Companies: AI.    CDY    FNT    SND    TYM   

At face value, there's never been a better time to invest in the Alternative Investment market. There are currently 640 companies listed on Aim, making it the largest and most diverse growth market anywhere in the world outside of the US. It is also Europe's most successful IPO platform, having accounted for just over a third of all new issues in Europe over the past 14 months. And with the stock prices having fallen considerably over the past few years, companies no longer boast share prices in the stratosphere.

But these facts and figures, although appetising for growth investors, do pose a few problems. With such a diverse selection of companies across a multitude of sectors on offer, choosing which one to back can be difficult. This stock selection issue is exacerbated by the fact that when you delve deeper into Aim, a weird and wonderful array of investment anomalies present themselves.

To uncover the quirks, we fed five criteria into our Aim Guide Online research database and came up with some impressive buy - and sell - opportunities.

For instance, companies whose shares have doubled or more in the past year still seem cheap and those that have posted significant earnings improvements are still rated as 'low growth'. Others that have secured negligible revenues and possess negative cash flow are feted by the movers and shakers. In other instances, some unpopular profitable ventures have market values leagues below the revenues they generate.

Surprise share price stars

The first area we looked at was basic share price performance over the last year. Surprisingly, following a strong set of interim figures released in late January, toy manufacturer Cassidy Brothers established itself as the best performing Aim stock, powering up 170 per cent to 60.5p since January 2001.

Strikingly, there is evidence to suggest that the shares may still have some way to go. First half profits surged 269 per cent to £682,416 due to a decision to shift production to the Far East. Assuming the group breaks even in its traditionally weaker second half, this means that the company is trading for around six times prospective earnings.

Another strong performer has been Tertiary Minerals – currently 130 per cent ahead of its price 14 months ago at 26.5p. Like Cassidy, Tertiary is quite volatile (the shares have almost doubled since the turn of the year) but a series of positive recent drilling updates and licence updates suggest that it could represent a good long-term investment.

Much the same could be said of e-procurement specialist Aero Inventory (tipped by GCI last month) and utilities services group Fountains. The latter is due to increase full year profits to £1.3 million putting it on a forward p/e of 10.9.

The worst share price performances in this period are dominated by e-business/e-tailing ventures BikeNet, bizzbuild and Gameplay, which have all fallen by in excess of 96 per cent. After a dismal start to 2002 washing machine developer Monotub Industries also finds itself embedded on the list of the biggest losers. Shares in the company have crashed to just 11p (from 575p 14 months ago) after its decision to suspend production of its £650 Titan washing machine. All of these ventures should be avoided.

Pick of the newcomers

Measuring the performance of Aim's newcomers since January 2001 also proved a fruitful exercise. Of these, Send has been the best performer, almost quadrupling to 93p. Unfortunately, all is not tiptop here. A November statement warned of a fall in demand at glass packaging division Beatson Clark and an expected £900,000 hit. Analyst Roger Brocklebank, from house broker Old Mutual Securities, has cut back his forecasts accordingly, and now expects a £1.9 million profit (£3.3 million profit) for the year to December. But for 2002, he expects a recovery to £3.4 million, putting Send on a prospective 2002 p/e of just 4.9.

Other exceptional share performances have come from sports and leisure group Coliseum (70 per cent ahead of its issue price at 42.5p) and Brewin Dolphin-advised Synergy Healthcare, a services company hoping to benefit from the increasing trend for outsourcing in the NHS.

Since launching in August, Synergy has marched to 220p – valuing it at £35.6 million. Moreover house broker Brewin Dolphin is forecasting a £1.5 million profit (£1 million) for the current year and £2.3 million in 2003. With the government pumping ever-increasing amounts of cash into the NHS, Synergy appears well positioned to benefit. In contrast to most of the main risers, its forward p/e of 33.8 suggests it is fully valued by the market.

Of the new issue losers, the worst is secure payment system developer Earthport. It moved from Ofex to Aim in January 2001 and has had a torrid time since, spending half its time on the suspended list and watching its original adviser, broker and several key directors resign. It is to be avoided, as are strugglers KeyWorld Investments and Prestige Publishing.

Big earners but low values

The third area we decided to investigate was companies with peculiar market value to sales ratios. Our subsequent list of those stocks with low market values to sales ratios contained a number of unattractive – and heavily loss making – stocks recently arrived on Aim via the Full List. These included electronic office supplier ISA and mobile phone distributor European Telecom.

ISA raked in £296.8 million of revenue last year but is valued at £4.4 million, largely on account of increased net debts of £35.5 million. European Telecom, meanwhile, ran up a £27.3 million loss from £311 million of sales in the year to March 2001 and has a market cap of £6.9 million. Recent interims from the firm revealed a 587 per cent increase in losses to £9.5 million.

