant on external funding. If Tiris becomes a producing mine, financing will come easily. But we also have to remember that many junior mining companies list with the goal of achieving production but few ever achieve it.

Michael Taylor is long on REAT, SHOE, YCA, DBOX, NBI, PCIP, and AURA. For more market insights get Michael’s free Buy The Breakout weekly newsletter at shiftingshares.com/newsletter

SEE ALSO:

• How to hunt down the best Aim stocks

• Three mistakes to avoid when investing on Aim

• Four Aim stocks to buy for 2022

• Five Aim stocks with plenty of potential for 2021

The first quarter of 2022 is over.

It's a natural point at which to take stock of what's happened in markets.

It's also a completely arbitrary point, of course. Just because markets have been doing something over the past three months doesn't mean they'll keep doing it.

Yet, arbitrary or not, taking a snapshot of markets can give us an idea of what the overall narrative is at any given time.

And it's very clear from the first quarter of this year that the big stories in investment are now dramatically different to the ones that drove the post-2009 bull market...

The FTSE 100 is doing well – what's gone wrong with the world?

One of the most obvious changes in the investment environment is that the UK's headline stock market index isn't clutching tightly to the wooden spoon for once. That's quite the shift.

During the first quarter of 2022, the FTSE 100, which comprises the 100(-ish) biggest (in terms of market capitalisation) companies listed on the London Stock Exchange, gained 1.8%, notes George Steer in the FT.

You may not be cracking open the champagne on that sort of gain (certainly not with inflation sitting at its present levels). And if you'd been more adventurous, investing in Brazil say, you'd be up a whopping 34.3%, says Morningstar.

But it's rather a lot better than if you'd invested in most other major developed global stock markets – or British ones for that matter.

The FTSE 250, which comprises the next 250(-ish) companies, lost 10.6%, while the biggest companies on Aim – London's junior market - lost an even more brutal 16%.

As for international comparisons, eurozone stocks (as measured via the Stoxx 600 index) fell by 6.5%, while the S&P 500 dropped 4.9%.

There's a pretty straightforward story to tell here. The FTSE 100 has done reasonably well for two main reasons. One is that it has been the least popular developed market in the world for a long time now, so it was starting from a low base. That shunning was partly due to Brexit.

Two - which has nothing to do with Brexit – is that it is full of the sorts of stocks that everyone has hated for the duration of the post-2008 bull market. The FTSE 100 has banks (at the heart of the last bubble); miners and oil companies (hated because they're the opposite of both ESG and "digital" assets); and a distinct lack of hot tech stocks.

Oh and it's a dividend-heavy index in a world that had decided that regular payouts to investors showed that a company had run out of imagination.

So in a world where investors have decided that "value" investing is a dirty word, it's little surprise that the FTSE 100 index was hated.

Clearly that's changing now. Even before Russia invaded Ukraine, commodity and energy prices were surging. Inflation finally stopped being described as "transitory" in December last year as the Federal Reserve "retired" the word.

Meanwhile, on the other side of the equation, anything speculative (in other words, any asset where profits are a distant prospect) has struggled. "Growth" has lost its popularity. "Virtual" has become less appealing. "Expensive" is no longer a synonym for "high-quality".

This helps to explain why the US in particular – previously the world's leading stock market by far – has started to struggle. It's far more "growth-y" and "tech-y" than the FTSE 100.

The trend is clear. The rationale is pretty clear too. The big question now is: is it likely to continue?

How to invest for a continuing shift to value from growth

On the "big picture" level, a lot of this boils down to what you think will happen to interest rates, inflation and the economy over the coming year.

If you think that inflation will drop back down and that the world's central banks are going to be clear to cut interest rates, but that we'll scrape by avoiding a recession, then we could probably flip back to the good old days of growth trumping everything and everything being hunky-dory in a slightly glum manner.

If you think that inflation will persist, that central banks are caught between a rock and a very hard place, and that we might end up with the economy being dragged down by soaring living costs even as staff agitate for higher pay to compensate and countries scramble to secure scarce supplies of key resources – well, we can probably expect more of the same.

I'll admit I find scenario number two or some variation thereof the most likely option here. I would prefer a more cheerful outcome (and if wages start rising in a persistent manner, that would make me more optimistic about the economy, if not about earnings prospects).

But overall, it's hard to see how we go back to the previous "secular stagnation" scenario which sounded very gloomy but in practice, entrenched the dominance of the top performers and wasn't much of a problem as far as Wall Street was concerned.

How do you play this? We've looked at lots of ways to play lots of different commodities, from copper to silver and platinum. You could also invest in value-oriented investment trusts or those which are aimed at protecting you from inflation.

The other option is to look at a simple FTSE 100 tracker fund. It won't give you pure exposure to all of the things that will do best out of any shift from growth to value, but it is a cheap option for investing in the overall shift.

On that note, for more on the debate over passive investing and its impact on markets, you really should listen to this week's MoneyWeek podcast, in which Merryn chats to Robin Wigglesworth, FT journalist and author of Trillions, an in-depth history of index investing and its impacts. Have a listen here.

The Aim market is increasingly becoming the UK’s go-to destination for backing innovative, fast-growing public companies. More than a quarter of companies listed on the London Stock Exchange’s junior market operate in the technology, healthcare and biotech sectors, compared with just 11% for the main market. Many Aim constituents are also maturing into some of the UK’s most successful businesses. In 2015, just three companies had a market cap greater than £1bn. Today there are 30.

Many – but not all – Aim stocks also qualify for inheritance tax (IHT) relief. They can be held in an individual savings account (Isa) and so they could provide an IHT-efficient solution for the nearly six million Isa investors aged over 65 who hold a total of more than £305bn in Isas. Note that DIY investors building their own Aim IHT portfolios must be careful to monitor their investments, ensure they continue to qualify for IHT relief and keep meticulous records of when they bought them.

We have picked three of our favourite Aim stocks below. Each is a fast-growing technology-based business that may offer some value following the recent pullback in sentiment for growth stocks.

Ideagen: the growing global market in risk

Ideagen (Aim: IDEA) specialises in software that makes risk management and compliance tasks simpler and more effective. Enterprise governance, risk and compliance is a large and growing global market, estimated to be worth $36.1bn annually – and rising to $60.7bn by 2026.

This £800m market-cap business is highly cash generative and uses that cash to acquire smaller complementary software businesses, which it then introduces to its global distribution platform to accelerate growth. It has an ambitious goal of £200m in annual recurring revenues by April 2025. Total revenues have grown from £27.1m in 2017 to £65.6m in 2021. The latest first-half results saw a 33% rise in total revenues.

Kape Technologies: profiting from internet safety

Kape Technologies (Aim: KAPE) is a leading digital security software provider. It employs 750 people in ten locations across the globe and has a market cap of more than £1bn. This is a good example of a highly scalable, fast-growing technology business in a large and growing global market.

A recent trading update revealed 2021 was a record year, with revenues jumping 89% to $230.5m and gross profits expected to come in at roughly $77m, a 97% increase on the prior year. Two strategic acquisitions in 2021 are expected to help propel Kape’s revenues to more than $600m in 2022 and generate profits of more than $166m.

Next Fifteen: a blue-chip client list

Next Fifteen Communications (Aim: NFC) is a global marketing and communications group. It employs more than 2,000 people in 15 locations across the globe and has a market cap in excess of £1bn. Around half its revenues come from selling services to the technology sector, including clients such as Microsoft, Google, Meta and Amazon.

This blue-chip global client base and diverse mix of revenue streams provide some resiliency while giving it exposure to one of the fastest-growing segments of the global economy. A recent trading update for the nine months to October 2021 revealed broad-based growth, with revenues rising 38% compared with the same period the previous year.

With interest rates well below inflation, it is difficult to find deposit accounts offering over 0.4%. I have therefore previously highlighted several large, stable companies with modest dividend yields just above deposit-account returns, but with reasonable growth prospects. This month I am recommending a smaller company with a unique business model that enables it to offer a much higher yield with moderate risk.

