Lockdown and coronavirus might have put paid to certain Christmas traditions this year, but one has survived entirely intact – it’s still the season for the newspapers to issue a variety of stock tips in the hope that one of them goes up so that they can then proclaim how well they did, while conveniently forgetting the ones that bombed.
This latter issue is one of the biggest problems with tips in general: often the downside is not mentioned. To get an accurate measure of a company’s investment merits, we don’t just need to know its potential – we also need to be aware of what can go wrong. For example, I’m well aware that any stock mentioned in this article could announce a profit warning in the few days’ gap between me writing the piece and you reading it. Investors must always be mindful of the risks – and it should go without saying that if you are looking for excess rewards, that means taking a higher level of risk.
2020 has provided plenty of opportunity. We have seen a “V-shaped” recovery in the stockmarket and although the economy has taken a significant whack, equities are now pressing all-time highs. Money is being pumped into the market with reckless abandon and asset prices have soared along with investors’ confidence. But it’s not just about money printing. Covid-19 has given boards free rein to do what perhaps should’ve been done a while ago. It’s hard to make unpopular decisions about cutting underperforming parts of the business when companies are announcing record profits, particularly when a brand is in the public eye. However, when survival of the business is at stake, corporate restructuring is accepted and leaner businesses emerge.
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So I am excited for 2021 and below I highlight five potential ideas – not tips! – that could offer generous upside. To be clear, I hold positions in all of the shares mentioned below. However, I emphasise that these ideas are just starting points for your own research. Your portfolio requirements are different from mine and shares can go down as well as up – I get my fair share of losers like everybody else. The key is to cut them quickly if they do go wrong, and run your winners.
Anglo Asian Mining
(Aim: AAZ): 127.5p
Anglo Asian Mining is a gold, copper and silver explorer and producer in Azerbaijan. It’s a minnow in the sector, with a market cap of around £150m. The shares have come a long way since they hit a low of below 4p back in 2016, but over the past year have traded in a wide range, with a low of 70p in March and highs of 175p. Estimates for annual metal production are in the region of 68,000-72,000 gold equivalent ounces (a measurement used by miners, expressing total metal production in terms of gold).
Following the recent war between Azerbaijan and Armenia, the company announced to the stockmarket that its Vejnaly contract area had been “liberated”. The miner has the rights to explore the mineral-rich area, but it has been under Armenian control since the break-up of the Soviet Union. As a result, it’s quite possible that the market has not ascribed any value to this region’s potential, which comes over and above the fact that Anglo Asian Mining could be a good play on a rising gold price in any case. The price/earnings (p/e) ratio of ten is undemanding, although bear in mind that this may well be down to investors taking into account the volatility of the region.
(Aim: CALL): 88p
CloudCall is a cloud-based integrated software provider that allows businesses to improve their communications systems. CloudCall’s products can be integrated into the existing customer relationship management (CRM) system, allowing calls to be recorded, logged and categorised. The company has seen great take-up of its products in the recruitment sector in particular, where outbound calls are the lifeblood of the business, due to its “click to call” (whereby on-screen phone numbers can be dialled simply by clicking on them) and “local dialler” (which displays a number local to the area being dialled, which means people are more likely to pick up) features. However, it believes it has found an even bigger market in the property sector.
CloudCall raised £12m in September 2019 via a share issue and as of its last set of results (for the six months to 30 June), had £8.3m in cash, plus a further £1.5m available via its existing debt facility. From an investment point of view, CloudCall’s “software as a service” (SaaS) model is highly scalable. For every £1 the company invests in customer acquisition, it returns on average £7 in long-term value. Put that alongside the fact that the company converts 56% of its demonstrations for potential clients into sales wins and the stock could be a real growth story.