To find stocks with low market values but strong sales that were worth buying, we had to look further down our list. Construction and building maintenance group Tolent, for one, looks a good bet (see p. 9) as does defence training systems developer Pennant International.

Last year Pennant registered £14.2 million of turnover (£7.1 million) and a £232,000 pre-tax profit (£1 million), yet it is now valued at a lowly £600,000. This is partly due to the impact of a freeze on defence sector budgets over the past couple of years. It is expecting a full year loss of around £2.25 million but it recently announced a brace of contracts. While speculative, Pennant could provide considerable upside for those prepared to take the risk.

Big value, low earners

Of those that are highly valued, but have historically generated precious little revenue, the frontrunners are generally those boasting 'exciting' technologies. The likes of pipefitting specialist Oystertec, compressed air technology business Corac and automotive transmission innovator Antonov have all attracted investor interest for this reason.

Transense Technologies is another, but the £113.5 million market cap lavished upon it seems more than a little excessive at this stage of its development. Like Antonov, the company develops technology for the automotive industry. Its Surface Acoustic Wave system has applications ranging from the development of power assisted steering systems to tyre pressure monitoring. Licensing agreements have already been signed with tyre giant Michelin and steering wheel innovation group TT. However, broker WestLB Panmure does not expect the company to report profits until the year ending December 2003. Even then at its current price Transense stands on a hefty forward p/e of 161.

Strong sales growth

Spotlighting firms that have registered the greatest increase in sales over the last two years threw up many interesting situations.

Between 1999 and 2000 motor accident management group Auto Indemnity drove turnover up from £20,000 to £3.57 million. In this period, losses increased from £14,000 to £4.9 million. For 2001, house broker Teather & Greenwood forecasts a £870,000 profit before tax, rising to £1.4 million in 2002 on sales of £10.2 million and £15 million respectively.

One other firm worth highlighting here is Systems Union, a group that secured an 8863.3 per cent revenue surge to £53.78 million in the last two years. The rise coincided with management's decision to dump e-commerce activities and acquire a brace of business software providers. Losses during this period hit a whopping £106 million (£2 million) but the portents are now extremely promising. SU reported an interim pre-tax profit of £679,000 after a £6.3 million outlay on research and development and has since continued to win major contracts. House broker Peel Hunt now expects a £3.6 million profit on £78 million for the full year putting the company on a prospective p/e of 26.6. It deserves this rating.

Price earnings options

The last area we looked at was the conventional p/e criteria. Some of the lowest p/e ratios here were, unsurprisingly, supplied by the dowdy household goods and textiles sector.

That female clothing manufacturer Jacques Vert should trade on a p/e of 5.25 did not cause a stir as it fell into losses of £95,000 last year. But it seems that Vert may have turned its business around – Rhys Williams of house broker Seymour Pierce is hoping it will produce a £1 million profit before tax for the current year. A punt could pay off.

Perhaps even better value can be found in two profitable companies spun out of Aquarius last summer. At present, bath suite and accessories manufacturer Airbath and furniture producer Collins & Hayes stand on forward p/es of 3.58 and 4.69 respectively.

At the other end of the spectrum 3d imaging specialist OMG currently boasts a high prospective p/e of 95.27. The group develops both software and hardware for the 3d marketplace, ranging from motion capture to predictive camera tracking. To date applications have ranged from biomechanics to engineering. However, it is the role they have played in creating visual effects for films such as 'Gladiator', 'Harry Potter' and 'The Mummy Returns' that has captured investors' attention. With OMG continuing to step up research and development and marketing activities a reduced profit of £630,000 (£800,000) is expected this year on sales of £12.4 million. House broker Teather & Greenwood expects this to swell to £1.65 million in 2003. It is still too expensive for us.

Also highly rated at their current share prices are single board computer manufacturer Concurrent Technologies and on-line learning specialist Epic – both on course to produce a significant drop in full year profits – and computer games retailer Warthog. Despite the difficult market conditions for companies in its sector Warthog has performed well since its February 2001 listing, rising 5.5p above a placing price of 43p. This year the company is expected to produce a slightly improved profit of £400,000 (£300,000) on sales up 140 per cent at £9.1 million (forecast earnings of 0.7p affording a prospective p/e of 69.3). For the year to March 2003 profits should improve to £2.7 million, putting it on a far more modest ratio of 11.

*NB - all tables exclude suspended companies and those in administration. All prices correct as at 21/2/02

P/E tables represent GCI selection