Most investors will avoid AIM and with good reason as the market has gained a reputation for frauds and corporate scandals over the years.
However, not all AIM stocks are bad. Some companies have achieved highly impressive returns for investors, and tarring them with the same brush as AIM’s other rotten eggs, is unfair. Here are three such opportunities.
Growth through acquisitions
Building products group Epwin Group (LSE: EPWN) may not be the most glamorous business, but it is a cash cow. For 2015 the firm generated £22m in cash from operations and for 2016, based on first-half figures which show cash generation up more than 100% year-on-year, it looks as if the firm is set to beat that number for full-year 2016. With a market capitalisation of £150m, cash generation from operations is highly attractive.
Management is reinvesting Epwin’s cash for growth, as well as paying out around 50% of earnings to investors. Over the past four full financial years, Epwin’s shareholder equity has nearly tripled as bolt-on acquisitions have helped grow the business.
At the time of writing, the shares support a dividend yield of 5.8% and the payout is covered twice by earnings per share. For 2016, City analysts expect the company to report earnings growth of 23% followed by 6% for 2017. Despite these impressive growth and income numbers, shares in Epwin only trade at a forward P/E of 8.2.
Defensive business
Advanced Medical Solutions (LSE: AMS) is one of my favourite AIM companies.
Since the beginning of 2013, shares in AMS have nearly tripled as the company has gone from strength to strength. Pre-tax profit has doubled in the past five years, and there’s little chance the company will go out of business anytime soon as its medical products are in high demand. Even though growth has now slowed, investors are still willing to pay a premium to get their hands on shares in AMS. The shares currently trade at a forward P/E of 27.2 and City analysts have pencilled-in an earnings per share rise of 3% for 2017.
At the end of 2016, AMS reported a cash balance of £51m, up 49% year-on-year. For a company with a market capitalisation of £513m, this cash pile is extremely attractive.
Housing demand
Despite the shortage of affordable housing in the UK, shares in Telford Homes (LSE: TEF) remain undervalued. Unfortunately, for the year ending 31 March, City analysts are expecting the company to report a decline of 3% in earnings per share, but for the next fiscal year, earnings growth of 29% is pencilled-in. If the company hits this target, it will have raised earnings tenfold in five years. However, the market hasn’t recognised Telford’s rise, and the company’s shares look cheap compared to both historic and forward growth. Shares in Telford are currently trading at a forward P/E of 9.7 and support a dividend yield of 4.4%.
