(Note: Unless specified otherwise, when I am writing about European stocks, I am referring to the euro.)
Philip Best launched the Argonaut Micro Cap Fund in June 2003 and is a director and major shareholder of Argos Managers. He has 26 years’ experience of the European investment scene having started as a fund manager at Warburg Investment Management (later Mercury/Merrill Lynch). At Warburg, Philip launched and managed the Mercury European Income Fund. In 1987 he joined Enskilda Securities as a broker specializing in European small cap companies. In 1994 he established and ran the Paris office of The Europe Company Limited, a specialist research-driven European small cap brokerage which was sold to Jefferies & Co in 2000. Philip joined Gadd & Cie in Geneva in January 2003 and The Argonaut Fund was launched later that year.
Philip has a degree in modern history from Oxford University and is bilingual in English and French.
Value driven manager based in Geneva, invests in European microcaps.
The whole idea of microcaps: 8,200 companies in Europe, 450 which represent 75% of market cap. All of the coverage is on those companies, with brokerage, coverage, fund ownership and ETF coverage. Once these stocks get lower and lower in market cap, like 100 million euros, you have virtually no coverage. There are 5,000 companies below 200 million. There are 1,500 companies below 20 million – 100million market cap, which is our sweet spot.
A lot of people are trying to become their own macro manager with ETFs, which don’t gold these companies.
Conventional wisdom:
· Highly illiquid
· Risk
· Management is bad
· I have been burnt before…
· Volatile
But big companies have also gone bust. And during the tech crash if you are a value investor you were relatively safe, and there are plenty of bad managers:
Ibbotoson small-cap value stocks outperformed the market 4.3% from 1926 – 2010 annually.
Are small/micro caps more volatile? In the European market over the past eight years has only been slightly more volatile.
My fund has only been a tiny drop more volatile than large caps.
Because of the margin of safety there is a larger downside capture ratio, which is just under 70% for my fund, if the market falls 10% mine will fall 7%.
Fundamental research and a strict research disciplines show this risk assumption can be wrong. There has been a de-correlation of my fund which is up 200% in past eight years.
We look for asymmetric risk/return profile. So even if the company does poorly we have protection, usually from the assets. We did not invent this — we are doing what Benjamin Graham taught.
20 million – 100 million, there you have to do the work entirely yourself; there are no brokers interested in that part of the market.
Nexus is a company which we visited in 2007; we were their first investors to visit them in four years. Their market cap was 37 million, and their equity was 43 million, net cash was 17 million from their IPO in 1999. The P/E was 40, but we did not care because 45% of the market cap was cash.
Today the market cap is close to 100 million, sales grew nicely, and they have been taking market share in Germany in Austria, and now have a small presence in France. Now two brokers cover them, and soon they will become a growth stock, as the company starts to get more coverage. We are starting to sell some of our stock. By the time Fidelity is buying we try to sell.
Carlo Gavazzi is a cheap family owned business. It is a holding company based in Switzerland. They make electronic components including components for the solar industry. They have 15 employees in their office in Switzerland. No one follows them anymore. The market cap is 141 million Swiss francs. Sales were up 26% taking into account the rise in the franc. The operating margins have gone up, and they have 57 million Swiss francs. They are trading 5.8x historic earnings.
Close to 20% of sales in new energy. In 2009, the company got rid of cash losing business in 2009. Now it is a pure play on electronic components.
It is their 80th year of existence, and they are paying a special dividend of 15 francs, which will make it a 10% dividend yield total for their year.
Chargeurs is a cigar butt. It used to be a huge company and used to own UTA, and 67 subsidiaries. Warren Buffett would call this cigar butt left in investing.
It is starting to wind up, and is left with three great businesses. Novacell — which makes thin film business; interlining-padding for clothes and seats, wool-combing — they are No. 1 worldwide. If you take the value of these three businesses and take their tax losses it has a total value of 320 million euros versus a market cap of 67 million. I think they will sell off all their businesses, and just remain with the thin film business.
EPH — another Swiss company. It is Eastern Property Company with a 130 million market cap. It owns RE in Moscow, and St. Petersburg. It is not covered by anyone. It is a complex structure, but it is managed by Valartis bank, which is also their largest shareholder.
In the US the share price is 38 million but their RE was recently evaluated at $80.5 million. There is no catalyst, but I think value in itself is a catalyst.
For example, Storm Capital just bought at 12% holding, and they are taking an activist role. The share price went up, but is now back down to $38 again. They are in the process of selling half of their prime realty in Russia. And now this could help the share price.
