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Fear is creeping into the smaller end of the stock market. The oil price has hit $60 a barrel, causing manufacturing and distribution costs to rise, and indebted consumers are clamping down on spending as interest rate rises start to bite.

A small cap sell-off has pushed the AIM Index down 15 per cent over the past three months. This means the FTSE 100 is out-performing its junior counterpart during 2005, showing a 5.5 per cent increase, against a 1.5 per cent drop for AIM. This has not happened for several years.

Resource stocks down

Much of the recent decline has come from high profile upsets in the natural resources sector, which accounts for nearly a third of AIM’s value. Disappointing drilling news at Regal Petroleum sent the exploration concern down 82 per cent, and failed takeover talks meant Algerian gas deposit developer First Calgary, AIM’s largest company last quarter, is now 62 per cent lower.

Investors are also taking fright at some more speculative endeavours. Interactive television channel operator Yoomedia tumbled 80 per cent, after respected chief executive David Docherty quit ahead of a profit warning. And the resignation of Graham Hind as CEO of Bioprogress prompted the drug delivery innovator’s share price to halve.

Others showing significant declines include Biofuels, off 64 per cent, and in-car entertainment systems maker Centurion Electronics, down two-thirds. Drug developers have suffered, with GW Pharmaceuticals halving after disappointment on regulatory tests for its cannabis-based medicine, and skin disease specialist York Pharma also down by 50 per cent.

Temporary blip?

Overall, investors seem to be more risk averse and keen to sell loss-making stocks on the slightest sign of trouble. However, some of the fallers caught in the downdraught during

the past quarter may have been experiencing a temporary blip, rather than a permanent decline in fortunes.

For instance, the allure of Neutec Pharma remains compelling. It is conducting late-stage clinical trials into antibodies to combat hospital-acquired infections like MRSA.

Despite the huge need to find a solution to this medical predicament, and the fact that its treatment for fungal infections is about to be authorised by the EU, the shares have fallen 30 per cent in the past three months. They hover above the 490p level at which the company raised £24.5 million a year ago. The current price of 510p values the group at £148 million. At end-December, Neutec had £30 million in cash left.

Resilient businesses

Companies in the healthcare sector with sufficient cash should be relatively immune even if there is a lengthy economic decline. Telecoms-connected concerns should also be able to brave a downturn, as they provide perennially essential services. AIM has plenty of resilient operators in this area to choose from. One is web-hosting business Group NBT.

A month ago, chief executive Geoff Wicks said the second half of the current year to the end of June would ‘produce a better than expected result’, thanks to increased efficiencies following the acquisition last year of Easily. The shares have fallen 24 per cent to 114.5p since encouraging interims, showing a fivefold profit increase and turnover up 53 per cent, were released in early March. At this level Group NBT looks tempting.

Another rapidly growing business in a related area is text messaging technology specialist WIN.

Food producers should withstand any economically difficult patch as well. Take The Real Good Food Company, formed by experienced industry financier Pieter Totte. Valued at just £19.6 million, broker Corporate Synergy envisages a £3.4 million pre-tax profit this year on sales of £46.1 million. That would give earnings of 20.4p and put the shares, down 28 per cent since January, on a p/e of just 6.8. The company, whose main business is seafood products maker Five Star Fish, is also currently in talks to acquire ingredients outfit Napier Brown, also on AIM.