10 quality AIM shares that are beating the market

This stock screen from Stockopedia explains how you can pick up some of AIM’s strongest stocks.

Anyone taking an interest in US politics in recent years will know that President Donald Trump keeps a keen eye on the stock market. 

In particular, he likes to conflate America’s motoring economy with the Dow Jones index smashing new highs. After all, there’s nothing like a surging stock market to give everyone the impression that the good times are rolling. So, it’s no surprise that Trump likes to talk it up. 

But things aren’t quite that simple. 

There’s no doubt that a booming economy will, in places, roughly translate to higher profits and rising stock prices. But there’s a well-worn phrase in finance that the stock market is not the economy - and you only need to look at UK shares in recent weeks to see that.

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Coronavirus crashed the market in mid-March, but since then equity prices have been rising. At the company and industry level, there have been big winners and losers, but generally the market has been in a steady uptrend. The FTSE All Share is up around 28% since the end of March, and the FTSE AIM All Share (below) is up by 50% over the same period.

FTSE AIM All Share: three years

One might wonder why. Millions of people face a deeply uncertain future, businesses are in turmoil, earnings have collapsed and whole sectors face genuine peril. If corporate earnings are about to readjust very significantly downwards, why hasn’t the stock market? 

Analysts offer a host of possible reasons. It could be that the market is sanguine on the idea that corporate profits will recover in time. Or, to put that another way, this was a good buying opportunity. It could be that, even with the risk of another pull back, there is still no better place to deploy capital in such a low rate environment.

Finding the best stocks on the move

For those investors taking a bullish view on stocks, the future is certainly scary. A spate of dramatic earnings contractions looks like a dead cert, so picking shares that can navigate their way through all this is a delicate job.

The Alternative Investment Market - which is 25 years old this month - has perhaps been a surprisingly strong performer in the aftermath of the coronavirus lockdown. As a smaller-cap market for growth stocks, it has historically been quite sensitive to economic shocks. But its army of speculative stocks in sectors like mining, biotech and tech have actually done well in this period. There have been some very big winners among what would usually be seen as lottery-like investments.

But micro-caps aside, here’s a screen that sets a minimum market cap of £200 million and minimum Quality Rank of at least 80 out of 100 (that focuses on profitability, financial strength and safety) and then sorted for the highest relative price strength over the past three months.

The results, as you can see, pick up some of AIM’s strongest stocks, ranging from the drinks specialist Fevertree Drinks (LSE:FEVR) and precious metals processor Pan African Resources (LSE:PAF) to biotech specialists like Abcam (LSE:ABC) and Bioventix (LSE:BVXP).

Source: Stockopedia  Past performance is not a guide to future performance

This simple quality and momentum strategy deliberately ignores value - and the risk of picking up troubled companies. The focus on positive earnings and financial strength in tandem with shares that have withstood the crash and are trending higher, mean that it’s looking for two very important factors. 

Historically, shares with this kind of profile have tended to perform very well in the stock market - although it’s essential to keep a close eye on their momentum to ensure those promising early signs of support can withstand the inevitable periods of volatility that lie ahead.

Stockopedia helps individual investors beat the stock market by providing stock rankings, screening tools, portfolio analytics and premium editorial. The service takes an evidence-based approach to investing, and uses the principles of factor investing and behavioural finance to help investors make better decisions.

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These investment articles are simply for generating ideas. If you are thinking of investing they should only ever be a starting point for your own in-depth research.