How AIM shares can bounce back from 2022 crash

AIM has had a terrible first half of 2022, but there are great reasons to own AIM shares. Award-winning writer Andrew Hore explains why you shouldn’t give up on the small-cap index and picks three great stocks to watch.

AIM and the Nasdaq US tech index are the worst-performing major markets in the world this year, and in contrast the FTSE 100 index is the best performer having hardly fallen so far in 2022. 

AIM has fallen by around 27% in the year so far, or 30% if the FTSE AIM 100 index is used. This decline follows three years of gains. Some of the ratings were getting heady and they were going to be difficult to maintain.

Nasdaq has fallen because of its focus on technology and biotech shares, which have been in demand in the previous couple of years. AIM also has significant exposure to technology and biotech companies, although there is a wider spread of sectors than on Nasdaq.

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The FTSE 100 index did outperform AIM last year, but it had significantly underperformed in 2020. This year the index has fallen by less than 1%.

In times of economic uncertainty there tends to be a favouring of larger investments that are thought to be safer.

Even though the FTSE 100 index has done relatively well there are only 21 out of the 100 constituents that have risen this year. There are nine constituents that have fallen by more than 40%. None have halved.

That compares with 18 AIM 100 constituents that have risen this year, while a further 18 have fallen by at least 40%. Eleven have more than halved.

There are steady businesses in the FTSE 100, such as British American Tobacco (LSE:BATS) and Imperial Brands (LSE:IMB), which tend to hold up well when stock markets are tough because of their steady earnings and attractive yields.

Weightings

It is not as simple as it seems to compare different markets because they are made up of different weightings of sectors. These are based on market capitalisations, and sometimes one or two companies can dominate. In the past ASOS (LSE:ASC) used to dominate AIM, although that was no longer true before it moved to the Main Market.

The top five companies in the FTSE 100 account for 31.9% of its weighting and four of them have risen this year. The top five companies in the AIM 100 have a weighting of 15.1% and they have all fallen this year, including mixer drinks company Fevertree Drinks (LSE:FEVR) where the share price has slumped by 49.1% and electrolysers developer ITM Power (LSE:ITM), which fell by 51.7%.

The high oil price has also boosted oil company share prices. Shell (LSE:SHEL) accounts for 9.12% of the FTSE 100 index, so the fact that it is the fifth-best performer in the index and has risen by 25.1% this year will have a significant effect on the overall index. BP (LSE:BP.) is nowhere near as big as Shell, but it has risen by 13.7%. Energy has the largest weighting at 13.39%. If the oil price falls, then the performance of FTSE 100 could decline.

Oil and gas producers are also some of the better performers on AIM, but they are not as influential on any AIM index. It may seem that the energy sector is also important for AIM with a 8.85% weighting, but that includes the fuel cell companies, which are some of the largest and worst performers on AIM and account for more than one-third of the sector.

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The healthcare sector is another example where the make-up is very different on AIM compared with the Main Market companies. Healthcare is one of the worst-performing sectors on AIM, whereas pharmaceuticals is a top four performing sector on the Main Market.

That is because AstraZeneca (LSE:AZN) and GSK (LSE:GSK) are in the top five FTSE 100 weightings, and they have risen sharply this year. In contrast, the pharma and healthcare companies on AIM tend to be drug developers, so they do not have commercial products. These early stage companies were previously in demand, just like they were on Nasdaq, but the lack of fundamentals means they have fallen back this year.

There are hardly any banks on AIM, whereas it is an important sector on the Main Market. There has been a mixed performance, with Barclays (LSE:BARC) and NatWest (LSE:NWG) falling, while Standard Chartered (LSE:STAN) and HSBC (LSE:HSBA) have risen. However, HSBC is much bigger than the other three combined and has the third biggest weighting in the FTSE 100.

But there are still reasons to consider investments in AIM shares despite the current negativity.

Greater exposure to technology

Technology companies are underrepresented among the larger companies on the Main Market. Even the broader All-Share index only has a 1.3% weighting for technology companies, compared with 12.1% of AIM.