The company is Duke Royalty (Aim: DUKE), which lends companies money in return for a royalty on future sales. It provides finance at a lower cost than private equity and does not take control away from the owners, as private-equity lenders do.

Duke typically offers between £5m and £20m and can give a decision on making the money available in about eight weeks. The royalty agreement can be likened to a corporate mortgage where both principal and royalty are paid back over a period of 25 to 40 years. The initial yield on Duke’s investment is 12%-14% of capital provided and the royalty rate is reset upwards or downwards each year (between a 6% increase and a 6% fall, depending on the client’s sales performance), so Duke participates consistently in a client’s growth. The company can buy back the royalty after three years by paying the initial principal along with a 20% redemption premium.

Royalty finance

Royalty finance is well established in North America, where it is a $50bn sector, and Duke has brought the idea to the UK and Europe. Duke is the only listed UK royalty company, having taken over its only British competitor, Capital Step, in 2019. Typical clients are well-established, profitable, owner-managed medium-sized businesses wishing to expand by acquisition, buy out a minority shareholder, or finance a management buyout from a larger company.

Duke tempers the risk in its investments by stipulating that royalty payments should be worth significantly less than 50% of a company’s cash flow. Duke seeks firms with a sustainable competitive advantage. It avoids start-ups, oil and gas, mining and biotech companies, and aims to diversify by industry and geography. Two of Duke’s typical client companies are United Glass Group (UGG) and Brightwater Selection. UGG is one of the UK’s leading glass merchants and processors. Duke provided it with funding of £6.5m in April 2018, which allowed it to refinance existing debt and buy out a minority equity stake in a key subsidiary. A second investment of £4.5m facilitated the acquisition of London Architectural Glass and purchase of a key facility’s freehold.

Brightwater Selection, a recruitment company, was a management buyout funded with £1.9m from Duke. A further £7.7m was provided to Brightwater in January 2020 to acquire PE Global, a leading healthcare and life sciences recruiter in Ireland. Duke’s results for the year to the end of March 2020, the last before the virus, show that it had 12 royalty partners (clients) and made substantial follow-on investments in three of them, so that £20.4m of new capital was deployed during the year.

To finance expansion, it raised new equity of £17.5m and refinanced a revolving credit facility on better terms; the facility was also increased to £30m. Cash revenue for the year was £10.4m, up by 91%, with net cash inflow from operating activities £6.8m, up by 65%, and total dividends for the year 2.95p per share, up by 5%. Given the uncertainties in 2020 about the effects of Covid-19, Duke wisely preserved cash by paying the first two quarterly dividends of 2020/2021 as scrip dividends of 0.5p.

Still, the positive trading update for the third quarter of 202/2021 said the cash position had improved, so a cash dividend of 0.5p was paid. The results for the year to the end of March 2021 showed operating net cash flow up to £8.94m from £6.78m in 2020 and £4.11m in 2019. The 2020/2021 results encompassed the virus period and demonstrated the resilience of Duke’s royalty model.

A juicy and growing dividend

Duke’s costs are fixed so increases in revenue work straight through to the bottom line. It is therefore encouraging that 2021 has so far seen five new royalty deals, including a £6.2m investment in Fabrikat (a well-established steel fabricator), and a new €10m agreement in June with Fairmed Healthcare Group of Switzerland .

There were more deals in July, August and September. Further investments have been made into existing partners, such as £6.5m in UGG to fund another acquisition. The first royalty partner in North America has been secured. Three exits so far in 2021 have raised £18m. Duke has liquidity of more than £55m to fund its growing pipeline of opportunities.

In assessing Duke as an investment, the key issue is whether the dividend can increase. This is determined by the number of new royalty partners and whether partners are well chosen and can grow their businesses to increase royalty payments. The virus in 2020 provided a stiff test of clients’ quality and it is reassuring that the key measure of operating cash flow per share has increased from 2019 to 2020 and then again, to 3.68p per share, in 2021. This gives investors confidence in Duke’s prospects. Its shares cost 50p in late 2019, fell to 19p and are now around 43p. Dividends of 2.25p were paid in 2020-2021, giving a trailing yield of 5.3%. The annual dividend yield has ranged from 5% to 8% since flotation in 2017.

“The smaller, the better,” says the London Business School, which has examined the performance of smaller companies since 1955. The compound annual return of the Numis Smaller Companies index, representing the bottom 10% of the UK market, has been 14.7% since then, 3.4% ahead of the All-Share index. The yearly return of the Numis 1000, representing the bottom 2%, has been 16.3%.

Excluding investment companies, there are over 100 listed “micro-cap” companies with market values below £100m, but they only account for 0.2% of the total market by value. Another 50 have market values of £100m-£200m, adding 0.4% of total market value, but the inclusion of listings on Aim, the junior market of the London Stock Exchange, trebles the number of stocks.

Scouring this mass of tiddlers for bargains are two trusts, the River & Mercantile UK Micro Cap Investment Company (LSE: RMMC), launched in late 2014, and the Miton UK MicroCap Trust (LSE: MINI), launched a few months later. Both have assets of a little over £100m; target firms with a market value below £150m; and trade on discounts to net asset value (NAV) of around 3%. However, George Ensor, manager of RMMC, points out that his trust has also returned capital to investors four times, £57m in total, in order to limit its size. It has just 41 holdings and without that limit would have to increase that number or have larger and less liquid holdings. Gervaise Williams, MINI’s manager, is happy with 128 holdings.

The tortoise and the hare

It’s been a story of the tortoise and the hare. RMMC raced away under its first manager, who was then forced to leave owing to an obscure compliance issue. Its investment return has been 143% over five years and 44% over one. MINI has returned 94% over five years, but 92% over one. Both trusts struggled in 2018-2019, but MINI, with a strong bias towards value, struggled more. Having withstood the sell-off in early 2020 better than RMMC, it has since soared. This is probably due to Williams’s focus on “highly cash-generative stocks”.

Choosing between them is tough. Ensor is clearly finding his feet, but lacks Williams’s 30 years of experience. Inevitably, both trusts are full of stocks few people will ever have heard of. Ensor has moderated the growth focus of his predecessor: “growth is important, but we don’t want to overpay for it”. Williams notes that “it’s important not to get carried away by a good story”, though his exposure to information technology companies is, at 14%, ten percentage points higher than Ensor’s. By contrast, Ensor’s exposure to the consumer and healthcare sectors is 32% compared with 17% for Williams.

Unparalleled choice in the UK

Williams sees particular opportunity in “the cyclicality of various financial and commodity micro caps, providing greater upside at a time of recovery from the pandemic. The potential could be even greater if [inflation takes off]. They have been out of favour for so long that it is easy to underestimate the full scale of their upside”. He has pushed exposure to these sectors up to about 40% of the portfolio compared with 32% for RMMC.

Neither trust has any borrowings and both have plenty of cash. As to the outlook, “what remains curious is how easy it is to find attractively valued companies capable of compounding value for shareholders over a multiyear horizon,” says Ensor. “The UK stockmarket is possibly unparalleled from this perspective.” Williams thinks that the low valuations of micro caps provide “better potential for recovery than other areas of the market” and thinks they could be “at the start of a brand-new supercycle”. This corner of the UK market is easily ignored, but promises rich returns for investors in either trust.

Aim (sometimes called the Alternative Investment Market) is London’s less-stringently regulated junior market. It’s designed to help young, small companies with potential for rapid growth (and unfortunately that’s often all it is: potential) to raise capital from interested investors. And there are certainly tempting-looking opportunities. Aim has produced a handful of extraordinary winners, such as Domino’s Pizza and online retailer ASOS, which have paid out spectacular returns to investors who got in early. However, it’s very much a stock-picker’s market – this is not a market for passive investing or index trackers.

Last week, in the first part of this article, we looked at three of the biggest mistakes that investors make when they first start out investing on Aim. To summarise, the three main mistakes new investors make are: failing to read the annual report thoroughly, and to work out how well management’s interests are aligned with those of shareholders; failing to pay attention to cash flow (which dictates whether a business lives or dies); and investing in firms whose business simply cannot grow beyond a certain point. In short, you cannot skimp on research and you need to be able to find your way around a set of accounts.

