AIM Heavyweights: ASOS and GW Pharma

By Matthew Heywood of Spreadex

Trading AIM stocks is a great way to invest in smaller companies that have the potential to provide significant earnings growth. AIM stocks also come with a number of tax incentives including Venture Capital Trusts, Enterprise Investment Schemes, Business Property Relief and the more familiar ISAs. However, one takes a risk on trading less established companies, and investors should do as much research as they can before selecting their preferred AIM stocks.

Here are two of the most recognisable and interesting AIM stocks out there:

ASOS PLC

ASOS.com’s £3.345 billion market cap is the biggest on AIM, and the company currently trades at a Spreadex spread of £37.85-£38.07 (as of 13/05/2015) with an average daily volume of around 1 million. After years of strong growth, 2014 was a bit of a disaster for ASOS, as the stock fell from a peak of £70 at the end of February to £18.67 in the middle of October after three successive profit warnings.

Yet things have picked up since then, and 2015 has seen steady gains for the online clothing giant, and CEO Nick Robertson claims he is confident that the company will reach its full-year profit targets despite a 10% fall in like for like profits for the 6 months to the end of February. In fact, in 2016 ASOS is expected to increase its earnings for the first time since 2012.

However, there could be more trouble on the horizon for the hip clothing site. Morgan Stanley produced a cutting analysis of ASOS on Monday 11th May, stating that the stock could be overvalued by around double its true worth. This led the Morgan Stanley’s ratings team to give the stock a target price of £18, less than half ASOS’ current trading price.

The main thrust of Morgan Stanley’s argument is that investors are underestimating the issues ASOS will face as it tries to expand abroad, despite being the world’s most visited fashion website with 30 million unique visitors a month. For example, there is a significant gap between its UK and international sales growth; the former saw a 27% increase in its 6 month interim report in April, whilst the latter only grew 5%. In fact, its quarterly results announced in December had seen a 2% decrease in international sales.

Elsewhere, in an example of some AIM synergy, ASOS is partnering with BooHoo, the 6th most visited fashion website in the UK and a stock many analysts are eyeing as the ‘Next ASOS’, with the latter set to start selling its products through the clothing website from May. Regardless of ASOS’s recent wobbles, it shows the importance, and potential, of AIM stocks that two of its biggest companies can hold such strong positions in the fashion industry.

GW Pharmaceuticals PLC

After ASOS, GW Pharmaceuticals has the largest market cap on the AIM stock exchange at £1.566 billion. It is also one of the most modern pharmaceutical companies, mainly due to its key focus: cannabis. With the legalisation of the drug in some US states suggesting a changing of the tides for cannabis, GW Pharmaceuticals is at the front line of weed-based medicine.

For example it recently announced that it has obtained a US patent to use cannabidivarin to treat epilepsy with the drug entering phase 2 testing in the UK, whilst its child epilepsy studies for its drug Epodiolex have entered phase 3. It has also recently received Orphan Drug Status (a drug developed for a rare medical condition) for the use of cannabidiol on Dravet Syndrome in new-born babies.

Higher spending on Epodiolex was the main cause of GW Pharmaceuticals’ widening half year pre–tax losses, announced on Monday 11th May, which grew from £10.6 million a year ago to £13.7 million for the period ending 31st March. This was joined by a revenue slip of £0.7 million to £14.3 million and an increase in R&D costs to £30.5 million from £21 million.

However, it is par for the course that pharmaceutical companies, especially smaller ones like GW, have fallow periods dictated by reinvestment in research, and the fact that the company raised $167.8 million by issuing 1.6 million American Depositary Shares softened the blow. Like ASOS’ no.1 fashion website ranking, the fact that GW Pharmaceuticals is listed both on the London Stock Exchange’s sub-market AND the NASDAQ shows that some AIM stocks are not to to be sniffed at.

GW’s growth in 2013 and 2014 has continued into 2015, prompted by the strength of its epilepsy research, with the company opening the year at £3.50 and now trading at a spread of £5.8840-£5.9410 (as of 13/05/2015), with a daily average volume of around 440k.

Spreadex is known for its specialist small cap provision and has an extensive list of small caps on its website.

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