US institutions have been taking positions in the share over the past year, although the price has yet to move much. There’s certainly no guarantee that it will go higher. CloudCall is loss-making, and that is likely to remain the case as it continues to invest in growth. But I believe the stock is now sufficiently funded for a proper swing of the bat, rather than the piecemeal share placings that held it back in previous years. To be very clear, the shares are illiquid and so any bad news or disappointment will see a crowded exit. In other words, the share price could fall very hard, very fast if anything goes wrong. So while I am comfortable taking this risk, do be aware of it if you’re thinking of buying.
(Aim: COG): 56.5p
Cambridge Cognition is a neuroscience digital-health company that specialises in the measurement of clinical outcomes in neurological disorders. I didn’t know what that meant either, so I had to look it up. In short, the company’s tests and software measure cognitive function. These can be used in clinical trials of drugs or treatments to measure any improvement or decline in mental health, for example. Sounds good, but like most companies in this sector it has promised investors a lot and woefully under-delivered.
That could be changing. A new commercially focused chief executive was appointed in 2019 and new funds raised via a share placing. In the six months to 30 June revenues rose by 39%, losses fell 75% to £430,000, and the company spent £160,000, leaving a cash balance of £1.96m. So a quick back-of-the-napkin calculation shows that if improvements continue, the company will be profitable and self-sustaining soon. However, there is still a lot of work to do. It’s an early-stage business model and despite having some of the world’s biggest pharmaceutical companies as clients, the company is valued at just over £17m, showing the immaturity of the business. So while the shares have already risen a great deal from an April low of 19p, there could be much further to go, for those willing to take the risks of investing in such a young company.
(Aim: ESC): 16.5p
Escape Hunt, a provider of “escape room” experiences, is another stock where a change of board has led to a potential turnaround. Graham Bird of asset manager Gresham House joined as chief financial officer earlier this year and the business model was beginning to bear fruit. However, given the nature of its business, when the Covid-19 crisis hit the share price was smashed to smithereens. A placing was done at 7.5p to raise £4m in May and costs were navigated carefully. The board bought shares (I took part in this raise too).
News of the vaccine has driven the price higher and with a motivated board and no immediate need for capital, the stock could be a potential winner as the UK begins to unlock and normality is restored. The company recently announced a deal with Netflix to create a game that can be played at home to tie in with the release of an upcoming Netflix original film. This is no doubt a small deal, but if successful it could see further wins. As for risks to be aware of, Escape Hunt is currently unprofitable and further lockdowns will inevitably have a negative impact. And, of course, escape rooms may be a passing fad – just as table tennis bars were a few years ago.
(Aim: SMRT): 136p
SmartSpace Software offers workspace optimisation solutions, such as software for booking meeting rooms or desk space. The company’s client list is impressive, including the BBC, Skyscanner, and the Department for Work and Pensions. It recently sold a loss-making unit and has made the switch to a pure software as a service (SaaS) business model, which means higher profit margins and recurring revenue – offering greater visibility and scalability to the business. It is also now potentially cash-flow positive – if confirmed, that removes a significant amount of risk from the business.
With a market cap of £37m, the upside is high as long as the business can keep growing its revenues and client base. A trading update earlier this month pointed to the positive momentum continuing, but there is a risk that a lasting shift to working from home might affect growth. One other point to note is that board members do not own significant amounts of the stock. This always concerns me, as I prefer to see entrepreneurial management. That said, as with the other ideas here, I hold a position in SmartSpace.
Four key points when researching Aim stocks
- Check the cash-flow statement and the annual report, and avoid low-growth and unscalable businesses.
- Cash is reality. It doesn’t matter how much profit a business makes if the cash is not appearing. As Jerry Maguire would say: “Show me the money!”
- Check Aim Rule 26 for a list of major shareholders. Have any institutions been buying or selling? Does the institution have a good record?I don’t believe in following others, but seeing certain names on the shareholder register can offer a hint to keep digging.
- Remember: nobody cares more about your own money than you do. Keep an eye on the story and play each card as it is dealt. So long as the story remains sound, it may not be a bad idea to stick with it.
You can download Michael’s ebooks on the UK stockmarket from shiftingshares.com
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