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Hawksmoor: bubble warning on AIM's soaraway 'AbFab' stocks

Hawksmoor: bubble warning on AIM's soaraway 'AbFab' stocks

The FAANG acronym has become a popular shorthand to describe the US tech giants at the forefront of the stock market rally over recent years.

But fund managers Hawskmoor believe the UK has its own home-grown roster of small cap stocks which have offered similarly explosive returns, and trade at equally exorbitant valuations.

FAANG stands for Facebook (FB.O), Apple (AAPL), Amazon (AMZN.O), Netflix (NFLX) and Google owner Alphabet (GOOGL.O).

All have offered strong, and in some cases spectacular, returns over the last five years, while Amazon and Netflix continue to trade on extremely high valuations.

Stock 5-year share price return (%) PE ratio
Facebook 744.8 33.3
Apple 109.3 18.8
Amazon 378.3 280.6
Netflix 1,719.90 202.4
Alphabet 205 35.8

Hawksmoor’s Alternative Investment Market (AIM) portfolio team has coined its own term for AIM's runaway shares.

'AbFab' stands for online clothing retailers Asos (ASOS) and Boohoo (BOOH), drinks maker Fever-Tree (FEVR), biotechnology company Abcam (ABCA) and online estate agent Purplebricks (PURP).

‘You will have noticed the acronymic fudge in using the “B” from Purplebricks, but ABFAP is far less catchy,' said Hawksmoor senior investment analyst Ian Woolley.

Fever-Tree in particular has seen its shares rocket since listing on the stock market three years ago, while Purplebricks'  322% rally since listing less than two years ago has been spectacular.

Apart from Purplebricks, which is yet to make a profit, the others all trade on price-earnings ratio of nearly 50 or above, although none boasts the three-figure ratios of Amazon or Netflix.

Stock 3-year share price return (%) PE ratio
Asos 125.1 77.2
Boohoo 352.2 86.4
Fever-Tree 1,049.40 60.4
Abcam 160.1 49.7
Purplebricks 322.3* n/a

*Returns since IPO in December 2014 

While some investors have concerns about FAANG valuations, given the strong run these stocks have experienced in recent years, Hawksmoor takes a similar view on the AbFab stocks.

‘The average price-to-earnings ratio of the group is a sky-high 50 x. Purplebricks, a website valued at £1 billion, is actually loss-making,’ Woolley added.

Bar Fever-Tree, the other four companies have disruptive digital business models. Although they experienced significant revenue growth during their early years, Woolley says the outlook has become clouded as new competitors emerge.

‘Relatively low capital requirements mean the threat of new entrants is extraordinarily high. It becomes a race to the bottom on margins, and less future growth potential for incumbents. When those pressures couple with bubble-like valuation levels, there are good reasons for investors to be worried,’ he explained.

Fever-Tree has been one of the most prominent AIM success stories over the past three years. However, its current price-to-earnings of 60 times looks expensive, according to Woolley. This ratio measures share prices relative to per-share earnings.

The senior analyst suggested that strong demand for AIM portfolios helped to explain the high valuations of the AbFab stocks. Many investors seek exposure to the AIM market because it offers inheritance tax and business property relief.

‘A lot of asset flows are going to the largest AIM asset managers, who are forced by their size to only buy the largest stocks on AIM,’ he explained.

In his opinion, this means valuations are no longer based on fundamentals but rather asset flows.

Small is beautiful

The good news is there are investment opportunities across the AIM market for investors who are able to move further down the market cap scale.

Here, Woolley highlights IG Design Group (INGR), which manufactures greeting cards and gift wrapping, as a good example. Since the team bought the stock in early 2016, its market cap has doubled to £200 million. On a price-to-earnings ratio of 16 times, they believe it looks attractively valued.

They also like Oxford Metrics (OMG1), which provides analytics software for motion measurement.

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