If GAFAM and other tech giants, as well as big pharma companies, were in the markets' favor in 2020, some small European stocks also managed to do well, Marc Saint John Webb writes in an essay on finews.first.
This article is published on finews.first, a forum for authors specialized in economic and financial topics.
Like all businesses deemed non-essential, fishing tackle shops have had to close their doors in the spring in many countries, with an initial negative impact on sales. But it soon became clear that the lockdown had not only caused people to tinker at home, play video games or improve their gardening skills. Indeed, recreational fishing was also very popular and equipment sales reached record levels.
With time to spare between videoconferences, many occasional fishermen rediscovered the joys of this essentially solitary pleasure practiced far from the crowds. A new, younger public, fond of outdoor activities, also gave in to the appeal of rods, lines and other bait. Rapala VMC, the Finnish manufacturer of fishing tackle, thus had an excellent year, resulting in a 57 percent increase in its share price in 2020.
«Forsaken by analysts as many other small caps, the firm is still undervalued»
Following the merger with the French hook manufacturer VMC, the company is now the world leader in the bait and hook sector. After disappointing results in recent years, a new CEO with a proven track record in revitalizing consumer goods brands was appointed in early 2020, and he intends to capitalize on the strength of the brand to generate substantial revenue growth, expand the product range by adding rods and reels and increase profitability.
Forsaken by analysts as many other small caps, Rapala is still undervalued, with a P/E ratio of 8x this year's estimated earnings, and the publication of their annual results next month is expected to be a pleasant surprise.
«The Spanish swimming pool manufacturer Fluidra was logically one of the big winners of this trend»
At the same time, lockdown and travel constraints have led many families to make greater use of their existing swimming pools or to start building a new one in their garden. Professionals in the sector are thus rubbing their hands together, with order books full until the summer of 2021. The Spanish swimming pool manufacturer Fluidra was logically one of the big winners of this strong trend, with a 74 percent share price increase over the year.
The synergies made possible by the merger with Zodiac led to improved margins, and the strong sales growth should enable profits to continue to grow this year. Rediscovered as a quality growth company, thanks to its strong global market share, solid margins, cash generation, and the high proportion of its revenues derived from its recurring pool maintenance business, Fluidra should see its share price benefit from renewed interest.
«The company was ignored by the market for a long time»
Locked up at home and bored stiff, many have taken the opportunity to invest in the stock market. The ease of use of the trading sites, the positively-oriented markets that made the first steps easier, and the boom in bitcoin thus enabled Swissquote, the Swiss online bank, to enjoy an excellent financial year in 2020, with an increase in its share price of 80 percent.
Considered as a simple online trader for small Swiss speculators, the company was ignored by the market for a long time. However, Swissquote is a very dynamic fintech that is expanding in Europe and Asia and has for some time now been offering an online banking service that is attracting more and more small international financial institutions.
«The firm should see its profitability increase sharply thanks to the record levels reached by Bitcoin»
It is also one of the pioneers in cryptocurrency trading and has a strong market share in this very high-margin market. It should therefore see its profitability increase sharply thanks to the record levels reached by Bitcoin. The company has just announced that it will exceed its estimated revenue and profit targets for 2020.
As we can see, it is often erroneously that so-called secondary values have been discarded in favor of big names whose stratospheric valuations should nevertheless incite caution. For investors who prefer companies that are more reasonably priced while offering solid growth prospects, small caps offer attractive potential. An additional positive element can be added to these fundamental factors.
«This privatization trend is expected to accelerate in 2021»
As these companies often trade well below the multiples achieved in private equity transactions, which are currently around 12x EBITDA due to the overbidding of specialized funds, many family shareholders choose to delist their companies by buying out the entire capital.
This is notably the case of the family that owns Sonae, a Portuguese holding company that manages supermarkets, which bought the shares from the public at a 40 percent premium. This privatization trend is expected to accelerate in 2021.
Marc Saint John Webb joined Genevan Asset Manager Quaero Capital in 2006 as a Fund Manager. He is the co-manager of The Argonaut Fund and launched the European Smaller Companies Fund (formerly Family Enterprise) in 2007 where he is a significant shareholder. He has over 25 years’ experience of investing in European equities, starting out as a stockbroker for Warburg Securities in Paris in 1987. In 2001, he co-founded IXIS-Rothschild Midcaps, a Paris-based joint venture specializing in corporate brokerage and research on French mid-sized companies. He studied at Aston Business School in England, the Complutense University of Madrid in Spain and INSEAD in France.
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