AIM starts to move

At the start of July I asked “Has the tide turned for AIM resource stocks?”

Eight weeks later and this looks like it is going to be one of my better calls. As always, I prefer to look at the general conditions to help guide my stock picking. We can often fool ourselves that success is based upon our prophetic talents at divining the fortunes of individual companies, but often the reality is far simpler than that. All we need do is plonk our speculative little investment boats in the water when it is low and wait for the tide to rise, hoping that our choices don’t suddenly spring leaks! 

For most of the summer, I’ve been telling anyone who would listen that the AIM resource sector appeared to be going through a final phase of capitulation. The previous 18 months had been a horrific experience for anyone with money in this market. General pessimism was reaching a peak and there were some desperate corporate actions, as companies struggled to survive. Many stocks were being priced to fail and there were several examples of companies trading at a decent discount to cash, a sure sign of fear. Even some of my perma-bull friends seemed about ready to throw in the towel and I have to admit, I came pretty close myself.

Then things started to change. The market began to exhibit the classic hallmarks of a turnaround in fortunes and the early indications are this could be the start of a new trend. First we saw some of the better quality gold stocks (e.g. CNR & MML) start to make solid gains off their lows. Next some of the micro-caps rocketed on good news (e.g. SOLG, REM & ECR) and, perhaps more significantly, hung onto their gains. Finally, in the last week, there has been an across the board rally, in which a great number of other AIM resources stocks have risen in the region of 30-40% on no news (e.g. GRL, RMP, BMZ, KIBO and the list goes on). 

It is very important that this nascent rally gains a foothold and the recent gains aren’t surrendered too quickly. Confidence is bound still to be fragile out there and as sentiment appears to be the primary driving force of stocks at this wretched end of the market, it will no doubt take a little while before the torments of the bear are forgotten. Ideally I would like to see more companies react well to apparent good news and the more this happens the more confirmation we will have that the new trend is in place.

Were AIM a normal market I’d probably have taken profits after such sudden gains, but my strategy is high risk, high reward. If I’m correct and this is the beginning of a new trend then now is the time to add, not sell. So with this in mind I have three basic principles to help guide me;

1. Above all I am looking for companies, which have secured funding. Most of the recent funding deals have been very expensive, but irrespective of this, those that now have money will be much better positioned than those that don’t. I believe this new bull market is going to be different to the last and basic survival is going to play a greater role.

2. I am looking for projects, which have the potential to excite. I’ve pretty much given up looking for companies, which I believe will genuinely fulfil their potential as they are so few and far between on AIM it seems a pointless exercise. What seems to matter most is how well a company can promote its projects and how the wider investment community is likely to react. Possibly this is a cynical attitude, but how many pie in the sky Competent Persons’ Reports have your read promising untold riches for a company with a £2-5million market cap?!

3. Finally I want to put money into individual stocks, which are exposed to regional good news in their areas of operations. The most obvious examples of this approach are companies with exposure to oil exploration in the Falklands, off the coast of Ireland, in Namibia and on the Horn of Africa.

This AIM market really does have the potential to be a speculator’s dream. I don’t believe we will see a repeat of the shooting fish in a barrel market of 2009 and 2010, but valuations have been beaten down to such an extent that a wide range of stocks could easily double and treble in very short spaces of time. The trick will be to remain nimble and bank profits. Buying and holding these stocks is, after all, investment suicide. 

Declaration: I currently own positions in GRL, RMP and BMZ.