|Capital returns to Aug 21st||AIM||small cap||mid 250||FTSE 100|
A quiet month for the UK equity market indices, though it seems the force is still with AIM. As we can see, it leads on all the timescales in the table and by a healthy amount. And there seems to be little indication of it wanting to jump off its happy uptrend. Since last month we had a few geopolitical wobbles with the North Korean sabre rattling, and the S&P recorded a couple of rare 1 per cent plus down days. But it’s not been enough to knock equities off their perch. Or even to make the perch sway a bit!
The force is with AIM
In fact the AIM index chart remains very encouraging. It has made a post financial crisis high and is picking up nicely again after some consolidation in June and July. From a technical aspect I have to say it looks pretty good. The main market’s FTSE small cap index also looks fine, while both the mid and large cap indices seem to be becalmed. This is clearly a market where it’s easier to make money further down the size scale.
While it’s certainly possible to find cheap stocks on AIM, the current outperformance is being driven more by superior growth situations. With the economy growing modestly and interest rates at rock bottom, the stock market continues to prize highly stocks that are delivering premium growth rates.
Go for growth
Looking at the leaders on the AIM 100 index over the last month we find familiar faces Keywords Studios up 47 per cent and trading on a prospective p/e of 35, along with Fevertree up 35 per cent on a p/e of 62. Other highly rated growth stocks also feature among the big monthly risers and this theme is definitely well-entrenched. These are also some of the largest stocks on the AIM market, so they have a big influence on the return of the overall index – amazingly Fevertree’s market cap is now £2.8 billion!
These AIM leadership stocks are highly profitable and have top quality financial characteristics; so it’s not an unhealthy speculative fever that’s driving them ever-skywards. Rather, I believe, it’s investors’ thirst for growth and a belief that the momentum of profit upgrades will be sustained. Which is understandable and easy to have sympathy with.
While it feels uncomfortable to chase stocks on ultra-premium ratings like the two mentioned, it’s important to have exposure to the theme. Several GCI portfolio holdings might fit the bill on more palatable p/e ratios. Last month we discussed the rerating that many of our favourite picks have enjoyed. With the exception of Tristel which had moved onto a p/e of 32, we concluded they were all still OK to stick with. Well Tristel has gone up another 20 per cent since then, which illustrates the power of the theme!
Our conclusion remains a rather awkward compromise. There’s no point in fighting the tape, so stick with a good equity allocation. But also be aware that many valuations are getting extended and value is a lot harder to find than it was a year ago. Which means also holding some cash and looking patiently for those increasingly rare ‘growth at a reasonable price’ stocks which have served us so well.