Britain’s top tiddlers: four of the best small-cap stocks on London's Aim market
The small-cap stocks on Aim, the London Stock Exchange’s junior market, can be very risky – but also highly lucrative. Michael Taylor reviews his picks from last December and suggests four more .
It’s hard to believe it’s been six months since I wrote Five Aim stocks with plenty of potential for 2021 (27 December 2020). We’re now closer to next Christmas than the miserable last one. But money never sleeps – and neither should you when it comes to stock picking. The market moves constantly. Being asleep at the wheel is a cardinal sin when managing your own money.
The five stocks I picked in December have done well. Four have risen and two have doubled. It would be easy to proclaim my own genius, but the reality is that all stocks have performed strongly. What’s more, these are investment ideas, and rarely does an investment thesis play out over a six-month sprint. Let’s look at how they have performed before moving onto four ideas for the second half of 2021.
How my five picks from December 2020 have done
Anglo Asian Mining
(Aim: AAZ) 127.5p, now 143.5p
A modest 12.6% increase in price suggests little has changed at this Azerbaijani copper, gold and silver producer. But a five-year extension to its Gedabek contract area has been approved, while 2020 saw record revenues and strong cash generation. The company believes it has “exceptional development opportunities” in its six contract areas.
I sold out of the firm because I believed there was faster money to be made elsewhere. I’m a trader and if there are better opportunities somewhere else I have to chase them. But the investment thesis is stronger than ever and Anglo Asian has entered 2021 in fantastic shape. Shareholders may need to be patient for a catalyst to appear to drive the share price higher. I have not ruled out buying back and will continue to monitor the stock closely.
(Aim: CALL) 88p, now 65p
This is the only stock of the five that has fallen. I must admit I got this wrong. I underestimated the effect that Covid-19 would have on the company. My initial belief was that working from home should be great for Cloudcall because it is a telephony-solutions business. But growth has been slow and will remain pedestrian even though it’s a cloud-based scalable platform.
The company thinks it can reach revenue growth of 25% in 2022 and it is targeting EBITDA breakeven during 2023. It’s unfair to blame management for the virus, but with the growth story pushed back further it’s also not unfair of me to sell. Cloudcall executed a brilliant fundraising in the period. It scooped up approximately £6m, highlighting the strong institutional support for the business.
The upshot? I’m happy to keep this stock on my watchlist. I don’t mind buying it higher if growth starts increasing faster than expected. With a market capitalisation of £31m, the stock’s upside potential is high – but for now I believe there are faster returns elsewhere.
(Aim: COG) 56.5p, now 142.5p
The stock of this specialist in neurological disorders (its software measures cognitive function) has almost tripled since I tipped it. The company has delivered revenue growth and more contract wins and so I’ve increased my holding several times. I said in December that Cambridge Cognition should be profitable and self-sustaining soon.
It was confirmed in March that the last quarter of 2020 was profitable and the firm is now adding to its cash position comfortably from its operations. Renowned investor Peter Lynch wrote that selling winners and adding to losers is like watering your weeds and pulling out the flowers. Although the shares have risen significantly I still believe the upside is high and I see no reason to sell out.
(Aim: ESC) 16.5p, now 39p
This company has been a stellar performer in 2021. Traders should always be looking for asymmetric risk-reward scenarios, where the reward far outweighs the potential loss. When I took the placing at 7.5p in May 2020, everyone had written this provider of “escape room” experiences off.
People were saying “hospitality is dead, retail is done” – yet Escape Hunt had raised enough cash to see itself through the next 12 months. I thought that if the Covid-19 situation was indeed as bad as everyone assumed and didn’t improve, the downside would be at least 50%. But if the Covid-19 situation was better than the market thought and improved, then the upside was potential multiples of the price.
Even when Escape Hunt raised capital to acquire its French master franchise partner BGP Escape at roughly its average unaudited EBITDA for 2018 and 2019 and we were actively rolling out a vaccine, the market was still fast asleep. I added more to my position in the placing and more in the open market.
At 39p, I’m up by 400% on my original purchase price and have sold some shares to book profits on what is a fantastic gain. I believe there is more to come from the company although I expect the shares to consolidate and trade sideways after such a bull run. I remain a happy holder having taken some profits.
(Aim: SMRT) 140p, now 165p
My final pick, Smartspace Software, which makes programs to help companies with office administration, such as booking meeting rooms or desk space, was originally going to be at 100p. But in the week between the article’s submission and publication, a tip sheet also spotted the potential here and pushed the price up to 140p.
This annoyed me because even though the stock was still a buy at 140p, it meant that you as the reader had missed out on 40% upside. I’m still holding Smartspace, but the valuation is now verging on rich. I believe this company is going to continue to win business and grow, and I remain a holder.
These ideas have done reasonably well. I’d be delighted if you had done your own research on these stocks and saw some benefit. Remember, investing in Aim companies always carries risk, but as we can see the rewards are substantially higher if you pick the right stock.
Now on to four more potential winners for the second half of 2021...
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Disclosure: Michael holds long positions in COG, ESC, and SMRT.