17Aug 2016

Safe AIM Stocks 4 – AIM IHT Portfolio Construction

AIM IHT Portfolio

Today we’re going to choose our final 50 stocks to make up our AIM IHT Portfolio.

AIM IHT PORTFOLIO

Two weeks ago, we went through magazine articles and reports from asset managers who provided inheritance tax (IHT) products to identify 44 AIM stocks that will qualify for Business Property Relief (BPR).

Last week we looked at the AIM 100 to identify another 36 stocks that qualify.

Today we’re going to whittle that list of 80 down to a final portfolio of 50 stocks.

The long list of 80 stocks is pricey, with an average (mean) PE of 50, and a median PE of 31. The stocks have a mean market cap of £345M, and a median market cap of £254M.

I hope to bring down the average PE without doing too much damage to the size of the company.

TOO SMALL

The first step is to remove the smallest companies.

I’ve set the hurdle at a market cap of £45M. The obvious level to choose would £50M, but I like the look of Hayward Tyler, a company that makes electric motors and pumps, and has a market cap of £46M.

Too small

The removes five stocks:

1. Jarvis Securities
2. Netplay TV
3. Stanley Gibbons
4. Robinson
5. Red24

The companies we’ve removed have a mean PE of 116, and a median PE of 44. They have a mean market cap of £25M, and a median market cap of £27M.

So now we are down to 75 firms.

NOT MAKING A PROFIT

I also want to steer clear of companies that are loss making.

Loss making

There are thirteen of these on the list:

1. Hutchison China Meditech
2. Mulberry
3. Clinigen
4. 4D Pharma
5. Fyffes
6. PurpleBricks
7. Verseon Corp
8. Benchmark
9. Vernalis
10. Xeros Technology
11. Sinclair Pharma
12. Avanti Communications
13. Goals Soccer Centres

We’ve lost a couple of household names here, but we’ve also removed quite a few of the more speculative tech and pharma stocks.

The companies we’ve removed in this section have no PE (they have negative earnings). They have a mean market cap of £378M, and a median market cap of £258M, which is close to the average of all 80 firms.

Now we are down to 62 firms.

TOO EXPENSIVE

To get down from sixty-two stocks to fifty, I’m simply going to eliminate the twelve most expensive stocks.

I’m going to use the trailing PE to do this. This is quite a blunt instrument, but it should be pretty effective over a large number of stocks.

Too expensive

The twelve stocks we are removing all have a PE of greater than 48, which is pretty pricey:

1. Restore
2. Next Fifteen Communications
3. Eco Animal Health
4. Fevertree Drinks
5. Victoria
6. GB Group
7. CVS Group
8. Accesso
9. ASOS
10. Staffline Recruitment Group
11. EMIS
12. Conviviality

We’ve lost a few more AIM stalwarts and household names here, but it should mean that we end up with a final portfolio that is much better value.

THE FINAL 50

Here is the final portfolio:

Final 50 1 to 17

Final 50 18 to 35

Final 50 36 to 50

It looks like a good spread of sectors and industries to me.

The portfolio has a mean PE of 23 and a median PE of 22. This is still slightly higher than I would like, but it’s at least in a territory that I understand.

The portfolio has an average market cap of £307M and a median market cap of £233M. That looks safe enough to me.

OVER TO YOU

What do you think? Have I missed out any obvious candidates, or any of your personal AIM favourites? Are any of the stocks on the final list likely to have problems with qualifying for BPR?

Let me know in the comments.

 

Until next time.

This article was written by Mike Rawson  http://the7circles.uk/safe-aim-stocks-4-aim-iht-portfolio-construction/

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