The trouble is I cannot get hold of any.

The bid/offer spread is 150p-175p and the ‘Normal Market Size’ is one thousand shares. So by the time I have allowed for dealing expenses the shares will have to rise by some 16% before I can break even.

This is an extreme case of the lack of liquidity that plagues many AIM stocks and the reason why, much as I would love to recommend these shares to readers of my Red Hot Penny Shares newsletter, I honestly can not.

A look at the Annual Report makes it pretty obvious why we have this problem. 62% of the shares are in the hands of the directors and a further 29% are held by ‘Principal Shareholders’ leaving a free float of just 9%.

These major shareholders do not want to part with their shares and I can understand why. Their company, Dillistone Group (DSG), has reported a 24% increase in earnings per share for 2007 on revenue that was up by 23%.

Such is the cash generative nature of the business that its cash balance swelled from £538,000 to £1,533,000 despite the generous dividend payments that give the shares a yield of almost 5% at the 175p offer price.

A City sparkler

You would not expect to find such an undervalued gem right under the nose of the City, but that is where I did find it, just up the road from Liverpool Street.

There I met Chairman Jim McLaughlin and Managing Director Jason Starr, who wore the relaxed smiles of businessmen who know they are on to a good thing. This good thing is software for the recruitment industry. It doesn’t sound very exciting does it? And yet Dillistone now has customers in fifty-three countries and clearly has a global reputation.

Its sells a software product called FILEFINDER which helps recruiters find the right candidate to fill a job vacancy. This is different from most software products in the industry in that, rather than simply handling the details of candidates who are looking for a job it helps recruiters to identify ‘passive candidates’ — in other words people who are not actively looking.

This has traditionally been the way in which top-end executive search firms have worked but it is now becoming more common further down the scale, for three reasons.

First of all employers naturally want the best person for the job rather than simply taking the best of those who have applied. Next there is now not only a shortage of high-powered candidates for top jobs, but owing to demographic factors there is an increasing shortage of people capable of doing jobs at the next level.

And finally as business goes global so it needs to find candidates from all parts of the world, and this requires a genuine search and the assistance of those with local knowledge.

Expansion ahead

FILEFINDER helps recruiters to manage this process and Dillistone has now expanded the product to help the recruitment of temporary and contract staff. Thanks to these innovations and its apparent global leadership it is enjoying strong growth both within the recruitment industry and within other organisations such as Merrill Lynch which have their own in-house recruitment departments.

It is gradually moving away from the license fee plus annual 20% maintenance fee model onto the ‘software as a service’ model which, while it hits profits in the short term, is ultimately more profitable.

It already has a high c.40% share of the UK market but last year won 153 new business contracts in 37 different countries. Just over half of last year’s revenue came from the UK, with about 20% from Europe, 15% from the USA and 10% from the Asia-Pacific region.

Although it can supply and install the software from London its offices in North America, Germany and Australia allow it to offer worldwide support around the clock. It markets its services at industry conferences and through mailing out its own magazine Search-Consult.

But much of its new business arises because this is an industry in which new recruitment firms are typically set up by those who are leaving larger organisations where they will have become familiar with FILEFINDER.

There is no sign that this successful formula has run its course and, despite expressing some caution about global economic conditions, a fortnight ago Dillistone reported an excellent start to 2008. Now Dillistone is considering acquisitions. It will do well to find a business as attractive as the one that it already owns — but a move of this nature may at least make it easier to get hold of some shares.

Regards,

Tom BulfordSource: A Company I’d Love to Be a Shareholder In

It wouldn’t have been a bad idea. In the last year, the junior Alternative Investment Market (Aim) index has fallen around 14 per cent while the FTSE 100 is down only 6.5 per cent. Admittedly, you’d have been better off in cash – you’d have made 5 per cent there. But, relatively speaking, at least the experts were right.

