A stock market return of 35,000% in Europe? Here’s how | Popgen Tech


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Henrik Larsson Lyon told me he doesn’t pay “much attention” to Hexatronic Group AB’s share price.

If I were CEO of the Swedish fiber optic cable group, I would think of little else. Acquisitions and booming sales in the US, UK and Germany have boosted its value more than tenfold (900%) over the past two years, delivering a return of 35,000% since 2012 in US dollar terms (an astonishing 55,000% in local currency).

Hexatronic is one of 55 European companies worth more than $1 billion whose value has multiplied by 10 over the past decade with reinvested dividends, Bloomberg data show. With returns like this, who needs crypto?

Many of these so-called ten-baggers – the “holy grail” of stock investing – are unknown names, which is a shame, because there’s a lot investors can learn from them.

Europe’s rating is not far behind the US, where 71 companies have achieved the same feat in the past 10 years, belying the idea that the corporate landscape here is sclerotic. It shows that investors can still make amazing returns in Europe if they know where to look.

Hopefully, this guide will help you identify the next ten-bagger early and change your mind about Europe’s “dull” business landscape and capital markets.

Think small, with one exception

Investors should look harder for outperformance in Europe because the continent lacks tech giants; Tesla Inc., Netflix Inc. and Microsoft Corp. has increased tenfold in the last 10 years.

ASML Holding NV, a supplier of lithography technology to the semiconductor industry, is the only recent European top ten worth over $100 billion.

ASML is the only firm capable of producing extreme ultraviolet machines that cost around 160 million euros ($171 million). (See this fascinating Odd Lots episode for more). Even now it is hardly a household name.

Companies that increase tenfold in value in a short period of time tend to have rapidly growing revenues and profit margins, and are rewarded with higher price-earnings multiples, according to a recent Bernstein Research analysis (which provides a slightly different methodology used to mine).

Our European ten-baggers are valued on average at more than 40 times this year’s estimated earnings (more than three times the valuation of the Stoxx Europe 600 index). Their operating margins have increased from 9.5% to 23% on average since 2012 and they have achieved average annual sales growth of 24% over the past five years. Overseas expansion is often necessary to grow so quickly: British equipment rental firm Ashtead Group Plc generates nearly 90% of its sales in North America.

Of course, a stock has a better chance of going up tenfold if it is undervalued to begin with. Investors had to ignore loads of bad news to buy wind turbine maker Vestas Wind Systems A/S in 2012; those who did were rewarded with a 2720% return (despite this year’s disappointing performance).

In addition to ASML, the Netherlands boasts two other ten-baggage semiconductor equipment companies: chip packaging specialist BE Semiconductor Industries NV and ASM International NV, which controls more than half of the global market for atomic layer deposition equipment (which adds ultrathin films to a silicon wafer). Because few companies can produce such complex machinery, they can charge high prices without fear of losing business to competitors.

Similarly, Mycronic AB has a global monopoly in advanced laser-based mask writers for the production of television and smartphone screens (it also serves the semiconductor industry). The Swedish firm’s machines create ultra-precise patterns similar to a photo negative; a top model costs up to $45 million each.

Contract pharmaceutical manufacturing has also been a rich source of investor returns: Lonza Group, Bachem Holding AG and Dottikon ES Holding are all ten-baggers. These Swiss firms’ high profit margins reflect the boom in drug development for biotech/pharma companies and the trend towards outsourcing. Lonza helps Moderna Inc. to make Covid-19 vaccines, and Bachem is a market leader in therapeutic peptides, while Dottikon specializes in “dangerous reactions.”

Life sciences equipment is another area where European companies excel. Sartorius Stedim Biotech SA, the Paris-listed subsidiary of Germany’s Sartorius AG, makes bioreactors and filtration kits for the biopharmaceutical industry. The sector is highly regulated and after several takeovers there are few alternative suppliers. Replacing reusable stainless steel components with its cheaper one-off technology has boosted recurring revenue, which investors value more.

Chemometec A/S, whose shares have climbed 20,640% in the past decade, controls more than one fifth of the world market for cell counting machines, which are used in cancer and stem cell research as well as the production of animal semen doses for insemination. The Danish group’s operating margins reached 47% in the financial year to June.

French group SES-imagotag SA has a 50% share of the global market for electronic shelf tags – which are sold by retailers including Walmart Inc. used to digitally display prices and alert store managers to empty shelves. The stock has risen 67% this year alone when most tech stocks have fallen. Niches don’t have to be high-tech: Games Workshop Group Plc sells miniature orcs, space warriors and goblins for tabletop gaming. Expansion in North America and the licensing of its intellectual property for computer games have helped the British company increase operating profit margins from about 15% a decade ago to nearly 40% last year. The shares rose 16% on Friday after the announcement of a potential television and film partnership with Amazon.com Inc.

Europe has led the way in efforts to curb climate change, so it’s no surprise that there are several clean energy ten-diggers: In the wind industry, there are turbine makers Vestas and Siemens Gamesa Renewable Energy SA, plus German wind farm developers PNE AG and Energiekontor AG; sustainable fuel companies Neste Oyj and Verbio Vereinigte BioEnergie AG; solar generator Solaria Energia y Medio Ambiente SA and British sustainable investment specialist Impax Asset Management Group Plc.

Here, too, niches can be highly profitable: Sweden’s Nibe Industrier A/B has been making heat pumps for four decades, a once obscure technology that will play a key role in the decarbonisation of home heating.

The sector’s outperformance also reflects the large influx into clean technology in recent years, which pushed up valuations because there were relatively few stocks available to buy. Nibe is valued at around 50 times estimated earnings.

Like Hexatronic, several European ten-diggers are serial buyers. Nibe, Vitec Software Group AB, Lagecrantz Group AB and Beijer Ref AB have each competed with numerous acquisitions over the past decade. Beijer Ref, a Stockholm-listed refrigeration wholesaler, announced last week the $1.275 billion takeover of Heritage Distribution Holdings to enter North America.

While the consolidation of a fragmented market boosts earnings growth, “roll-up” strategies sometimes rely on stock market voodoo: Investors apply a higher earnings multiple to the acquirer than the smaller companies it acquires, which provide a cheap source of funding for more deals. As the acquirer grows larger, it can become more difficult to find targets at reasonable prices and cost savings sometimes do not materialize.

High valuations can crumble if investors suspect that growth may weaken. Vitrolife AB has lost two-thirds of its value this year. Nemetschek SE, which sells specialist software used by architects and civil engineers, fell 59% on concerns about the slowdown in the construction industry.

Even Hexatronic may fall out of favor, with hedge fund Marshall Wace LLP shorting the stock this year. When sentiment changes, what went up quickly can come down even faster.

Elaine He contributed the ten-bagger stock chart

More from Bloomberg Opinion:

• Big Tech is standing in the way of the next bull market: John Authers

• Tiny Space Warriors Trump Tesla in Stock Market Race: Chris Bryant

• Musk drags Twitter down a dangerous rabbit hole: Parmy Olson

–With assistance from Elaine He.

This column does not necessarily reflect the opinion of the editors or Bloomberg LP and its owners.

Chris Bryant is a Bloomberg opinion columnist covering industrial companies in Europe. Previously, he was a reporter for the Financial Times.

More stories like this are available at bloomberg.com/opinion


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