However, with that in mind, the good news is that if we know what to avoid, we can then focus and drill down for companies that exhibit the characteristics common to previous market winners. Here are three key features to look out for.

1. Return on capital employed (ROCE)

ROCE is a metric that measures the return a company gets on the capital that it spends on itself. Think of ROCE as the company’s own interest rate. For example, if a company invests £1,000 in its own operations and returns £200 in that investment, we would say the company has a ROCE margin of 20%.

Everyone knows the power of compounding (making interest on interest), and in this instance it works in much the same way. A company that can generate attractive returns on its investment in itself can then use those returns to reinvest in the business, leading to a virtuous cycle. This is especially profitable if the company itself is capital light (eg, it doesn’t have a lot of machinery or offices to maintain) and thus does not require significant amounts of maintenance capex. By increasing the amount it spends on growth, a company with a high ROCE can generate significant returns for its investors.

Fevertree, the upmarket mixer-drinks group, is a good example of this. Rather than produce the product itself, it outsources it – it’s a brand marketing company rather than a producer of mixers. Placing itself in the premium sector has given it high profit margins which can then be reinvested in the business.

2. Entrepreneurial management

One key common denominator of stockmarket winners has typically been a shrewd management team. Often these companies will still be run by their founders and their families, or by their descendants, which means that they are highly incentivised – often as much by a desire to uphold the family name as by a desire to protect and grow their wealth – to build the business up.

Management teams that view themselves as owners of the business tend to be well aligned with shareholders, which means that they will also likely act with the benefit of shareholders foremost in mind. Companies such as testing systems group AB Dynamics, and again Fevertree, have delivered outstanding returns for shareholders because the management teams involved were focused on increasing their wealth for the long term, rather than using the company as a temporary vehicle to finance a lavish lifestyle.

However, there can be such a thing as too much alignment with shareholders – be wary when there is a significant power imbalance, as it effectively means that small shareholders have very little ability to hold managements to account. For example, managements of companies with single large shareholders have been known to take their businesses private and keep them for themselves, rather than continuing to pay expensive listing fees. This is particularly tempting if they feel that the stockmarket is persistently undervaluing their company, or if they are fed up of dealing with the demands of the City. This is what happened with financial services company London Capital Group a few years ago. Management decided to delist and the share price promptly halved, as few people want to own illiquid shares in an unlisted business. Directors who also own a large enough stake in the business can act in the full knowledge that minority shareholders are unable to stop them. A recent example from a company which shall remain nameless is the director who decided he would pay himself an exorbitant sum from the company in order to use his home as an office.

3. Operational gearing

Companies that benefit from operational gearing – or scale – are companies that have large fixed cost bases, rather than costs per unit or service. This means that when business is good, profits rise sharply. Take the restaurant and bar business. Each individual premise commands a fixed price per month – rent, staffing costs etc – but once those costs are met, all of the additional revenues trickle down to the bottom line.

However, you do have to be aware that this type of operational leverage is a double-edged sword. It’s great when times are good, but if the punters are no longer delivering the footfall or spend, those fixed costs still need to be paid. Often, leases on premises run for fixed terms and have penalty clauses for early cancellation, which makes it very expensive or impossible for a struggling business to get out of them without bankrupting itself.

A better example would be online property portal Rightmove. The business has a fixed-cost platform and is hugely scalable (the cost base essentially stays the same, even as more and more agents pay to use it). As a result, Rightmove is highly profitable, and has delivered stunning returns for its shareholders.

Some of my top Aim picks

So which stocks might fit the bill today? I’ve listed two which I own here, and below the Aim specialists at Fundamental Asset Management select two that they own in their portfolios. My first pick is GAN (Aim: GAN), which provides enterprise online gaming software for big gambling companies. The company is both profitable and cash generative, and although it trades on a high valuation, its profits are rapidly increasing due to the lifting of the ban on US sports betting, which took place in 2018. The stock is best viewed as a picks-and-shovels play on the US betting market – its main customer is Flutter Entertainment (owner of Paddy Power and Betfair). Clearly that presents the obvious risk that Flutter might stop using GAN, but there is also the argument that Flutter might be tempted to take the business out – with shareholders hoping for a hefty premium.

The company is set to leave Aim to trade on the US Nasdaq index, and will be domiciled in Bermuda. If you already own the shares, you need not do anything – your holding will automatically be translated into the same value of shares in GAN on the relevant date. The one thing to be aware of is that shareholders may need to complete a W8-BEN form should GAN eventually pay out a dividend – this is simple to do and no more complex than it sounds.

My second pick, Intercede Group (Aim: IGP) is a scalable software company that supplies “identity solutions” in the form of MyID, which allows companies and government organisations to assign digital identities to people. Its clients include the US Transportation Security Administration (the federal agency responsible for security in all modes of US transportation) and the Kuwaiti government. Intercede has been viewed as a turnaround story for several years, but last year it made changes to its board and achieved the swing to positive cash generation. The company also recently announced that, as a result of increased sales and cost controls, profits look set to be substantially higher than the market had expected.

The team at Fundamental Asset Management meanwhile, highlight the following two stocks, held in the company’s own Aim portfolios.

“Advanced Medical Solutions (Aim: AMS) is a world-leading developer and manufacturer of products for the advanced wound care, surgical and wound closure markets. The group manufactures products at its sites in the UK and mainland Europe, both under its own brand and also under partner brands. As a provider of key consumable products to the global healthcare sector, AMS possesses a significant protective moat, reflected in its high operating margins. It has always maintained a prudent balance sheet, with a significant amount of cash, which is being used for research and development, and also to acquire other advanced wound-care products, thus creating a more diversified product portfolio addressing a very large global market.

“Craneware (Aim: CRW) provides software to US hospitals to help them manage patient billing and costs, and in turn improve their financial and operational performance. Craneware meets many of our key investment criteria: it has strong growth in a large market undergoing change; high operating margins; great visibility and cash flow; and a significant founder-shareholder as chief executive. The share price was punished in 2019 as growth temporarily stalled; however, in our experience, it’s never plain sailing for a rapidly growing business like this, addressing such a dynamic market.”

• You can download Michael’s free book on the UK stockmarket at shiftingshares.com

Seeking out companies that are unloved or ignored by mainstream investors is the key to discovering pricing inefficiencies and outperforming markets. These stocks are not priced inefficiently because of inferior quality; they are typically beset by problems specific to the company that are unlikely to endure over the long term.

The broad theme playing on people’s minds is uncertainty over the future growth of the world economy and hence the likely direction of future profits. This has resulted in heightened volatility and is another reason why solid companies may be available at attractive prices.

Profiting from private equity

Oakley Capital Investments (LSE: OCI) is a closed-end fund investing in and making co-investments alongside the private funds run by private-equity firm Oakley Capital. In August 2019 it was admitted to the Specialist Fund Segment (SFS) of the London Stock Exchange, an improvement over its previous Aim (junior market) listing, where corporate governance protections are weaker.

OCI experienced growth in net asset value (NAV) of 25% in 2019. In conjunction with a narrowing of its discount from 38% to 23% as investors woke up to Oakley’s improved corporate governance and increasingly strong record, this resulted in a 57% share price total return. Oakley boasts an attractive portfolio of fast-growing stocks and a unique approach of focusing on complex deals. It can draw on a network of entrepreneurs to find investment opportunities. Throw in a wide discount to NAV and it remains a compelling investment.

A bet on Brazil

Cosan Ltd (NYSE: CZZ) is a family-backed holding company. CZZ owns stakes in two Brazilian listed holding companies, Cosan SA and Cosan Logistica, and the perceived complexity has deterred investors. However, within this structure lie high-quality assets, exposed to rail logistics, fuel retail and gas distribution. Our investment is predicated on both the attractive nature of the assets and the potential simplification of the group structure.

In 2019 NAV grew by 106%. Coupled with a narrowing discount as management took initial steps to simplify the structure, this resulted in a share-price return of 160%. The discount to NAV currently stands at 32%, which, coupled with confidence in the underlying assets and management’s proactive approach to value enhancement, creates the prospect of further attractive returns.