Now, however, it’s all the other way around. If you are looking for fundamentally cheap investments, you need to be looking at Aim where the average price-earnings (p/e) ratio has fallen to a mere 6.3 times.

There are 1,600 companies listed on this market, so there are obviously huge variations within this – miners and oil companies trading on p/e ratios of 20-plus and the odd outlier, such as fashion super-success ASOS (LON:ASC), trading on 40 times. Even so, talk to a small-cap fund manager of any kind, and he’ll be quick to point to a pile of favourite stocks all throwing off cash yet selling in the market for the bargain prices of 4r or 5 times earnings.

One example is AT Communications (LON:ATCG), a perfectly respectable telecoms company on a historic p/e of 5 times and a prospective p/e for 2008 of a mere 4.75 times.

So just why are there so many apparent bargains about? One answer might be, tax.

Until recently, capital gains on Aim-listed stocks were taxed at only 25% of the normal rate for higher-rate taxpayers, as long as you held the stocks for two years – so an effective rate of 25% of 40%, which is 10%. Now, however, you pay 18%, just like anyone investing anywhere else.

Then there is inheritance tax to consider. Certain Aim stocks are immune from inheritance tax. But now that couples are able to leave their nil-rate bands to each other (automatically combining their tax- free allowances) perhaps fewer people feel the need to bother with the kind of estate planning that Aim provides.

Of course, there is – as there should be – more to this than just tax. There’s also general risk-aversion. Smaller companies tend to be more geared to the domestic economy than larger multinational companies so, when things turn down, their shares inevitably suffer more than most.

And things are turning down in the UK – big time. The housing market gets worse by the day; there are signs unemployment is about to take a turn for the worse as jobs in construction and retail start to go; oil prices have now started to “melt up” – even more quickly than I suggested they would – and rising inflation means no interest rate cuts.

However, an annual survey of the market from Baker Tilly and Faegre & Benson, entitled “Taking Aim”, throws another kind of light on the way things have changed in the market.

Back in 2005, there were 335 initial public offerings (IPOs) on Aim, raising an average of £17m each. In 2007, there were 82, but the average amount raised was a massive £231m. In some ways, this might look like a good thing – more money was raised in total. But for real smaller companies it might not be.

Why? It suggests, says John Glencross of Calculus Capital, that the London Stock Exchange (LSE) and the companies that work as brokers to Aim-listed companies are more interested in marketing Aim as a home “to foreign companies seeking an international listing, where the amounts involved are very large, than to growing UK companies which typically want under £10m”. A number of last year’s listings were also large funds of one sort or another, or property-related companies.

For these overseas companies, and the brokers getting paid for bringing them to the market, Aim also presents an opportunity for a form of regulatory arbitrage. Its relatively light regulation and less-than-arduous listing requirements make it an easier place to get a fundraising away – and earn those commissions.

This makes sense, of course, in that both the LSE and the brokers are looking to make money, and you make more from big listings and secondary fundraisings than small. But it does make it hard for small companies to get their hands on funding.

This might be the key to the low-looking valuations. Right now, a small company, however good, doesn’t really have anywhere to go to get money to expand. The banks are closed or upping their rates; the debt markets have never been small-cap friendly; and if they only want a few million, Aim isn’t suiting them very well either.

At the same time, liquidity has disappeared from the market itself. Spreads are wide and volumes are low. So buying and selling stakes in listed companies has become little easier than buying and selling in private companies.

The combination of these two factors means that, right now, being listed on Aim isn’t really all that different to being a private company.

And what do private buyers pay for private companies? It depends on all sorts of issues but, in general, the answer is around five times profits. Look at it like this and maybe the seemingly cheap stocks rattling around Aim aren’t so cheap after all.

It would be nice if there were something to be done about all this – small companies are incredibly important to the UK economy. But, as it probably won’t be, I think we can expect the sector to continue to be starved of both funding and investor interest. Both are compelling reasons not to leap in just yet.

Source: Why You Should Stay Away From the Alternative Investment Market