In the middle of 2007 the FTSE AIM All-Share posted a high of 1238.5. In that time it has declined around 70% peak to trough. That would suggest that a lot of good companies have seen their values slashed and there is certainly potential for some bargains in the long term. From where it was 6 years ago, the AIM All-Share is down 36%.

Using the Digital Look stock screener it is possible to sift through these AIM listed companies. In the current environment looking for companies with low PEG’s and healthy EPS is a good start, and with 200 different data points to choose from it should be possible to weed out the good from the bad.

Value investing draws on the investment strategies of Benjamin Graham tutor to the legendary Warren Buffet. This advocates the concept of the “margin of safety” and investing in stocks with low P/E ratios, low price to book and low price to cash flow stocks.

In a speech in 1984 Buffet concluded that value investing is, on average, successful in the long run and the key phrase here is “the long run”.

In October, Buffet announced that he was starting to buy US stocks which a number of commentators believe was way too early. However, he can afford to take a much longer view than the rest of us as he has much deeper pockets and can afford to weather further declines in share prices. Small investors don’t usually have that luxury and with saving rates set to decline further buying small amounts of AIM shares has never been more compelling, albeit high risk.

Using Digital Look’s premium product MarketStars this risk can be mitigated to some extent and while not proclaiming it as a holy grail, as a research tool it is unique in its field. MarketStars gives you the guidance you need to build a customized investment strategy and then test it against historical data to see if it has a track record of success.
See how your strategy has performed compared to the market as a whole, then test and refine it to help boost performance. Past performance is not a guide to future returns.

Using a variant of Benjamin Graham's value screen the following strategy would have outperformed the AIM All-Share over the past 6 years.

The screening criteria are as follows:
Broker Recommendations – Strong Buys.
Market Cap: Min £20m - max £100m
EPS Growth: Avg 4 years – min 20%
P/E: max 15
PEG: max 0.75



The blue line indicates the strategy performance over a 6 year period. In that time this strategy has returned over 90% compared to a decline in the AIM All-Share, designated by the pink line, of nearly 36%.

Looking at the broker recommendations on these stocks can be quite useful with respect to AIM companies, especially given the number of companies to choose from. Look for "Strong Buys" only. Tweaking the market cap criteria also allows the flexibility to increase and decrease the number of companies in the filter.

The blue bars signify profitable returns on a month to month basis while the red bars signify losses on a month to month basis. The returns peaked at the beginning of 2007 which is precisely when the bull market started to turn. As can be seen the last 18 months have not been good for this strategy but as a long term play it has performed very well.

It is well known that value strategies do not work well in bear markets but as sentiment starts to change these stocks tend to be the first to start to turn. Using stock screening strategies can be a useful tool to try and identify good companies for the long term.

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