Small caps, and particularly AIM stocks, have taken a battering post Brexit, but there is still potential in the sector, says Graham Spooner investment research analyst at The Share Centre’s. 
AIM stocks have been eligible to be included in ISAs for three years, but following Brexit, many investors have run from the junior market in search of security.
The scheme was introduced by the government to encourage investment in growing companies, and had an immediate impact over the first year, as the below graph shows.
Performance of indices over 3yrs
Source: FE Analytics
AIM stocks performed particularly well in 2013 and the early parts of 2014 but have since dropped off, and this is more pronounced following the EU referendum.
“In the four weeks post Brexit, the number of AIM investments in ISAs fell to 17 per cent as investors took action in the immediate aftermath and subsequently contemplated on what the result could mean for their portfolio, likely leading to a lower risk attitude,” The Share Centre’s Spooner said.
However, in the month leading up to Brexit, The Share Centre recorded that 25 per cent of investments in ISAs were made up of AIM companies.
“There’s no denying that AIM remains popular amongst private clients who are excited by smaller companies and willing to accept a higher level of risk,” Spooner said.
“Now the post-Brexit dust has settled and the markets are showing signs of recovery, it may be an appropriate time to for investors to consider casting their eyes once again over smaller companies.”
AIM stocks are perceived as more risky, and Spooner adds that while the potential returns can be higher, there is always the chance an investor could lose some or all of their money.
With this in mind, he suggests three stocks for investors willing to take on additional risk in search of higher returns.
Breedon Group
“Breedon provides various aggregates to the construction and building industry and so it is likely to be a direct beneficiary of increased infrastructure spending, which the group are expecting to grow strongly through to 2018,” Spooner said.
Formerly Breedon Aggregates, the firm has changed its name following the acquisition of Hope Construction Materials at the start of the month, and is now the UK’s largest independent construction materials group.
The £336m acquisition, which gained clearance from the Competition and Markets Authority in July, almost doubled the size of the business.
“Recent acquisitions should help the company expand its geographical presence in the UK and investors should appreciate that management expect a significant and improving contribution to come from these acquisitions.”
Performance of stock over 5yrs
Source: FE Analytics
The firm’s share price has risen 271 per cent over the last five years, and is almost back to pre-Brexit highs of 76.5p.
“Breedon Aggregates is a smaller AIM listed company that is geared to a recovery in infrastructure spend and for higher risk investors prepared to take a longer term view.”
Finsbury Food
The company, which provides baked goods to supermarkets, wholesalers, caterers and restaurants, last month announced that strong first half trading had carried on in the second half, meaning it expects to hit its previously upgraded full-year targets.
“Finsbury Food is now seeing strong benefits of the recent acquisitions beginning to flow through and its restructuring has enabled it to reduce production costs and lower debt levels substantially,” Spooner said.
Performance vs AIM All Share over 5yrs
Source: FE Analytics
The company’s share price has been on an incredible run over the last five years, surging some 541 per cent, and currently stands 155p – ahead of its pre-Brexit highs.
In addition, the firm paid an interim dividend of 0.93p, 12 per cent ahead of its half-year payout in 2015, when, for the whole year, it paid-out 2.65p per share.
“Due to the potential from the recent acquisitions, its diverse customer base, good relative value and the helpful underlying economic picture of rising wages and low inflation, we believe Finsbury Food is suitable for higher risk investors, seeking growth.”
OPG Power Ventures
India-based coal-fired power plant operator OPG Power Ventures is the last of Spooner’s recommendations.
“We believe it is an interesting stock choice for investors seeking growth within their portfolio,” he said.
“With the country’s demand for power in excess of supply, the group’s management are confident that its expanding operations will benefit from this and lead to further growth opportunities.”
Performance of stock vs AIM All Share over 5yrs
Source: FE Analytics
The firm has been much more volatile than the other two companies listed, and has slightly underperformed the AIM All Share over five years, however Spooner sees growth opportunities ahead.
“Potential investors will appreciate that the group’s results continue to highlight the progress it has made over the last year. Bright prospects, including the Indian government’s desire to have reliable power as a foundation for social, industrial and economic growth, make this a choice for investors looking for an overseas AIM company geared to economic growth in India.”