Value in Italian loans

We initiated our investment in Eurocastle (Amsterdam: ECT), a closed-end fund, in the first half of 2019. Eurocastle’s assets consisted largely of a portfolio of Italian non-performing loans (NPLs) and a stake in Italian-listed NPL servicer doValue. Having accumulated an 18% stake in ECT at a 20% discount to NAV, we worked with the board to implement a restructuring that led to the sale of the NPL portfolio and the distribution of the cash proceeds along with the doValue shares. We continue to see scope for further upside from the doValue shares, which we now own directly, with earnings growth set to accelerate from its recently-announced acquisition of FPS, the NPL servicing platform owned by Greece’s Eurobank.

Three to buy

Barkby Group

The Mail on Sunday

This Aim-listed conglomerate operates a diverse portfolio across pubs, property, and wholesale coffee. It also has interests in tech start-ups. The group’s pubs, which offer food and accommodation, are situated in affluent parts of southern England, with management planning to double the portfolio over the coming years. The highly profitable commercial property business, which is the largest division, should also continue to serve up “substantial growth”. This fingers-in-many-pies model can make Barkby difficult to understand, but the shares might prove an “exciting ride for the adventurous investor”. 29p

easyJet

The Daily Telegraph

Last year brought turbulence for this budget airline. However, it is making increasingly savvy use of data to boost revenue, predict aircraft maintenance needs and find new routes. A recent move to start offsetting aircraft carbon emissions will go down well with ever-more climate-aware consumers. Still, the ongoing risk of a no-deal Brexit at the end of 2020 could bring renewed share-price volatility. It’s a “risky buy”. 1,353p

Ørsted

Investors Chronicle

Once known as Danish Oil and Natural Gas Energy, this Copenhagen-listed business has sold off fossil-fuel assets and bet on offshore wind. Its 25% market share makes it the world leader in the field, with its wind farms generating DKK8.6bn (£990m) in profits during the first nine months of last year. Wind is emerging as a key part of global decarbonisation efforts and Ørsted’s first-mover advantage bodes well. DKK670

Three to sell

Learning Technologies

Shares

This Aim-listed online trainer helps companies to improve their workforces’ skills. The shares have returned 80% since we recommended them in April last year, so this looks a good time to take profits. Others may prefer to wait for a trading update at the end of this month before selling. This is a good company, but the share-price surge has taken the 2020 price/earnings ratio up to more than 28. That makes the risk-reward balance unfavourable. 136p

Judges Scientific

Money Observer

A sudden re-rating was a welcome Christmas present for holders of this portfolio of niche science-based businesses. The share-price surged 120% in the ten months to last November as the market came to appreciate the case for this “disciplined acquirer of small but established businesses”. Its specialised work limits competition and ensures steady revenue. Yet the shares now trade on a heady multiple of 29 times profit, so take some profit off the table and redeploy the funds elsewhere. 5,380p

YouGov

The Times

Although it’s best known for its election polling, politics accounts for less than 3% of this pollster’s revenues. It does, however, play an important role in raising awareness of the brand. Founded 20 years ago, YouGov operates on multiple continents, with clients paying to glean information and insights from the firm’s “panel” of eight million people. Its internet-based model is driving impressive growth, but the market has long since cottoned on to this story. The shares trade on a vertiginous 57 times forecast earnings and yield just 0.4%. Avoid. 655p

...and the rest

The Daily Telegraph

Antibody specialist Bioventix, whose products are used in blood-testing, operates in a heavily regulated industry that keeps competitors out. That means predictable profits and “very high returns on capital” (3,310p). Shares in warehouse developer Segro have risen 80% since 2017, but limited supply and strong demand thanks to the e-commerce boom should continue to drive returns. Buy (870p).

Investors Chronicle

Hollywood Bowl, the UK’s largest ten-pin bowling operator, is reaping big returns from expansion and refurbishment efforts and is now moving into minigolf – keep buying (285p). An ongoing “dogfight” in the mortgage market has hit banks’ profits, but Secure Trust Bank has minimal exposure to the sector and a 5.8% forward dividend yield (1,600p).

Shares

Retailers’ Christmas trading updates confirm the ongoing strength of the trend towards online shopping, which is now gathering pace in continental Europe as well. Warehouse investment fund Tritax EuroBox offers exposure and is forecast to pay a 4.5% dividend yield (93p). Shares in catering hire and laundry firm Johnson Service Group have hit a ten-year high, but it is a “low-volatility growth stock” that is still worth buying (212p).

The Times

Online grocery deliverer Ocado is an investing phenomenon: a loss-making business that pays no dividend, but is valued at £9.3bn. Yet its present retail partnerships represent a huge profit opportunity and earnings will start to come in this year, so investors should keep buying (1,334p).

The Evening Standard’s share tips for 2020

So far, most challenger banks have largely proved a challenge for investors’ wallets, but OneSavings Bank’s loan book is growing strongly and its specialist loans reap high profit margins. Bank on a re-rating (417p). In a world where “a bonkers orange bloke is in charge of the world’s biggest economy”, it is a good time to get defensive, so buy precious metals miner Fresnillo (652p). Australian gold mining stock Perseus Mining is an even more speculative way to play gold (61p).

Ted Baker had a dreadful 2019, but the “quirky fashion brand” is a fundamentally sound business (411p). A favourable Ofcom ruling on the future of broadband clears up one source of uncertainty for BT, but the current bombed-out price does not reflect the improving outlook (197p). Buy into Arrow Global’s “butterfly-like” transformation from debt collector to fund manager (274p). Boutique cinema chain Everyman is “hardly a cheap treat”, but the consumer demand is there and the group is expanding. Several blockbusters over the coming months will provide an extra boost (202p).

Shares in British Gas-owner Centrica slumped 26% last year, but talk of higher energy prices is bullish for a business that still has operations in exploration and production (88p). “The world will always need oil,” so BP “seems like a solid punt” (497p).

Investors being urged to use Isa and pension allowances before the end of the tax year may not realise there are even more valuable tax incentives available assuming they're prepared to accept additional investment risk. Alex Davies, the chief executive of Wealth Club, a specialist adviser on tax-efficient investments, calculates that the tax reliefs on offer from three other tax-efficient investments are together worth £724,000 this year.

"Venture capital trusts (VCTs), the enterprise investment scheme (EIS) and the seed enterprise investment scheme (SEIS) are bastions of tax-efficient investing where investors can shelter their wealth," Davies says. "If an investor takes up their full annual allowance in each, they could claim up to £710,000 back in income-tax relief. The bill from any capital gains made in the same tax year can also be halved, giving an investor up to another £14,000 on top."

All three schemes were launched to fund early-stage companies that often struggle to raise capital. The firms aren't usually listed on a stock exchange, though certain Alternative Investment Market (Aim) shares do qualify.

High potential returns and higher risk

Get these investments right and the returns can be attractive, even leaving aside the tax benefits. The average generalist VCT, for example, has delivered a 140% total return over the past decade, according to the Association of Investment Companies (AIC). Moreover, as VCTs, the EIS and SEIS invest in very different types of company to traditional Isa and pension funds, they can also offer valuable diversification benefits. Nevertheless, tread carefully. Even with a strong past performance record and decent tax breaks, the high-risk profile of these shelters means they're only suitable for a small chunk of your overall portfolio.

Research by the Harvard Business School suggests that up to 40% of start-ups that raise capital end up failing completely, while another 40% only manage to return investors' stakes. Just 20% of these businesses deliver a positive return on investment. Against that, however, VCTs are collective funds offering exposure to a portfolio of companies, which mitigates risk. What's more, their managers can leave up to 30% of funds invested in risk-free cash. EISs can also be structured as collective funds. And, of course, the tax relief on offer helps soften the blow of portfolio failures.

This relief really is very generous. To begin with, you can invest £200,000 each tax year into new shares issued by a VCT, claiming 30% income-tax relief upfront (though you can't claim more income tax than you owe). All income and capital gains from a VCT, moreover, are tax-free.

