Daniel Stewart is among the band of advisers, brokers and PR firms that are in the business of promoting AIM-listed stocks to investors. The company’s back catalogue of achievements as a nominated adviser (Nomad) and broker includes bringing insurance outsourcer Quindell (LSE: QPP) to market and raising £10m and £17m in placings for software firm GLOBO (LSE: GBO).
Daniel Stewart has this week had its shares suspended for failing to publish its last year’s accounts in the required time. The company, which made a £3m loss the previous year (a third annual loss out of five), saw its auditors resign in June.
Clearly, trying to earn a crust by tapping into the AIM gravy train of admissions to market, fundraisings, Nomad gigs and so on isn’t as easy is it sounds. And the pressures Daniel Stewart and its rivals are under to win work have implications — implications that small private investor like us would do well to be aware of.
Exciting, huh?
Financial websites, publishing analysts’ consensus earnings forecasts and broker buy, sell, or hold recommendations, are much used by private investors.
Perhaps an AIM stock has piqued your interest after reading a tip sheet, spotting an enthusiastic post on a financial bulletin board, or hearing a whisper from a bloke down the pub.
You go to your favourite financial website and are excited to find a stonking bargain of a P/E, broker recommendations indicating a strong buy, and recent news that includes snippets from bullish analysts’ research notes and target prices way above the price at which the shares are currently trading.
So, for example, a quick look round a few financial sites shows me Quindell trading at a share price of 159p, putting the company on a P/E of just three. The three brokers that cover the stock are all recommending it as a ‘strong buy’, and Daniel Stewart has a whopping target price for the shares of over £10. GLOBO’s credentials aren’t quite as stunning as Quindell’s, but it still has bargain written all over it: a share price of 46p, a P/E of seven and a ‘strong buy’ recommendation.
Exciting, huh? Well, hold your horses! Let me put Quindell and GLOBO into a wider context for you. I’ve just run a screen on financial website Digital Look for the whole AIM market, which shows 347 companies currently with broker recommendations. In only 13 cases is there any broker recommending a sell; and in only three cases is there a sell consensus.
A large pinch of salt
The fact is, there are far more critical broker notes and sell recommendations on FTSE 100 companies. Scrapping for crumbs down on AIM requires analysts don rose-tinted spectacles and not concern themselves too much with the quality of the businesses they’re covering.
Nomads/house brokers will typically tend to reflect the wild over-optimism often shown by AIM boards of directors. But non-house brokers frequently paint sympathetic, rosy pictures, too. It’s a way of putting themselves in the shop window (AIM is a veritable merry-go-round of Nomads).
So, what does this mean for investors? In short, I’d advise taking earnings forecasts, analyst notes and broker recommendations for AIM companies with a large pinch of salt.
Do your own research, and try to read between the lines of broker notes — even if that’s unlikely ever to be as easy as when conscientious analyst Derek Terrington famously published a note that included the helpful acronymic comment “Cannot Recommend A Purchase” (and put himself out of work in the process).