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In one year, AIM has soared 20 per cent, witnessed more new companies join than ever before and seen its value leap to £31.75 billion. It is now a veritable stock picker's dream, boasting 409 profitable companies, dozens of ventures on single figure p/e ratios and many trading at fractions of their annual sales. Vikki Kunz reports

Any shrewd investor will tell you that if you want to make a decent return on the market, AIM has got to be an integral part of your overall investment strategy. In the past 12 months, the exchange has been buoyant, surging around 20 per cent, attracting 333 new companies (£2.6 billion of new money was raised) and witnessed its market value hit £31.75 billion. There are now 1,021 companies listed, and some of the best performing shares in London have belonged to AIM ventures (yet again).

For those in need of further reassurance as to the strength in depth of this market, there is an abundance of other positive statistics to contemplate. For instance:

For the second year running Growth Company Investor, in association with leading City lawyers Lawrence Graham, has conducted unique and exhaustive research to get behind these statistics, running our slide rule over the entire market and applying a range of criteria to help you identify companies that are almost certainly worth backing – and none too few where you should pause for thought before you part with your cash.

The best performing shares

In Table 1 we have identified the best performing shares of the last 12 months. 52 companies saw their share prices more than double, many of which came from the resources sector. The reasons for the outperformance of numerous oil and gas stocks are many and varied. But one business – Falkland Islands Holdings – stands out in particular. It saw its share price rise rapidly because of two oversubscribed flotations of resource concerns in which it has valuable interests. Despite its share price rise though, this company is still worth considering, not only for its minority stakes but also because it recently made an offer for the Portsmouth Harbour Ferry Company in a bid to expand its interest outside of the Falkland Islands.

Sitting regally atop Table 1 is ASOS, internet clothing specialist, which recorded a staggering rise of 1,570 per cent. If you've got exposure to this stock, taking profits would probably be most prudent (see page 8). Another retailer of note is TV shopping channel operator Ideal Shopping Direct, whose shares soared on several bullish trading updates. Pre-tax profits are expected to reach £5 million this year, giving the group a prospective p/e of 19.1. For those that bought early in 2004 top-slice your gains (see page 16).

A number of businesses that reversed into shells also enjoyed huge hikes in their price. Failed mobile internet business OverNet Data re-emerged as FuturaGene, which could become a potential world leader in plant genetics if its gene therapies prove to significantly improve crop yields. While very interesting, this is a long-term investment as, by its own admission, revenue generation is 'still some way off'.

The worst performers

Table 2 lists AIM's worst performing shares. Unlike other resource punts, gold concern Thistle Mining's value fell 95.5 per cent in 2004 after its losses quadrupled. The shares remain unattractive, as existing shareholders will retain just five per cent of the company after a refinancing of the business.

The vast majority of the poorest performers on AIM are still struggling to maintain their original businesses. For a couple, the chance of revival looks exceedingly slim. Commercial property and leisure investor Probus Estates sold its largest assets to cover gaming tax bills, but is now in default to its creditors. Protein drug manufacturer TranXenoGen failed to obtain further funding and reduced staff from 20 to three. It is selling its facility and laboratory equipment to conserve cash. Small wonder the two shares fell 83 per cent and 88.4 per cent respectively.

Telecom-based tracking system developer QuikTrak had a torrid 2004, as its UK subsidiary was put in administration. But the company is hoping to exploit the intellectual property rights to its technology elsewhere and recently raised £800,000 to utilise the right it obtained in Australia to run its network. One for high-risk players only.

Fastest growing companies by sales

Table 3 contains AIM's fastest growing companies by sales. Topping the list is former motorcycle retailer Just Car Clinics, which increased its revenues over 15,000 per cent to £21.6 million after changing direction and acquiring Dixons Motors' car clinics business. Its results at the interim stage to June highlighted continued progress and new contracts with insurers Norwich Union and eSure will boost revenues. While unlikely to be a spectacular performer, it could provide steady gains.