The EIS, meanwhile, offers an annual allowance of £1m, or £2m for investments in "knowledge-intensive" companies with a heavy emphasis on research and development. Like VCTs, the EIS offers 30% upfront tax relief and tax-free capital growth. In addition, investors can set any losses they incur against their tax bills. Furthermore, EIS investments don't count towards inheritance tax once you've owned them for two years. Finally, the SEIS has an annual allowance of £100,000, but offers a whopping 50% upfront income-tax relief, as well as the same capital growth and inheritance tax reliefs as the conventional EIS.

How to choose a scheme that suits you

Which scheme should you opt for? VCTs and the EIS invest in companies of a similar size. These must normally be worth less than £15m, have fewer than 250 employees and be less than seven years old. VCTs are collective funds run by professional managers on investors' behalf; by contrast, individual companies raising capital can apply for EIS status and then offer their shares to investors, though a number of brokers also run managed EIS portfolios. To qualify for SEIS inclusion, meanwhile, a company must have traded for a maximum of two years, have assets of less than £200,000 and fewer than 25 employees. These are substantially riskier than the businesses in VCT and EIS portfolios, hence the generous tax relief.

As for choosing individual investments, the key is to do your homework.With VCTs, look for a manager with a strong record of generating good returns from funds in the sector. You don't qualify for the upfront tax relief if investing in VCT shares already listed on the stockmarket only new shares carry this benefit so you can't simply invest in an existing fund. However, past performance data on the AIC website will still give you an idea of which VCT managers have done well.

But ensure you're comparing like with like. Some VCT managers specialise in generalist funds comprising companies from a range of industries. Others focus on a particular segment of the market, such as Aim. Picking EIS investments can be more difficult, particularly if you're investing in individual companies rather than a managed portfolio of qualifying companies chosen for you by a professional. If the former, only invest after you have thoroughly researched the business and build a portfolio of EIS companies rather than putting all your eggs in one basket. Look for EIS managers with a strong track record and affordable charges.

The SEIS, by contrast, isn't available in any form of managed portfolio you really are on your own. That raises the stakes on due diligence: do detailed research and don't invest cash that you can't afford to lose.

London's Aim market had a grim end to the year.The FTSE Aim All-Share index peaked at just under 1,110 in the summer. Then, like most other global markets, itbegan a precipitous slide in early October, and closed2018 down 23%, at 850.Of course, the nature of Aim and its constituents (often young, high-growth, high-risk companies attracted by light-touch regulations) makes it prone to high-profile failures in risky sectors such as tech and resource exploration.

Yet the nastiest Aim surprises in 2018 did not come from these sectors. Bargain-booze retailer Conviviality went belly-up in spring last year after being hit with a "surprise" £30m tax bill.In October the Patisserie Valerie fraud began to come to light (see page 14). And near the end of the year, fashion group ASOS one of the UK's few genuine homegrown online leaders surprised the market with a profit warning.

Aim's IHT bubble

Yet while it's easy to blame the recent bout of queasiness on disaster stories, the reality, says Stephen English, head of Aim at Liverpool-based investment managers and stockbrokers Blankstone Sington, and manager of its Aim IHT portfolio, is that the retrenchment is simply due to the generally high valuations of many of the more attractive Aim stocks. Indeed, until October, it had been possible to talk about an Aim bubble of the kind witnessed at the turn of the millennium. On this occasion, rather than the mania for technology stocks, enthusiasm for Aim had been driven by one key thing: inheritance tax (IHT). About a third of all Aim-listed companies are thought to qualify for business property relief (BPR), which in turn means that investors in those companies can receive reliefon IHT.

Looking for hidden gems

English points out that certain companies flooring specialist James Halstead, wine retailer Majestic Wine and pub group Young & Co are three popular examples have what might be termed "exalted valuations" in part caused by the rise of Aim IHT portfolio services. As a result, the potential for the IHT rug to be pulled from certain stocks has already caused some instability in share prices. Fears that the chancellor would adjust the rules on BPR and Aim in the November Budget proved unfounded, but lingering fears remain that the Treasury might use the current tax simplification report which is due in the spring as an excuse to tinker. Gervais Williams, fund manager at Miton, notes such changes could hurt. "Longer term, the IHT market has been very helpful in keeping Aim viable."

Yet if investors are willing to seek opportunities away from the IHT spotlight then this effort will often be rewarded, says English. Analyst coverage of smaller companies is thin on the ground, partly due to the introduction of Mifid II regulations last year (which made the cost of research more transparent and thus harder to sell). Yet if fewer analysts are paying attention to a stock it should mean more opportunity to uncover hidden gems. Below are three stocks that English favours.

Three appealing Aim stocks

Driver Group (Aim: DRV)

Driver Group provides resolution services for handling disputes between clients and contractors on projects that have gone bad through cost overruns, delays or poor workmanship. Under previous management the company had struggled to get paid for work it had done. But a new team came in, raised money, and embarked on a turnaround. Pre-tax margins should rise closer to 10% from 6% last year, as it focuses on higher-margin work. The dividend has just been reinstated, and is covered seven times, giving plenty of room for growth.

For 2020, the shares trade on a single-digit price/earnings (p/e)ratio backed by £7m net cash on the balance sheet, and given the type of work it performs, the company should be resilient throughout the economic cycle.

Strix (Aim: KETL)

Pick up a kettle and look underneath chances are you'll see the word Strix. Strix is a global leader in the design, manufacture and supply of kettle safety controls, with a 38% market share. It has lots of scope for growth as more Americans take up the tea-drinking habit (market penetration of kettles in the US is just 15%, compared with 100% in the UK). Strix is automating more of its manufacturing to maintain its gross margins of 40%. It strenuously defends its patents and has even won cases in China, where it recently

forced an infringing manufacturer to cease using copycat controls and to fit Strix's own instead. On a p/e of below ten and a yield of more than 5%, the shares look good value.

Curtis Banks (Aim: CBP)

Curtis Banks provides pension administration services, mainly for self-invested personal pensions (Sipps) and small self-administered pension schemes (SSASs). Its business model is simple, scalable and sustainable. Rather than charge a percentage fee based on the value of a Sipp's assets (like most financial firms), it instead charges a fixed annual fee that rises with inflation. It can be viewed almost as an index-linked annuity

(as long as the assets remain under its administration, of course). With net cash on the balance sheet and operating margins that look set to rise towards 30%, we see long-term value in the shares, which trade

on 14 times forward earnings and yield 3%.

The Aim market (formerly the Alternative Investment Market)has traditionally been seen as a bit of a backwater. It was launched in 1995 in attempt to give smaller companies that were poorly served by the main market of the London Stock Exchange a chance to raise capital by going public. However, up until recently, it's proved to be a bit of a dud, notorious for being the haven for illiquid, sometimes dodgy, companies. For example, if you put £1,000 into the FTSE All-share index it would now be worth £5,003, while the same sum invested in Aim would only have grown to £1,390 less than a third of that amount.

However, over the last few years, Aim shares have actually outperformed the main market. Has Aim finally "grown up", or is it just a sign that the small-cap growth stock bubble is reaching bursting point? We decided to talk to two experts from Octopus, a fund management company that focuses on Aim shares (and other similar areas of investing such as venture capital trusts (VCTs) and the Enterprise Investment Scheme (EIS)). Paul Latham is the Managing Director of Octopus Investments, while Richard Power has had a lot of success running Octopus' UK Micro-Cap Growth Fund.

Latham admits that there was "a big surge in interest in Aim shares five years ago when the government changed the rules to allow ordinary investors to hold Aim shares as part of an Isa [individual savings account]". Previously, investors in Isas, although exempt from any capital gains on their investments while they were alive, were still charged up to 40% inheritance tax on their estate when they died. Allowing them to hold Aim shares, which are exempt from inheritance tax (IHT), in the Isa wrapper meant that they were able to get the best of both worlds a great deal for those looking for "a multi-generational investment".

