Maxima

I recently dipped my toe in the market again and bought some shares in Maxima. This will probably be my last AIM purchase for a while - I can't hold them in an ISA and the next financial year is just around the corner, so I need to think about what will go in the ISA.

MXM - Maxima Holdings - 2/4/08 - 146.5p - 11% of portfolio
Maxima is an acquisitive software company, and has a good record of buying smaller companies and integrating them. It also does some of its own R&D.

Many of its acquisition targets are relatively cheap in terms of P/E. Maxima bought a lot of them using its own shares when they were double the price they are now - making it even more of a bargain when I can buy shares at their current depressed price.

Once they acquire companies they aggressively cross-sell, which saves them a lot of time and money in seeking out new customers.

The thoughts of a UK recession are weighing heavily on the share, but I think things are way overdone. The directors agree with me - they topped up big-time at roughly the same price. I think there might also be a lot of sellers out there who received Maxima shares when their company was purchased. The disparity between buyers and sellers is causing a pretty favourable price.

Maxima has a P/E of just over 10, but if you take out amortization (which I think gives you a truer picture) this is actually 7.5. Cash flow is therefore very strong. They have some debt, which is a shame, but not enough to be concerning in itself. What is does mean is that large further acquisitions might have to be curtailed - paying in shares would be unfortunate given the current depressed share price. A period of consolidation might be no bad thing, and I think Maxima can achieve decent organic growth. They can fund a few small acquisitions just out of cash flow.

One last thing: they pay a pretty good dividend for such a small company. Yield of about 3.6%, covered many times over.

All in all, pretty tasty.

Downside: Recession could hurt earnings for a while. Debt and depressed share price could curtail large acquisitions.

Upside: Continued earnings growth & dividend growth will surely make this a star share once a recession has been and gone.

Outer: I don't want to get out, I want it to make me rich. I'm going to drop this field from my reports, because I'm not planning to sell any shares unless they're ridiculously overvalued.

Summary
Here's the breakdown of my portfolio based on current prices:
Emerging ETF: 17.5 (IFFF, IEER, LTAM)
Chemicals: 4.3 (ZRX)
Finance: 33.5 (RBS)
High yield ETF: 23.6 (IDVY, IAPD)
Software: 21.1 (BDI, EDD, MXM)

BDI and ZRX are the dogs of portfolio so far, down 24% and 22% respectively. The ETFs are all up to a greater or lesser extent. If Zirax weren't so thinly traded I would think about buying more, but I don't like the idea of the market maker taking 10% on every trade.