Hexatronic is one of 55 European companies worth more than $1 billion that have multiplied their value by 10 times over the past decade and reinvested dividends, Bloomberg data show. With returns like these, who needs crypto?
Many of these so-called ten bags, the “holy grail” of stock investing, are unfamiliar names, which is unfortunate because investors can learn a lot from them.
Europe’s path is not far behind the US, where 71 companies have achieved the same feat over the past 10 years, disproving the notion that the corporate landscape here is sclerotic. It shows that investors can still make amazing returns in Europe, provided they know where to look.
We hope this guide will help you identify the next ten bags early and change your mind about Europe’s “boring” business landscape and capital markets.
Think small, with one exception
Investors should do more to outperform in Europe, as the continent lacks tech giants. Tesla Inc., Netflix Inc. and Microsoft Corp. have grown 10-fold in the past 10 years.
ASML Holding NV, a supplier of lithography technologies to the semiconductor industry, is the only European bottom ten fund valued at $100 billion.
ASML is the only company that can produce the ultra-violet machines, which cost about 160 million euros ($171 million). (See this fascinatingly weird episode for more.) Even now, it’s hardly a household name.
Companies that grow tenfold in value over a short period of time tend to have rapidly expanding revenue and profit margins and are rewarded with higher price gains, according to a recent analysis by Bernstein Research (which used a slightly different methodology for mining).
Our ten European portfolios are valued at an average of more than 40 times this year’s estimated earnings (more than three times the valuation of the Stoxx Europe 600 index). On average, their operating margins have grown from 9.5% to 23% since 2012, and they’ve achieved average annual sales growth of 24% over the past five years. This rapid growth often requires overseas expansion; UK equipment rental company Ashtead Group Plc generates almost 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 piles of bad news to buy wind turbine maker Vestas Wind Systems A/S in 2012; those who did were rewarded with a 2,720% return (despite this year’s disappointing performance).
In addition to ASML, the Netherlands boasts two other top ten semiconductor equipment companies: chip packaging specialist BE Semiconductor Industries NV and ASM International NV, which controls more than half the global market for atomic layer deposition equipment (as ultra-thin films are added to silicon wafers). ). Since few companies can produce such sophisticated machines, they can charge high prices without fear of losing business to competitors.
Similarly, Mycronic AB has a global monopoly on advanced laser-based mask writers for TV and smartphone display production (it also serves the semiconductor industry). The Swedish firm’s machines create ultra-precise patterns that look like photo negatives. The top model in the range costs up to $45 million each.
Pharmaceutical contract manufacturing has also been a rich source of income for investors; Lonza Group, Bachem Holding AG and Dottikon ES Holding are all top ten bags. The high profit margins of these Swiss companies reflect the drug development boom and outsourcing trend among biotech/pharma companies. Lonza is helping Moderna Inc. develop Covid-19 vaccines, 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, a Paris-registered subsidiary of Germany’s Sartorius AG, manufactures bioreactors and filtration kits for the biopharmaceutical industry. The industry is highly regulated and after a few purchases there are few alternative suppliers. Replacing reusable stainless steel components with its cheaper single-use technology has increased recurring revenue, which investors value more highly.
Chemometec A/S, whose shares have risen 20,640% in the past decade, controls more than a fifth of the global market for cell counting machines used in cancer and stem cell research, as well as in animal production. sperm doses for insemination. The Danish group’s operating margins reached 47% in the financial year to June.
French group SES-imagotag SA has 50% of the global market for electronic shelf tags, which are used by retailers including Walmart Inc. to digitally display prices and alert store managers to empty shelves. The stock is up 67% this year alone, as most tech stocks have tanked. Characters don’t have to be high-tech. Expansion into North America and the licensing of its intellectual property for computer games have helped the British company increase operating profit margins from 15% a decade ago to nearly 40% last year. The stock jumped 16% on Friday after the announcement of a possible TV and film partnership with Amazon.com Inc.
Europe has led efforts to curb climate change, so it’s no surprise that there are a few ten bags of clean energy; in the wind industry there are turbine manufacturers Vestas and Siemens Gamesa Renewable Energy SA, as well as German wind farm developers PNE AG and Energiekontor. AG; sustainable fuel companies Neste Oyj and Verbio Vereinigte BioEnergie AG; solar power generator Solaria Energia y Medio Ambiente SA and British sustainable investment specialist Impax Asset Management Group Plc.
Here, too, niches can be very profitable. Sweden’s Nibe Industrier A/B has been producing 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 a huge inflow of cleantech in recent years, which boosted valuations as there were relatively few stocks to buy. Nibe is valued at about 50 times estimated earnings.
Like the Hexatronic, several European ten-bags are serial gainers. Nibe, Vitec Software Group AB, Lagecrantz Group AB and Beijer Ref AB have competed with multiple acquisitions in the past decade. Beijer Ref, the Stockholm-listed refrigerator wholesaler, announced last week the purchase of Heritage Distribution Holdings for $1.275 billion to enter North America.
Although the consolidation of a fragmented market drives profit growth, “rollover” strategies sometimes rely on stock market voodoo; investors apply more revenue to the acquirer than the smaller businesses it acquires, providing a cheap source of financing for more deals. As the buyer gets older, finding reasonably priced targets can be more difficult, and cost savings sometimes don’t materialize.
High valuations could be crumpled if investors suspect growth may weaken. In vitro fertilization devices and reproductive-genetic services company Vitrolife AB has lost two-thirds of its value this year. Nemetschek SE, which sells specialized software used by architects and engineers, fell 59% on concerns about a slowdown in the construction industry.
Even Hexatronic may be out of favor, with hedge fund Marshall Wace LLP shorting the stock this year. When emotions change, what went up quickly can come down even faster.
Elaine Hay invested in a ten-stock chart
More from Bloomberg Opinion.
• Big tech stands in the way of the next bull market. John Otters
• Tiny Space Warriors Trump Tesla in the Stock Market Race. Kris Bryant
• Musk pulls Twitter down a dangerous rabbit hole. Parmy Olson
– Assisted by Elaine Hay.
This column does not necessarily reflect the opinion of the editorial board or of 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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