Of course, Aim shares are by no means risk-free investments. Because of their small size and reduced liquidity, "they tend to move much more quickly in either direction than the main market", says Latham. It's also important to realise that not every Aim share is eligible for inheritance-tax relief. This can make investing in the Aim market "very dangerous" for those who aren't able to work out which ones meet the criteria, and which do not. Indeed, he argues that small-cap investing is one of the areas where active managers (such as Octopus) can add value "by making sure all the companies that we invest in are IHT-free".

Tax changes aside, Power thinks that there has also been an evolution in the type of companies that appear on Aim. "In the 1990s when I started in investment management, a lot of Aim companies were small family engineering firms which had most of their sales in the UK". Today, those companies "have started to expand internationally, and have been joined by others, where a global strategy is already part of their business plan". In his view, a key part of successful Aim investing is spotting companies with both the desire and ability "to increase sales from £10m to £50m, rather than those that just want to increase from £10m to £15m".

Power recommends that investors take a bottom-up approach that looks for great companies, rather than try to focus on those in a specific line of business. Of course, some sectors look more attractive than others. For example, the high street and restaurants are under a bit of pressure at the moment, with many firms issuing profit warnings. However, he still thinks that there are growth opportunities to be found if you look hard enough (he is very enthusiastic about Young's Breweries (Aim: YNGA).

Generally, his method is to find high-quality companies than can generate increasing amounts of cash. Once he finds such companies, he buys them and tries to hold them through the economic cycle, rather than engaging in economic timing. One of his fund's largest current holdings, and an investment that he has held for a long time, is GB Group (Aim: GBG), which makes IP verification software (allowing websites to work out where their users are coming from). He notes with pride that GB now gets around a third of its revenue from outside the UK.

Because of the increasingly global nature of Aim, Power is confident that Brexit won't have much of an effect on the overall market. However, he admits that "several companies have complained to me that the vote to leave the EU has made it much harder to attract skilled labour to the UK, and many EU workers have even started to return home to the continent". Indeed, one or two of them have even decided to expand non-UK operations at the expense of the UK, because they think that post-Brexit UK immigration policy will become too restrictive.

The Off Exchange (OFEX), now owned and operated by PLUSmarkets, was started in 1995 as a way for shareholders to deal in the shares of small companies that do not meet the stringent requirements of Aim and the LSE's official list.

Companies on OFEX are usually smaller than those on Aim, and are typically seeking to raise under £500,000 when they list. A panel determines entry to the market. The low level of regulatory requirement means that OFEX investments should be considered more risky than those listed on Aim.

Trading happens on a matched bargain basis, so you can only sell your shares if OFEX finds a buyer for them. This means that, although bargain hunters and penny-share buyers are attracted to the idea of getting into promising companies early on in their lifecycle via the OFEX exchange, illiquidity can often be a problem for the shares.

See Tim Bennett's video tutorial: What is a stock exchange?

It's not often you see a stock's share price crater by 40% in a single day.

And usually you have to loiter in the shadier streets of Aim, the London Stock Exchange's junior market, to find that kind of action. It's not the sort of thing you expect from the leafier boulevards of the FTSE 250.

So it's no wonder that support services group Carillion drew a great deal of attention with its devastating profit warning yesterday.

And it made a lot of short-sellers very happy bunnies indeed...

Why you should pay attention to short-sellers

Once a month, we publish a list of the ten most-shorted stocks in the UK index in MoneyWeek magazine.

Carillion, the construction and support services group, has been on that list for as long as I can remember. Recently, it's been right at the top, with about a quarter of all its shares outstanding being sold short.

For the uninitiated, "shorting" is when an investor (typically a hedge fund) bets on the share price of a company falling. So "shorters" make money when share prices fall, rather than when they rise.

The mechanics of shorting are as follows. You borrow the stock from someone else someone who's "long" the company, such as a pension fund, for example. You pay them to borrow the stock (which is why they're happy to lend it). You then sell the stock.

You have to return the stock in the future. The longer it's on loan, the more it'll cost you. So you have a time limit. Your bet is that the share price will fall, and that you'll be able to buy the stock back at a lower price. You'll then return it to the owner, and pocket the difference between the price you first sold it at, and the price you bought it back at.

In practice, as a small investor, you will only really be able to short a stock using spread betting. But it's worth understanding how the underlying process works, because there are a lot of misconceptions about shorting.

Shorting specific companies is incredibly risky. Firstly, it involves market timing always a challenge, and something that we're all told is impossible. If you go long, you can just "buy and hold". So if you see a "value" investment, you can buy it and sit on it until it comes good.

But going short, by its very nature, involves timing the market. You can't just "sell and hold". Your bet needs to work out, or be abandoned, within a relatively tight timeframe.

Secondly, your losses are theoretically unlimited. If you are long, then your losses are limited to 100% (unless you use leverage, which is a different story) because a share price can't fall below zero. 100% is a painful loss, but it's quantifiable.

But a share price can rise infinitely high. If you're stubborn enough, stupid enough, and wrong enough, you could lose everything on a short bet that goes wrong. Also, if a short starts to go wrong, it can go wrong very quickly.

A heavily-shorted stock (such as Carillion, say), often only needs a little bit of unexpected positive news to send its share price a lot higher. This is known as a "short squeeze".

What happens is that as the share price rises, more and more shorts have to close their positions, sending the price even higher. If you get caught in the rush for the exit, you can lose an awful lot more money than you ever bargained for.

Short-sellers come in for a lot of stick, particularly on bulletin boards (from shareholders who are long), during financial panics (from governments who want to blame someone else), and from chief executives of poorly run companies (who want to misdirect regulators and potential investors).

This is usually entirely unjustified. Because as I hope you can see, the reality is that short-sellers take a great deal more risk than those who are long. And that means they have to make more effort to be right.

There are plenty of "weak longs" in the market people who own stocks largely for no other reason than that everyone else owns them. There are very few, if any, "weak shorts" you need a good reason to be short. As a result, it's usually worth at least understanding the short case before you take a punt on a heavily-shorted stock.

(Shorting entire markets or commodities or currencies rather than specific companies is a somewhat different story there's no more reason to have faith in the shorts than the longs in those markets but that's not what we're talking about here.)

Why you shouldn't see this as a buying opportunity for Carillion

On the specifics of Carillion, let me just be clear. I wouldn't touch it right at this point (it's down another 10% or so as I write, so I'm guessing that's not an outlier opinion, but sometimes the crowd is right).

I'm not saying that it won't one day be a "buy". But right now there's just not enough clarity on what happens next.

The company has written down the value of contracts that have gone wrong by a staggering £845m.It has dumped its chief executive and its dividend, and it looks like there's a good chance that it will need to raise more money through a rights issue.

The interim chief executive Keith Cochrane, formerly of Weir has plenty of experience and he's probably the right man for a tough job. But I'd like to have a better idea of the full extent of the damage before I considered buying in. Although I'll admit I've never been a big fan of the support services sector in any case too much scope for contract slippage and over-optimistic accounting.

As for other heavily-shorted stocks: the other four in the top five at the moment (Carillion is at the top) are online grocer Ocado, grocer Morrisons, oil explorer Tullow, and oil services company Wood Group.

I can't tell you much about those stocks individually right now. And some of this stuff is definitely thematic oil price volatility is clearly an issue for oil companies, and retail also features highly in the "shorts" list right now, with Debenhams, M&S and Pets at Home all in the top ten.

But if you do own any of these stocks, you should be aware that there are a significant number of well-informed people betting against you. Make an effort to understand their case. In fact, if you're holding them, I'd insert a column in your investment journal entitled "Why the shorts are wrong on this stock". Explain why. And if you can't, maybe you need to sell.

Judging by the response we get from MoneyWeek readers when we cover the topic, inheritance tax (IHT) which is charged at a rate of 40% on the part of your estate that is worth more than £325,000 (or £650,000 for a couple) when you die is probably the most loathed of all taxes, writes John Stepek.The bad news is that the IHT take hit a record high of £4.6bn for the tax year just past. The good news is that there are several ways to protect your assets.

