New investments in Swiss smaller companies

Photo: Pilatus Aircraft

Following company visits and new attractive prices, we have invested in three Swiss stocks for our European Small Companies strategy: Composite materials specialist Gurit, private bank EFG International and high precision machining company Tornos. With a total of 69 holdings, we will now be pruning smaller positions in coming months.

The strategy has benefitted from some strong performances in recent weeks. Spanish swimming pool equipment maker Fluidra recouped all its January losses with a 10% rise in February, as the company published a 29% rise in profits for last year. The share will enjoy strong dynamics over the next two years as it becomes world leader with the transformational acquisition of US peer Zodiac, generating substantial synergies and driving profit growth. It is also going from a relatively unknown and illiquid small family-owned company to a €2bn market capitalisation which will attract more institutional investor interest.

German solar inverter maker SMA Solar has risen 37% since the beginning of the year. There was follow-on buying after the publication of solid results for 2017 and an upbeat outlook for 2018. The Jochnick family’s Swedish cosmetics company Oriflame also rose on the publication of a 38% rise in net profits last year. We invested in this stock when it was out of favour and suffering from declines in its core Russian and Ukraine markets. We took profits when the share rallied strongly as Asian business growth more than compensated for Eastern European weakness, and then bought again during a period of weakness last year. The share is now up 21% since the beginning of the year.

The Swiss online bank Swissquote is another strong performer. The company announced that net profit had grown 88% on sales revenues up 25%. Revenues are growing with increased transactions from clients on equities, derivatives and currencies, rising assets under management (+30% to CHF24bn), white label outsourcing of their technological expertise to other Swiss banks, increasing use of their Robo-advisory services and new revenues from their crypto currency trading platform. The forecast for 10% profits growth at Swissquote this year may even be too conservative, given the inflow of assets under management and the sharp increase in new account openings for crypto currency trading. Furthermore, the company is still carrying costs associated with the negative interest rate environment. If the situation normalises to positive rates, this will become a source of revenues.

After a series of positive economic indicators, European smaller companies have been affected by signs of incipient inflation. Bond yields are rising from their abnormally low levels and the inflation message is something company managers have mentioned regularly over the last six months. Raw material and purchasing costs are rising, but it is also easier than before to pass on these extra costs to clients.

Among the stocks affected is the German roadbuilding equipment maker Wacker Neuson, the strategy’s second largest holding, and German foundations services and equipment supplier Bauer. However, the managers consider that the longer-term outlook for both stocks is positive.

Other recent weak performers have been Italian gardening equipment maker Emak (-15%), French processed vegetables producer Bonduelle (-15%) and Italian supplier of parts for domestic cookers Sabaf (-12%). Swiss digital security company Kudelski fell 13% after publishing disappointing results for the year, due to restructuring charges for its declining pay TV access business, but the managers continue to see value in the business and its valuable patent portfolio.

Using a very focused and disciplined Value Investment philosophy, the QUAERO CAPITAL Smaller Companies Team aims to invest in smaller European companies that trade at a substantial discount to both their intrinsic value or to their long-term profit potential. The small cap team is one of the most experienced in its field and operates in one of the least researched part of the European markets. This dedication to investing “under the radar screens” and to a very research-intensive process has produced very credible results over the past 15 years.

The Argonaut strategy is one of the few investing exclusively in micro capitalisation stocks and concentrating on the lowest tiers of European stocks.

The Smaller European Companies uses the same investment philosophy and process but with a bias towards companies that have a substantial shareholder that is a family. This additional filter has shown to produce strong results over the long term but is yet widely ignored by most investors.

The New Europe strategy invests in small and medium sized companies across Eastern European according to a broader definition of the region, including countries such as Greece, Turkey and Russia. The strategy focuses particularly on little-known or poorly followed smaller and medium sizes stocks that have been ignored by mainstream investors, sometimes due to their location or their size.

The Swiss Small&Mid Cap strategy aims to achieve capital growth by investing in a diversified portfolio of Swiss-based companies, applying a strictly “Value” bias. The strategy focuses on companies that are undervalued or neglected by investors and analysts because they are less liquid that blue chips. The « Value » philosophy aims to limit the downside risk of selected securities, through a so-called « margin of safety » approach.