What sort of monster has AIM become?

I am indebted to the  CEO of an AIM listed company for this back of the envelope analysis of the c1200 companies on AIM.

“If one excludes the loss makers within the index, the universe of actually profitable becomes 200.  At this point, on those 200, the average PE is 38. If I then cull all those with a PE over 12, I’m immediately down to 48 companies. Picking low risk companies on AIM is going to be tough. That should not be a surprise though hey?!

Can this be true? Amazingly it appears to be the case. Just 4% of companies on AIM are what one might term traditional value buys. Of course, there will be some within that 48 which have other problems but equally, I suppose there will be some on PEs of greater than 12 where PEG analysis shows them to be cheap. But overall it is a pretty poor showing.

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Indeed, what of the 80%+ of AIM which are loss makers? How many of them will ever make a profit in their entire corporate existence? Half maybe? I suspect rather less. How many of the 1000 loss makers generate any revenue at all? My guess is that 60% would be bullish.  It seems quite likely to me that 40% (i.e. one third of the companies on AIM) generate no revenues, make losses and will always make losses.

This is not what a stockmarket should be. The market should be a place where companies go to raise capital for expansion. Not a casino where companies raise money to pay corporate costs and where those backing them are not investing on the basis of well laid out business plans based on cashflow and earnings but are merely speculating that they can offload the stock at a higher price aswell as enjoying the ride along the way. At shareholders expense (see post below on the worst type of this re NEOS Resources).

AIM was accused of being a casino market by those who questioned its regulatory teeth. I too have grave concerns about that. Self-regulation by the Nomads is a failing system. However, it is not that aspect of AIM that makes it a casino, it is the nature of the companies that are on the market. From sub critical investment companies to lifestyle mining juniors, AIM is awash with companies that can never make a return for shareholders.

Warren Buffett once said that he wants to buy a shares in a company knowing that if the stockmarket closed for five years he would still make money. If AIM shut for two years, I’d wager that half its constituents would go bust. It is now c20 years since the former USM (Unlisted Securities Market) folded and was replaced by AIM. The USM had become a casino market.  There needs to be some hard thinking at AIM.