To be fair, one of the reasons that the technology sector is so underrepresented in any Main Market index is that technology companies on the standard list, such as Alphawave IP (LSE:AWE), a semiconductor technology company valued at more than £1 billion, are not eligible for any FTSE index.

AIM provides investors with a range of new technology companies that they can assess and choose whether to invest in. Some could prove to be big winners.

AIM has lost some of its better-performing technology companies because they have been acquired – generally by private equity-backed vehicles. Risk management and compliance software provider Ideagen (LSE:IDEA) has agreed a 350p a share bid, valuing it at £1.06 billion, from Hg Pooled Management. Ideagen was introduced to AIM in July 2012 when it moved from Plus (now Aquis Stock Exchange) at a valuation of £11.3 million at an introduction price of 14.5p. Ideagen has made many acquisitions, but the share price has also increased significantly.

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There was a bid battle for robotic software supplier Blue Prism and the private equity bid was beaten by financial services and healthcare technology supplier SS&C Technologies Holdings Inc with a 1,275p a share offer, which values the company at £1.24 billion.  

When Blue Prism joined AIM on 18 March 2016, it raised £10 million at 78p a share valuing the company at £48.5 million. Revenues increased from £6.1 million in 2014-15 to £141.4 million in 2019-20 and most of this growth was organic.

These gains do not happen with every technology company, of course. There are plenty that fail or do not achieve significant growth. The point is that AIM provides investors with the opportunity to invest directly in technology companies and make their own choices.

New sectors and businesses

Most fully listed companies are relatively mature and have long track records. It is not just new technology companies that are on AIM. Other newer businesses with shorter track records are available as potential investments.

For example, OptiBiotix Health (LSE:OPTI) provides exposure to potential treatments based on the microbiome, as does its spin off SkinBioTherapeutics (LSE:SBTX), which is focused on skin-based treatments.

There are a range of cleantech and energy efficiency companies on AIM that are not available on the Main Market. They range from fuel cell companies to battery technology and electric motor technology.

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Some newer sectors require patience from investors. Most of the large fuel cell companies on AIM, such as Ceres Power (LSE:CWR) and ITM, floated nearly two decades ago. The share prices rose initially and then stagnated and it is only in recent years that they have risen significantly.

Advertising technology is a sector where there are plenty of opportunities on AIM, but the share price performance of the companies has been poor this year. Companies, such as Silver Bullet Data Services (LSE:SBDS) and Dianomi (LSE:DNM), have good long-term prospects but the shares have slumped this year.

One thing to be aware of is that there can tend to be fashions and a number of companies may float in a new business area, but many may not prosper. Following fashions blindly is a mistake.

Three companies with recovery value

AIM has taken a battering since last September when it reached its recent peak. This means that there are currently companies with reduced ratings and much of the froth has disappeared.

AIM has always been a market that is more about assessing individual shares, rather than buying the market.

Mortgage Advice Bureau (LSE:MAB1) shares have declined following the ending of house-buying incentives last year, but the business is still growing, and the acquisition of Fluent Money Group will significantly enhance earnings next year.

Building materials sector consolidator SigmaRoc (LSE:SRC) shares have fallen sharply this year, yet first-quarter trading has continued the previous growth trend. The prospective multiple has fallen to less than nine.

Domain name and online marketing services providerCentralNic (LSE:CNIC) has been the subject of forecast upgrades this year, yet the share price has still fallen – even if it is by a lower percentage than AIM. The prospective multiple is 10, and that undervalues the potential growth.

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Tax breaks

There is no reason to turn off investment sense just because there are tax breaks. The investment decision should be the same. However, AIM does offer benefits that the Main Market does not have.

The main one is inheritance tax relief on eligible shareholdings that are held for at least two years. That can save 40p for every £1 invested.

There is also capital gains tax (CGT) gift relief on the transfer of shares in an AIM trading company to a family member or specific individual. This means that the CGT liability is postponed until the shares are sold on.

There are also opportunities to acquire new shares in an AIM company that are eligible for Enterprise Investment Scheme relief. Up to £1 million can be invested by an individual in qualifying investments and this provides income tax relief of 30%. If the shares are retained for at least three years, then any disposal gains are exempt from CGT. Loss relief is also available at the investor’s top rate of tax.