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.
Four more potential winners for the second half of 2021
(Aim: PCIP), 81.5p
PCI-Pal provides payment solutions for card not present (CNP) transactions. The company is focused on contact centres (like call centres but also including emails and interactions on websites), which are becoming increasingly omnichannel and solve the problem of handling and storing customers’ data securely. This is a real problem for its clients because under GDPR and other data regulation frameworks the cost of breaches or misuse can be seriously damaging – both financially and reputationally.
It therefore makes sense for clients to outsource this risk to a payment card industry data security standard (PCI DSS)-approved provider so they can focus on their own core competencies. PCI-Pal is now embarking on a land-grab strategy, which I believe has the potential to generate multi-bagger returns. The company raised £5.5m at 95p in April to accelerate the rollout and open up new markets. Since then, PCI-Pal has announced that revenue for the full year will be 5% ahead of market expectations and about 60% higher than last year.
What I like about this company is that it is almost cash flow-positive at these levels. Profitability has been pushed out further because of the accelerated growth strategy, but this makes sense in a market that is very much up for grabs. Gunning it to be the main player is a sensible strategy here in order to scale up and dominate.
PCI-Pal uses a channel-focused (using a middleman to distribute a product) sales approach that is different from that of its competitors. One risk here is that channel partners decide to go their own way (I believe they will in time), but for now the likes of Salesforce are happy to recommend PCI-Pal’s products to their own clients.
The potential market has around 80,000 contact centres, of which PCI-Pal so far has fewer than 500. Contrast this with the current market value of £53.5m and the potential upside is clear if management can execute effectively (there’s always a risk that it can’t). The global footprint for PCI-Pal is expanding and I hope as a shareholder that the stock price will expand with it.
(Aim: GILD), 6.75p
Guild Esports is the first London-listed esports organisation and the first to list on a major exchange globally. Many have been sceptical about esports – saying “video games aren’t a sport”. The stereotypical view of a gamer is of a geek who lives in his mother’s basement. However, darts is hardly the peak of athleticism either; or take golf – where you walk around all day and hit a ball every now and again (and someone else carries your clubs).
Professional gamers today have coaches, managers and even nutritionists. People come to watch them compete against each other in arenas. David Beckham is a shareholder in Guild and the new academy the company has brought in to develop and nurture talent is built on the footballing model. The opportunity here is for the business to create a brand that other brands wish to be associated with. However, there is no denying that the value of these sponsorships could easily fluctuate upward or downward depending on the performance of the teams Guild puts out. Naturally, my hometown football club of Hartlepool United is unlikely to be attracting luxury brand sponsorships anytime soon. But top players and top teams can command premium deals, so Guild aims to grow its audience by keeping a roster of high-quality talent and monetising that brand through commercial sponsorships.
US esports giant Faze Clan has hired a chief strategy officer with an eye for targeting luxury brands. Guild has signed a two-year multi-million pound deal with Subway, and has hinted at more to come. Guild Esports is not yet profitable – and there is no guarantee that it will be. But with a market value of £35m and £18m in net cash on the balance sheet as of 28 January 2021, the risk here is to the upside should the group deliver on its sponsorship goals.
(Aim: TRT), 77.5p
Transense Technologies makes sensor systems measuring torque, pressure and temperature for industries ranging from renewable energy to aviation. It has been listed on Aim since 1999, but has never made a profit. It is an interesting example of how shareholders can fund stakeholder spoils for years without seeing any return for themselves. Directors get their salaries and advisers, brokers and PR companies are all paid for by the company.
But Transense is a classic example of the facts changing and the market being slow to respond. Two years ago, the company gave away its iTrack technology to a subsidiary of Bridgestone, the lorry and car-parts maker. There was a sense that the company had given away the golden goose as it was simply transferred to the company in exchange for royalties. I admit to thinking so. However, to market a technology such as iTrack would require significant upfront capital investment. By transferring it to Bridgestone and receiving income from licensing, Transense receives a pure profit and eliminates overheads and capital investment.
Royalty income in the second half of 2020 totalled £370,000. This is expected to increase as Bridgestone has launched its new MasterCore tyres for large mining vehicles and sells its iTrack technology alongside this. Even if the company didn’t see any expected growth in revenue and only received £700,000 per year for the next ten years, that would be cash that covers more than half the current market capitalisation of £12.6m.
But there are another two parts of the business. Transense’s surface acoustic wave (SAW) technology has also secured a licensing deal to go into GE Aviation’s T901-GE-900 engine, which has been picked by the US Army to re-engine its Apache and Black Hawk helicopters. Royalties are expected to come online in 2023-2024, but of course there are many things that could still go wrong.
The final third and small business Transense owns is a tyre-probing unit. Management claims to be focusing on it now to commercialise it. My belief is that the Bridgestone deal buys the company ten years to drive value elsewhere. With a new chair and the board now buying shares regularly, I am long.
(Aim: BAR), 173p
Beauty-products group Brand Architekts was previously called Swallowfield. The business has been completely reset with a sale of the old manufacturing business and a fresh board. It’s now a higher gross-margin company selling its own products.
Its valuation of £29.8m is bolstered by a £19m cash position – an improvement of £1m from the previous year. This shows there are no solvency problems, but the turnaround is still in its early stages. Management has revitalised the brands and is focusing on profiting from the 50% sales growth in skincare label Super Facialist and the direct-to-consumer platform, which is due to launch in July.
The downside here is that there is a large pension deficit on the balance sheet. I have never heard of a company going bust because of a pension deficit (and especially not when it is so flush with cash), but it is something to be aware of. I’m comfortable with this risk and I think this issue will be dealt with should management execute effectively.
Why you should read always annual reports
No matter how good a stock’s story sounds, always go through the financial statements properly. Many people spend more time trying to save £50 on a television than they do on researching where they’re putting their hard-earned cash. Is it any wonder some investors lose money? Management teams are well aware of this and along with trying to shift debits from the profit and loss statement into a credit on the balance sheet, they will hide what they don’t want you to see where they know you won’t look: their annual report.
Before investing in any company, you should take some time to go through at least the most recent annual report. I like to print the two most recent annual reports and read the older one first so I can get a feel for the story. Reading the latest one last also reveals whether management actually succeeded in executing the strategy they outlined the year before.
One of the important parts of the annual report is the notes to the financial statements. This is where revenue and segmental breakdowns are explained, as well as the reasons for laying out the accounts in the way they are presented. You don’t get this in the half- or full-year results, so this is essential reading.
I always like to check the remuneration part of the report to see if managers are aligned with shareholders. If executives’ pay rises significantly year-on-year with the share price achieving little and management owning almost no or zero stock, then this saves me a lot of time. I avoid the stock completely.
For more market insights you can get Michael’s “Buy The Breakout” monthly newsletter at www.shiftingshares.com/newsletter
Disclosure: Michael holds long positions in COG, ESC, SMRT, PCIP, GILD, TRT, and BAR.