Finding 10-bagger shares on AIM

Our award-winning smaller companies writer studies the history of incredible share price performance on the AIM market, and analyses the odds of picking a winner.

Ten-bagger shares – one’s which have risen 10 times in value - are the Holy Grail for many investors. It is something they seek but they do not necessarily find and buy. There is no easy way to spot a 10-bagger, and companies that appear to have good prospects can have problems along the way.  

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Successfully investing in a 10-bagger is rare. The tables below show companies with share prices more than 10 times their starting level over a range of periods. Even over 20 years there are only 12 companies (Dewhurst has two sets of shares). There will have been others that achieved the feat but not sustained the share price. There are only nine over a one-year period. 

Source: SharePad. Data compiled on 22 October 2020. Past performance is not a guide to future performance

Source: SharePad. Data compiled on 22 October 2020. Past performance is not a guide to future performance

Source: SharePad. Data compiled on 22 October 2020. Past performance is not a guide to future performance

Ten-baggers tend to be thought of as speculative and risky investments. It is true that some of the 10-baggers on AIM are companies that people would probably have thought you would be crazy to invest in, but others are solid companies that have grown steadily.

The best performer since the 20 March low for AIM is All Active Asset Capital (LSE:AAA) and it is a more than 30-bagger. This a company with a net asset value of less than £3 million and a market capitalisation of £64 million. The big change is that before this year there was hardly any trading in the shares. Following a change in both investment strategy and directors, investors have got excited. It is difficult to see All Active Asset doing a deal that will warrant the valuation in the short-term. 

Alien Metals (LSE:UFO) has risen by more than 19 times, but the share price is more than 99% below its high nearly one decade ago. It is still a mining company, although it has different assets and management to 10 years ago. Orosur Mining (LSE:OMI) has shut or sold most of its mines and has one joint venture project with Newmont, which has been enough to spark a resurgence in its share price. 

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None of the six 10-baggers since 20 March have reached the all-time high for the share price. Some are well below the peak. 

Getting in at the beginning is not necessarily a good thing. Flotations tend to be fully valued, and some of the potential is already priced into valuations for companies where there is expected to be a growing market for their product. 

Proton Motor Power Systems (LSE:PPS) floated 14 years ago when there was a raft of fuel cell technology developers joining AIM – most of which have left the junior market. The share price drifted downwards and bumped along the bottom for many years. Progress was slow, partly down to the lack of cash. In the past 18 months, as orders started to build up, the share price has soared by more than 10 times. The share price is still below the 80p when Proton joined AIM. 

Having said that, video games services consolidator Keywords Studios (LSE:KWS) has done well from the start of its time on AIM. 

Follower of fashion

Chasing fashions is not necessarily a good idea. There have been niche sectors that have done well in the short-term but have fallen back. Debt management and IVA companies were strong performers at one point, but changing attitudes to the services by the banks and others meant that trading got tougher and most went bust or left AIM. 

Publicity about cyber security also sent related shares soaring to unrealistic levels which were never going to be maintained.

Picking companies that have exposure to Covid-19 tests and treatments has worked in recent months. Novacyt (LSE:NCYT) is the best example, which is 18,000% ahead over the past year, but there are others, such as Synairgen (LSE:SNG), which has a potential treatment. They will not all be long-term winners. Part of the reason for such enormous price rises is the inability of analysts to predict how large the market will be. This enables the imaginations of some investors to run wild. 

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The experience of Open Orphan (LSE:ORPH) shows that not all Covid-19-related tests and potential treatments are progressing as well as expected. Although Open Orphan won a £10 million UK government-backed Covid-19 challenge study contract, sales of Covid-19 antibody tests have been lower than expected. 

There will be other disappointments among the Covid-19- related risers and they may not be offset by good news in other areas. 

A good strategy

Patience is important for investors. Many of the better performers have had a bumpy share price ride over the years. Choosing an investment at the right time can be highly profitable. It can be difficult to know when that is going to be, though.