Exponential growth also occurred at a number of cash shells that acquired operational businesses. Health investment vehicle Healthcare Enterprise reversed into dormant Interactivity and it's been non-stop activity since. The group announced a maiden interim profit, followed by the acquisition of Crest Medical from Alliance Unichem. The majority stake it owns in hospital cleaning agent concern Ebiox, which fights against the much-publicised superbug MRSA, makes this stock very attractive.

Fastest growing companies by earnings

Of the fastest growing companies by earnings (Table 4), which only includes companies that reported profits in 2003 and 2004, a couple of companies make an appearance because of exceptional events, rather than a significant improvement in trading. A 3,500 per cent increase in earnings for domain name manager Group NBT occurred largely because of a £25.8 million capital reduction. Nonetheless, it is delivering profits and attracting numerous clients. Its share price has risen recently to 108p but it's still undervalued compared to its sector.

Top ranking Comland Commercial increased its earnings organically by increasing its rental income by 27 per cent to £6.9 million in 2004. It also invested in £10 million of property earmarked for development or trading. As long as various permissions are granted, its pipeline of developments makes it a very interesting play.

Conversely, Western Australian wine producer Palandri has disappointed investors. Revenues and profits have both fallen and the company increased its banking facility by £800,000 not long after raising £1.4 million on admission. Steer clear.

Lowest p/e ratios

In Table 5 are AIM companies with the lowest price-to-earnings ratios based on brokers' estimates for their next set of annual results. In many cases these relate to 2005. Several relate to the 2006 financial year though.

Real-time data software supplier CMS Webview, which is also the sixth worst performing share on AIM (see Table 2), tops the list. The company's problems stem from delays in securing sales of its specialised product. Turnover halved in the year to last June followed by a poor trading statement.

Companies overlooked by the market that deserve further investigation include Aero Inventory, a provider of electronic procurement and inventory management systems to the aviation industry. On a prospective p/e of 4.8, the business appears to have recovered from a trading slump with revenues in recent months apparently three times higher than last year.

In-store television services provider Avanti Screenmedia also looks cheap, since it is expected to double profits to £1.8 million this year (see page 8).

Highest dividend yields

Most AIM companies prefer to use their cashflow to generate growth rather than pay dividends to shareholders. Often those that continuously pay dividends are struggling companies that attempt to keep their shareholders happy by throwing off cash. Furniture maker Collins & Hayes heads Table 6, listing those with the highest yields. Intense competition has made recent trading tough. The situation is not dissimilar for ceramics maker Portmeirion. Recovery may take some time, but being well-known quality brands, both could be decent long-term investments.

Mixed-use property developer City Lofts may only have listed on AIM in December 2003, but the profitable group has already adopted a progressive dividend policy, yielding 6.3 per cent. City Lofts recently delivered maiden interim profits and its dividend policy most assuredly benefited its chief executive (he owns over 22 per cent). But don't let this put you off; the business is in a good niche market and looks robust.

Lowest and highest price-to-sales ratios

Many of the constituents in the higher echelons of Table 7, measuring companies with low price-to-sales ratios, have low margins and are going through major restructuring to minimise costs and improve profitability.

After listing on AIM in April, foreign exchange provider 4Less recently reported poor results, prompting management changes and wage reductions. The shares have plummeted from 85p in May to its current 27.5p.

The restructuring of Montpellier to a pure construction and property development business was an expensive exercise. Its value halved over the past year to £13.5 million compared against a turnover of £434 million. However, an imminent return to profits should inspire confidence.

At the other end of the scale, nine AIM companies are worth over a thousand times their annual turnover (Table 8). Most tend to be speculative companies with low revenues and large losses in the biotechnology, resources and technology sectors. Forbidden Technologies is one such example. The video technology developer may have intriguing technology but it's failed to generate much turnover and its fortunes look unlikely to change in the near term. Avoid.

One notable exception is First Calgary Petroleum, whose market capitalisation of over £1 billion may be justified on recent news that possible natural gas reserves of 13.5 trillion cubic feet, worth a potential £2-to-£4 billion, are at its Algerian site. Unsurprisingly, its shares have soared to 927p. If you've already bought in, topslice but hold some back for further growth.

* All prices correct as of 30/11/04