One of the less well-known options is to invest in assets that qualify for Business Property Relief (BPR). Once a qualifying investment has been held for two years, it is 100% IHT-free. To qualify for BPR, a company cannot be listed on a recognised stock exchange, and its main business cannot be investing in other companies or property so investment trusts do not qualify, for example. Where would you find such a company? One obvious hunting ground is the Alternative Investment Market (Aim), which is not a recognised stock exchange.

Of course, the tax tail should never wag the investment dog there is no point in careful IHT planning if you only save on tax because you've lost all your money. So any stocks you invest in need to be companies you would want to buy anyway. Below, analyst and private investor Richard Beddard looks at five stocks that are appealing regardless of their BPR status.

A word of warning: a company may currently qualify for BPR (we have checked those listed below with the IHT screening tool offered by Investor's Champion),but that could change. The key point is that it needs to qualify when your estate is passed on. So it is vital to keep a track of your Aim holdings and their status.

Also, as mentioned above, this is not the only way to manage your IHT exposure. Other methods include simply giving away assets (although if youdie within seven years, these may still count as part of your estate), or investing in agricultural land. At MoneyWeek, we think it's important for investors to be able to manage their own finances, but this is one area that, if you have an estate that is large enough and complicated enough to justify extensive IHT planning, is worth discussing with a tax specialist.

1. BrainJuicer (BJU)

Market capitalisation: £45m

Debt-adjusted price/earnings ratio (p/e): 12

BrainJuicer is a small company that does market research for giants such as Coca Cola, McDonald's and Procter & Gamble. It uses techniques drawn from the burgeoning field of behavioural science. Traditional market researchers might test whether an advertisement gets a particular message across, but BrainJuicer asks people how they feel as they watch it.

The company says that if we feel more, we buy more, an insight it used to test advertisements featuring Three's dancing pony and John Lewis's penguin, Monty. The company also tests product concepts by asking people what they think other people will buy, claiming that we're better at predicting other people's behaviour than our own.

Academics have been writing about these sorts of psychological insights for decades. But they have only recently made their way into mainstream market research. That makes BrainJuicer a pioneer in the field it has been using behavioural techniques for over a decade now, and has collected a large database of test results that helps it to determine which advertisements will achieve the highest sales.

Not so long ago this advocacy of novel market research techniques was unusual, but several other firms now offer new ways to find out what we think about advertisements and products. Established market research firms such as Millward Brown are touting behavioural testing, and technology companies are tracking our behaviour on mobile telephones and mining the data for insights.

BrainJuicer, with its extensive experience in the field, could be a beneficiary as its techniques go mainstream. But it must also contend with growing competition by maintaining the pace of innovation. Earlier this year it attempted to turn the traditional market research role on its head by launching an advertising agency, System1.

Instead of testing advertisements created by agencies (the traditional role of market research), System1 employs freelancers to make them, guided by BrainJuicer's testing. Although revenue and profit growth has slowed in recent years, BrainJuicer remains a growing, highly profitable, cash-rich company in an exciting field, and it's still run by its entrepreneurial founder John Kearon, who owns a significant stake.

2. Dewhurst (DWHT)

Market cap: £40m

Debt-adjusted p/e: 9

Dewhurst manufactures a wide range of components and systems used in lifts, cash machines, railway carriages and traffic management, and earns more than two-thirds of its revenue and profit abroad. The group traces its success back to the launch of the US81 Original Pushbutton in 1971.

The design of the stainless steel button with a chrome surround has been aped by other manufacturers, but perhaps not its quality which means that although the major elevator companies use cheaper pushbuttons in new lifts, architects and lift consultants often choose Dewhurst for refurbishment projects. The pushbutton is a fairly low-cost component, and it's worth paying more if it reduces the maintenance bill.

In the six months to end-March, Dewhurst revealed that profit had fallen by 25% year-on-year due to reduced spending on public- and private-sector infrastructure projects, and lower keypad orders. Also, about a fifth of the company's revenue comes from keypads for NCR cash machines. Dewhurst's dependence on this customer means that shareholders have become used to an element of volatility in its results. Dewhurst is also having to adapt to a longer-term technological challenge.

To accommodate large crowds, busy hotels and offices are turning to "destination dispatch" systems. People choose their destination using a keypad, touch screen, or room key and are directed to a lift going to their floor. These systems generally require fewer push buttons.

However, Dewhurst has responded to its changing market by developing the components required by the new systems, such as the hall lanterns that indicate which lift to go to. It also assembles entire control panels, buying in components such as touchscreens that it cannot make itself.

Although this means that Dewhurst must share some of the profit with the manufacturers of the underlying components, the company remains highly profitable under the majority ownership of the Dewhurst family. Brothers Richard and David have been running it since the mid-1980s, overseeing a measured expansion. Be aware that the company is quite tightly held, so the spread (the gap between the buying and selling price) can be quite wide.

3. FW Thorpe (TFW)

Market cap: £270m

Debt-adjusted p/e: 23

FW Thorpe is best known for its principal brand and largest business, Thorlux. Thorlux manufactures commercial and industrial lighting systems. Take a tour around the Thorlux factory in Redditch and you will witness a small industrial revolution taking place. Beside production lines manufacturing traditional fluorescent lighting systems by hand, newer robotic lines assemble light-emitting diode (LED) systems. The principal components the LEDs are soldered to printed circuit boards in a cleanroom in a corner of the factory. The cleanroom is less than three years old.

In factories, shops, schools, offices, hospitals, and on our streets, old-style fluorescent light bulbs are being replaced by these more expensive, but longer-lasting, more energy-efficient LED lighting systems. LED systems are much more sophisticated than their forebears. For example, they come packaged with electronics that can control the light level depending on whether there are people moving nearby and the level of ambient light.

Other FW Thorpe businesses manufacture more specialised lighting, for roads and tunnels, streetlights, signs, and retail displays. Today, more than half of the company's overall sales by value are LED lighting systems, but the group must still support customers who have yet to convert to the new technology. The company blames its lower profitability in recent years on the cost of developing and maintaining two product ranges, LED and incandescent.

However, three factors mitigate this decline. Firstly, Thorpe still achieves enviable levels of profitability its return on capital in its last full financial year was 22%, the same as the previous two years. Secondly, as Thorpe retires its older products, profitability should improve. Finally, the company is focused on cutting the cost of the LED components it buys in. The adoption of LED lighting is happening very quickly and Thorpe admits it rushed to develop new products, not always cost effectively.

But as the cost of LEDs comes down, profitability should improve too. William Thorpe, who founded Thorlux in 1936, might be surprised if he were to return and see the factory now, but his grandson, Andrew Thorpe, who is the company's chairman and joint chief executive, appears to be guiding FW Thorpe effectively through a potentially difficult transition. Again, the stock is tightly held so be aware of the spread when looking to buy or sell.

4 James Halstead (JHD)

Market cap: £850m

Debt-adjusted p/e: 24

Twenty-four times earnings is a high price to pay for a share. Earnings are the profits left over for shareholders after all costs. If you divide the earnings attributable to each share by the share price and express it as a percentage, you get a revealing figure: the earnings yield. James Halstead's earnings yield is a fraction over 4%. In theory, this is the current return on an investment at today's price.

In practice, it is a very blunt measure, because companies rarely return all their profit to investors, usually holding some back to invest in the business. If the business grows, profit, and thus returns, will be higher. But the high price investors are prepared to pay for shares in James Halstead higher than any other company in this selection tells us that shareholders expect the company to keep growing.

They may well be right. James Halstead has grown revenue relentlessly for three decades and it's very profitable. It makes vinyl flooring with specialist properties that dampen sound, resist chemicals and fire, and guarantee a non-slip surface. The flooring is laid in factories, shops, hospitals, conference centres, cruise liners and railway carriages from the Scott Base in Antarctica to the Svalbard Hotel in Spitsbergen, an island in the Arctic Circle almost flush with the northern half of Greenland. Halstead claims to have shipped flooring to countries covering 98% of the earth's land surface.

