Stock idea generation

Due to lower coverage versus larger market cap stocks like FTSE 100 giants Hargreaves Lansdown and Experian, investing in AIM stocks can be hard. Especially when you are trying to come up with new companies that you know little about or have never heard of before.

Here I discuss my tips for how to start the process of creating a pool of stock ideas to look further into, conducting your own analysis to further examine them. For example, looking at valuation metrics such as operating margin and return on capital employed, and identifying areas that will make the business profitable for years to come such as trends and clients.

PAST PERFORMANCE

When investing I like to look for companies that have a track record of robust performance. Though past performance is not an indicator of future returns, I believe that it does highlight that sentiment towards the business is improving which generally occurs from improving valuation metrics and the business being able to continuously beat market forecasts.

The site I use to find stocks that have performed well is Hargreaves Lansdown market summary page, which looks at the FTSE AIM 100: (past) Performance. This list is by no means exhaustive but it does provide a good place to start. 

I would suggest only looking at performance data for 3 to 5 years. This provides a better indication of track record as there can be changes in the short term that don’t reflect the effectiveness of the business itself. For example, political events that influence overall market sentiment rather than any material changes to the business itself. Additionally, this will provide a better time horizon for investments going forward in order to overcome short term fluctuations as mentioned.  

For example, AB Dynamics is the top 5 for performance for 3-year performance and provides an idea of how stocks that have done well continue to do well. Essential, success breeds success. However, this is only an idea generation for investing. After this, for each company, you will need to delve deeper into what the company does, where they derive profit and will they continue to do so in the future.

TOP PERFORMING FUNDS

Another way to look at performance is to see what the professionals are doing. You can do this by looking at top-performing funds in the sector. A site I like to use is Citywire Funds Insider. Here I have linked to top performance in funds that specialise in Equities – UK (All companies). 

To explore different funds you could either select on managers who have done well in the sector and explore their corresponding funds or alternatively look at high performing funds. 

For example, when I followed this method I came across Keith Ashworth-Lord and his CFP SDL UK Buffettology General Inc. To explore what companies he was investing in I looked at his top 10 holdings which produced ideas such as RWS Holdings, AB Dynamics and Bioventix. 

Again, this is just an idea generation stage and requires you to delve further into each company. However, it does help provide a platform to start researching into companies that have done well, looking at what past performance has been derived from and how to predict if they will continue to provide returns for investors going forward.