Novacyt is a company I have followed for years and its growth plans were not going as it was hoped they would. The potential for one product – the Covid-19 test – changed things by sparking a sharp increase in revenues and the share price. The latter led to additional cash being raised through warrants at higher prices than the pre-Covid share price. This means that Novacyt can finance its growth in a way it could not before, and it would have probably gone on making slow progress without Covid-19. 

It is better to choose companies with good prospects rather than getting too focused on whether the share price will be 10 times the current level in a few years. 

Buying shares when a company has been losing money, but it is approaching profitability can be a good strategy. The Advanced Medical Solutions (LSE:AMS) share price is 14 times the level it was 20 years ago. The woundcare products developer took many years to make a profit, but once it was covering its overheads the rising revenues increasingly fell through to profit. This fuelled the share price rise. 

One of the things to note is that the majority of the longer-term 10-baggers pay regular dividends – some have also paid special dividends. That means their overall performance has been even better than the share price changes shown. 

It should be noted that the majority of the AIM 10-baggers over 20 years were on the Main Market at the start of the period and subsequently moved to AIM. 

Taking random time periods, such as 10 years, is inevitably going to mean that some good performers will be missed because they may have performed at times outside of the set periods. There are also some companies that have been taken over. 

An example is ASOS (LSE:ASC), which is a strong performer over 15 years but is not a 10-bagger over 10 years or less because the main rise was in the previous decade. 

Robotic software provider Blue Prism (LSE:PRSM) has risen by nearly 20 times since floating in March 2016. It became a 10-bagger during 2017 but does not feature in any of the tables because of the specific timing. 

Source: SharePad. Data compiled on 22 October 2020. Past performance is not a guide to future performance

Short-term versus long-term

There is a big difference between the 10-baggers over one year or less and those over a longer time period. The short-term gainers are more speculative and sometimes illiquid, which leads to the sharp movement in the share price. 

The longer-term winners tend to be profitable and growing businesses that have cash to reinvest in operations and pay dividends. Many have track records that go back even longer than the time periods shown in the tables. This shows that risks do not have to be sky high in order to benefit from outperformance. 

Resources companies are less prevalent among the 10-baggers over longer-time periods. Some of the poor performers in recent months, such as budget airline Jet2 (LSE:JET2), formerly Dart Group, are still impressive performers over 20 years. 

Many of the companies are highly acquisitive but that is not always a good thing for the share price. Companies, such as Judges Scientific (LSE:JDG) and Marlowe (LSE:MRL), have used shares to finance acquisitions but they have not been dilutive deals over the medium-term. Other companies tend to issue shares and not bother about the dilutive effect on earnings and the potential growth in the share price. 

Investors could try to pick the short-term winners, but that is a lottery as some of the recent 10-baggers show. 

If investors are seeking to invest money via ISAs or Junior ISAs it is better to take a longer-term approach that balances risk and reward. A well-run growth business that generates cash can give an excellent return over many years. There may be opportunities to pick them up at valuations that have not fully recovered from declines earlier this year. 

Companies to watch

Digital payments and fraud prevention services provider Boku (LSE:BOKU) has been growing strongly and increased online usage has enhanced this growth in some sectors. The fraud prevention division has held back progress, but it will contribute more in the longer-term. 
Engineer and cylinders manufacturer Pressure Technologies (LSE:PRES) is doing poorly at the moment but this is a cyclical business. Once revenues recover profit will improve rapidly.

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Alternatively, there are companies, such as Kromek Group (LSE:KMK), that have spent millions of pounds developing technology that has yet to be fully exploited. Kromek’s medical imaging, security and nuclear detection technology has already generated significant orders and investment has increased capacity. Contracts have been delayed but Kromek should bounce back and return to growth. 

Seeing Machines (LSE:SEE) has been on AIM even longer. Driver monitoring systems (DMS) have been fully developed and regulatory factors will boost demand for the technology. There is legislation in the US and Europe that will make these systems compulsory in cars and trucks. There are already deals with OEMs that supply car manufacturers. There is cash in the bank to cover ongoing losses as contracts build up. 

Andrew Hore is a freelance contributor and not a direct employee of interactive investor.