It created its most significant brand, Polyflor, in the 1930s. Its founder, Geoffrey Halstead, and his descendents who still run the company have invested continuously to improve the products and the reputation of its brands among building contractors, architects and specifiers. While the company has much larger competitors, they are less specialised and can't match James Halstead's sustained profitability. Based on the company's half-year statement in March, it would be a big surprise if in September, when James Halstead reports its full-year results, it has not grown once again.

5. Solid State (SOLI)

Market cap: £25m

Debt-adjusted p/e: 9

Electronics manufacturer and distributor Solid State has put its shareholders through the emotional wringer. Two years ago the company announced that it was part of a consortium that had been awarded (by its standards) a massive contract with the Ministry of Justice (MoJ) to develop electronic tags for convicted law-breakers. The dream began to turn into a nightmare late last year, as the contract was first delayed, and then terminated when the MoJ decided to use an off-the-peg solution instead.

However, while long-term shareholders would have experienced exuberance as the share price took off, and dismay as it later crashed, for any investors considering buying shares now, it's as though the nightmare never happened. Solid State received a one-off payment to settle the contract, which it immediately spent on Creasefield, a manufacturer of battery packs. Although Creasefield made a small loss in the year to March 2016, Solid State expects it to return to profit this year, helped by co-operation in design, engineering and sales with its existing successful battery business.

The battery business is part of Steatite, the manufacturing arm of Solid State. The company also distributes electronic components through Solid State Supplies. Both businesses are in good shape due to decisions taken well over a decade ago.

While many manufacturers of electronic equipment chose to relocate their operations in China and other low-cost economies in the 2000s, Solid State chose to specialise instead, focusing on high-value rugged computers, batteries, radios and components especially designed for use in the field. Because of exacting specifications, and the regulations required to handle dangerous materials and sensitive information, it's preferable and sometimes necessary to manufacture this equipment in the UK.

As far as tagging goes, Solid State retains the intellectual property it developed and it is working out what to do with it. But even if the company never makes a profit from tagging, business as usual is no bad thing.

Last August, the government finally removed the frustrating and illogical restriction that prevented Aim (Alternative Investment Market) stocks from being held in an Isa. This has made stocks on the UK's smaller companies board especially attractive from a tax perspective. In addition to now receiving tax relief on dividends and capital gains when held in an Isa, many continue to be exempt from inheritance tax under the Business Property Relief rules. What's more, Aim stocks will be exempt from stamp duty with effect from April 2014.

Those who prefer more stable, established companies may conclude that this won't benefit them. But that's not necessarily the case. While Aim is mainly for smaller, riskier companies, there are also a number of established firms that have never made the jump to the main board. Online retailer ASOS (Aim: ASC) has long been the most famous example it's large enough to make it into the FTSE 100 had its Aim status not ruled this out. Perhaps the most interesting for conservative investors are a number of stable, cash-generative, dividend-paying businesses, many of which are family-controlled and are on Aim to take advantage of less stringent rules on free float.

Popular choices include flooring specialist James Halstead (Aim: JHD), retailer Majestic Wines (Aim: MJW), soft drinks maker Nichols (Aim: NICL) and pub chain Young's (Aim: YNGA (ordinary) and Aim: YNGN (non-voting)).

See also:

Isas make sense so act quicklyCash Isas: Get a better rate on your savingsFunds Isas: How to pick the best platform for youStocks & shares Isas: It pays to compare brokersAdventurous investing: Spice up your Isa with exotic investmentsSipps: Take control of your pension

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Every stock-picker dreams of finding the elusive multi-bagger'. A retirement stock. The one great pick that makes your fortune.

Take one of the classic multi-baggers of recent years online retailer Asos. If you'd invested £1,000 when the company listed in 2001, your stake would now be worth £78,000.

Of course, sensible investing isn't about getting rich quick.' For every Asos, there are hundreds of duds. If you stuff your portfolio full of lottery ticket plays, you're more likely to end up in the poorhouse than the penthouse.

But don't let that put you off the sector. Research shows that if you take the right approach investing in small caps can give your portfolio a real boost.

And with new tax rules making investing in Aim stocks far more appealing, there's never been a better time to go hunting

The government does us a favour for once

The government recently made changes to the tax rules, with the aim of making investing in smaller stocks far more attractive to individual investors.

The changes apply to the Alternative Investment Market, or Aim. This is largely made up of small companies, many of which aren't yet established enough to pass the more stringent listing criteria for the main market.

You can now put Aim stocks in your individual savings account (Isa). That means you won't have to pay capital gains tax on any profits you make. You won't have to pay income tax on dividend payouts either.

On top of that, most Aim shares are exempt from inheritance tax as long as the owner has held the shares for at least two years prior to death. (Do be aware that this exemption doesn't apply to property or investment companies, and it's not always easy to tell which are exempt so if your tax-planning strategy relies heavily on this, get professional advice.)

And from next April, you won't to have pay stamp duty if you buy an Aim share.

In short, these exemptions mean that you won't have to pay any tax on most Aim shares whether you're dead or alive.

So great tax breaks. But a tax break is pretty worthless if the underlying investment doesn't deliver any returns to pay tax on. The good news is that plenty of research shows that small stocks in the past at least have more than earned their place in portfolios.

Two academics at the London Business School Professors Paul Marsh and Elroy Dimson - have looked at the performance of smaller companies. Their research shows that, judged by total returns (so including dividends) the Numis Smaller Companies index has beaten the FTSE All-share index by 3.2% a year since 1955. That's a massive out-performance.

In fairness, the Numis index includes many shares that are listed on London's main market' Aim was only created in the 1990s but the point is, the figures show that small cap investing can deliver great returns.

How you can beat the City in the small cap sector

So why do these shares often outperform? It's partly because it's easier for small companies to grow at a rapid rate. If a large company is a dominant player in a particular market, it's hard for it to generate sales growth of, say, 50% a year for ten years. That's pure common sense it's always going to be easier to grow sales from £50,000 a year to £100,000, than from £500m to £1bn.

But this is also one of those markets where the canny private investor can beat the City. It's much easier to spot unloved stocks that are priced far too cheaply. In the jargon, the small cap market isn't efficient'.

Large companies tend to be followed by a large number of analysts and fund managers at any one time. So a large company's share price while far from being priced perfectly - is likely to represent a fair reflection of the company's prospects at any one time.

But with smaller companies, there are often very few followers, so the market can be inefficient. In the past, I've certainly seen small companies issue news releases that are dramatic breakthroughs for the companies concerned, but the share price barely moves. That's a sign of an inefficient market.

What's more, smaller companies are often family concerns, or the management team may have substantial stakes in the company. If the directors own plenty of shares, they're incentivised to do a good job.

Also, sheer scale can be a problem for institutional investors. Even if a fund manager spots a great opportunity, it's often impossible to put enough money into it for it to make significant difference to their portfolio. Warren Buffett has complained of this problem in the past.

All this means there can be exciting opportunities for savvy investors who keep a close eye on the small-cap world.

Of course, there are downsides too. Smaller companies are more likely to go bust. The share prices can be very volatile, which means they can give you more sleepless nights. And you have to watch liquidity there can be a big gap between the price you buy at and the price you can sell at (the spread'). But overall, the potential returns are worth the added risks.

How to invest in small cap stocks

If you don't fancy hunting for small cap bargains yourself, you could always invest in a fund that focuses on the bottom part of the market. I particularly like the Fidelity UK Smaller Companies Fund, which has beaten pretty much all its peers. Another option is The Throgmorton Trust (LSE: THRG), an investment trust with a solid long-term track record.

Just be aware that while you can put either fund into an Isa, you won't benefit from the exemption for inheritance tax. My colleague David C Stevenson wrote in more detail about his favourite ways to invest in UK small caps in MoneyWeek magazine a few weeks ago.

As for individual stocks, my colleague Phil Oakley tipped a couple of small alcohol-related stocks last month, one of which has already performed very well. If you're not already a subscriber, you can subscribe to MoneyWeek magazine.

And if you want to keep a closer eye on what's happening in the small cap sector, you should sign up for my colleague David Thornton's free email, Penny Sleuth. David spends his time looking for exciting opportunities in the small cap or penny share' market.