2010 was a glorious year for most investors. If you have done the annual totting up of your household’s wealth over the Christmas period you will probably be feeling pretty flush. After all, the FTSE 100 share index of our so-called ‘leading companies’ gained 14% in 2010, while that broader measure, the FT All-Share Index, weighed with a slightly better gain of 15%.
Not bad. But how much better would you have done had you been investing in small companies! For the second year in a row the AIM index of over one thousand small companies smashed its lofty rivals, this time soaring from 667 to 934 to deliver a gain of 40%!
From the very trough of despair in 2008 when investors were writing off small companies once and for all they have, yet again, proved their resilience and widened their long term advantage over the big boys.
I think 2011 will be another great year for penny stocks. Several industries are on the cusp of potentially explosive developments – from biotech to energy and mining. And these could produce returns every bit as rewarding as those we saw last year. Today I’ll explain how you can get to these stories before they become mainstream news.
Why penny shares trumped the FTSE 100 last year
Frankly I have written often enough about the absurd hurdles that are erected to deter investors from participating in this richest of stock market sectors. Whole ink cartridges have been spent trying to convince you that if you want to make real money you need to go right to the very source of wealth creation.
I believe that means investing directly into our most dynamic and ambitious companies and not stick your money in those great slugs of the 100 share index or, worse still, allow overpaid fund managers to fritter it away and charge their rip-off fees. If you have not got the message already then it is time you did, because some of the returns that are being made in the small company sector are spectacular.
40% for the broad AIM index is good enough, but it does not give the full picture. Pick the right shares and you could do a whole lot better. Of course there were some major casualties last year. AIM-listed accountancy firm Vantis – which included business recovery and advisory services amongst its specialities – was put into administration in June. And pub ATM operator Cashbox hit the wall in November when rival YourCash demanded repayment of a £1.8m loan.
But among the best performers, no fewer than 137 AIM listed companies saw their share prices at least double last year. 37 delivered returns of 300% or more. 15 made over 500%. Who were these heroes?
Last year’s prize penny stocks
Unsurprisingly fourteen of the top fifteen were in natural resources, the only exception being recovering media group Avesco(LON:AVS). Oil plays in the top 15 were Xcite Energy (LON:XEL), Nautical Petroleum (LON:NPE) and Encore Oil (LON:EO.), all of which proved that it is still possible to make important oil discoveries in the North Sea. Petro Matad (LON:MATD), which has found oil in Mongolia; Chariot Oil & Gas (LON:CHAR), which could have ten billion barrels of oil off-shore Namibia; and Niche Group (LON:NGP), a gas play in Turkey and the Middle East, all produced great returns for investors.
Amongst the biggest winners in the mining sector were Herencia Resources (LON:HER) which has a copper and silver project in Chile; Beowulf (LON:BEM), which has a large iron ore deposit in Sweden; gold and base metals play Sunrise Resources (LON:SRES); Anglo Asian Mining (LON:AAZ) which is producing gold in Azerbaijan; and Red Rock Resources (LON:RRR), an investor into gold projects around the world.
All of these saw their share prices soar by between 500% and 900%. But none made the top three best performers of 2010. Taking the bronze medal was Arian Silver (LON:AGQ), which brought its Mexican silver mine into production at the ideal moment to benefit from the surging silver price. Its shares gained 1,326% in 2010.
Mounting the podium in second place was Condor Resources (LON:CNR), which has found gold in Nicaragua. Living up to its name and soaring like the famous South American bird, it saw its shares gain 2,429%.
But taking the gold medal is a company that demonstrates the faith that investors put in a track record. Despite having little more than a clean sheet of paper, shares in Parkmead Group (LON:PMG) have gained an astonishing 2,713% on hopes that new Executive Chairman Tom Cross will be able to repeat the great success of his previous vehicle, Dana Petroleum. So where do I think the action will be this year?
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The most explosive stock stories of 2011
The mining sector is charging ahead, and assuming continued growth of demand from China, should produce more winners. A lucky oil strike will transform the fortunes of any small company.
Global food and water supplies, rare earths, internet security and even the downtrodden biotechnology sector all have small companies with massive potential.
• This article was first published in Tom Bulford’s twice-weekly small-cap investment email
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