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Investing in a penny stock already has the risk of high volatility, and the waters may get even choppier on October 30. That’s when Chancellor Rachel Reeves will present the government’s budget aimed at stabilizing UK public finances.
It is now feared that inheritance tax on AIM-listed companies will be withdrawn. This may force financial advisers to recommend their clients sell AIM stocks. This is due to ‘consumer duties’ laws, which are designed to protect clients from losses that advisers may foresee.
Many UK small caps, including most penny stocks, are listed on the small market. According to estimates from Peel HuntCity investment bank, the end of this break could cause an immediate drop in the value of AIM-listed shares by 20%-30%.
Uncertainty all around
Now, it should be noted that we don’t know what will happen in the budget. There may be no change at all. I FTSE AIM All-Share Index it’s only down 1.3% over the past month, so it seems that investors are currently bullish on this.
If this happens, however, it will be bad for a market that is already struggling to attract listings. Indeed, the London Stock Exchange it said the number of companies in its micro market fell to 704, compared to 1,694 back in 2007. Increasing volatility is unlikely to encourage more private businesses to list.
It is estimated that giving away tax breaks could raise £1.6bn a year. That’s a drop in the ocean in the grand scheme of things (enough to pay the interest on the national debt for several days).
So, I think it would be a short-sighted move. Then again, I currently have five AIM-listed shares in my portfolio, so maybe I’m biased.
How I react
A significant sell-off and decline in market value may hamper the ability of AIM-listed companies to attract funding. However their daily business activities may not be directly affected.
So, I would see the small cap crash as an opportunity to buy fear, to paraphrase Warren Buffett. One AIM stock I would like to buy is 30% cheaper. Keystone Law Group (LSE: KEY).
The network-style law firm, which has a market capitalization of £182m, uses a platform where lawyers work as self-employed consultants. This allows scaling without the high fixed costs of traditional companies.
Keystone has been growing revenue at a decent rate and has strong profitability. The company also offers a dividend yield of 3.2%.
| Year (ends in January) | 2023 | 2024 | 2025 (forecast) | 2026 (prediction) |
|---|---|---|---|---|
| Net income | £76.4m | £87.9m | £94.0m | £99.2m |
| It’s all profit | £6.73m | £7.65m | £8.88m | £9.07m |
In the first half, revenue grew by 8.3% year-on-year to £46.5m, with 153 new “high quality” lawyers filed at the time.
Looking ahead, a major recession could have an impact on income growth. Also, the UK is now seeing an exodus of wealthy citizens (Keystone offers a range of legal services often required by wealthy individuals).
However, I still think there is significant opportunity for organic growth. As more law firms seek to return to the office, Keystone’s flexible model allows lawyers to work remotely and independently, potentially making it even more attractive.
In addition, the company is led by founder James Knight, which I find interesting. Founder-CEOs tend to prioritize long-term business decisions, which aligns well with my foolproof investment philosophy.
If there is a Halloween scare in AIM stocks, I will be buying this one with my ISA portfolio.
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