Tanfield — 40 million-euro market cap. The share price was over 9 euros in 2007, now it is at 9 euros. They are a construction business at their core, which is called Snorkel. They also own 49% Smith Electric Vehicles, which is soon to do an IPO on the Nasdaq, being underwritten by Goldman Sachs (GS, Financial). President Obama recently visited one of their plants. Just the value of their market cap of Smith Vehicles 25 million, plus their net cash of 13.6 million euros is close to their current market share.
A lot obviously depends on the timing of the IPO.
If you are a value investor there is still good value to be found, with plenty of stocks below book value.
That leaves more investments under the radar screen.
The ETF trend has also helped this trend.
I do not predict the markets, but a margin of safety provides a cushion. Additionally, the best opportunities were created in 2003 and 2008, so if the market tanks it will create even more opportunities.
Q&A
Q: What is the biggest risk in these stocks? A: You can’t just put in an offer in the market; you have to go to the right type of broker. It is difficult to find a block of the stock to buy. When there is a big family investor, the best place to look is there.
Q: Are you worried about the person selling might know more than you? A: This is always a problem with investing, but you can never be 100% sure.
Screening is not a perfect method. The data a lot of times will be outdated, and you will be working on old assumptions. We look at companies with good balance sheets.
Q: Where do you find value in the balance sheet type of stocks? A: The best time it was pretty was in 2006 and 2007, and it was hard to find companies selling at less than book value. If it is a large bull market, we find it tough. But the desertion of the market cap area has been helpful.
Since 2008, sub 100 million European stocks have barely moved, but if you pick the right stocks you can hit a home room.
Disclosure: None
http://www.valuewalk.com/
Philip Best launched the Argonaut Micro Cap Fund in June 2003 and is a director and major shareholder of Argos Managers. He has 26 years’ experience of the European investment scene having started as a fund manager at Warburg Investment Management (later Mercury/Merrill Lynch). At Warburg, Philip launched and managed the Mercury European Income Fund. In 1987 he joined Enskilda Securities as a broker specializing in European small cap companies. In 1994 he established and ran the Paris office of The Europe Company Limited, a specialist research-driven European small cap brokerage which was sold to Jefferies & Co in 2000. Philip joined Gadd & Cie in Geneva in January 2003 and The Argonaut Fund was launched later that year.
Philip has a degree in modern history from Oxford University and is bilingual in English and French.
Value driven manager based in Geneva, invests in European microcaps.
The whole idea of microcaps: 8,200 companies in Europe, 450 which represent 75% of market cap. All of the coverage is on those companies, with brokerage, coverage, fund ownership and ETF coverage. Once these stocks get lower and lower in market cap, like 100 million euros, you have virtually no coverage. There are 5,000 companies below 200 million. There are 1,500 companies below 20 million – 100million market cap, which is our sweet spot.
A lot of people are trying to become their own macro manager with ETFs, which don’t gold these companies.
Conventional wisdom:
· Highly illiquid
· Risk
· Management is bad
· I have been burnt before…
· Volatile
But big companies have also gone bust. And during the tech crash if you are a value investor you were relatively safe, and there are plenty of bad managers:
Ibbotoson small-cap value stocks outperformed the market 4.3% from 1926 – 2010 annually.
Are small/micro caps more volatile? In the European market over the past eight years has only been slightly more volatile.
My fund has only been a tiny drop more volatile than large caps.
Because of the margin of safety there is a larger downside capture ratio, which is just under 70% for my fund, if the market falls 10% mine will fall 7%.
Fundamental research and a strict research disciplines show this risk assumption can be wrong. There has been a de-correlation of my fund which is up 200% in past eight years.
We look for asymmetric risk/return profile. So even if the company does poorly we have protection, usually from the assets. We did not invent this — we are doing what Benjamin Graham taught.
20 million – 100 million, there you have to do the work entirely yourself; there are no brokers interested in that part of the market.
Nexus is a company which we visited in 2007; we were their first investors to visit them in four years. Their market cap was 37 million, and their equity was 43 million, net cash was 17 million from their IPO in 1999. The P/E was 40, but we did not care because 45% of the market cap was cash.
Today the market cap is close to 100 million, sales grew nicely, and they have been taking market share in Germany in Austria, and now have a small presence in France. Now two brokers cover them, and soon they will become a growth stock, as the company starts to get more coverage. We are starting to sell some of our stock. By the time Fidelity is buying we try to sell.
Carlo Gavazzi is a cheap family owned business. It is a holding company based in Switzerland. They make electronic components including components for the solar industry. They have 15 employees in their office in Switzerland. No one follows them anymore. The market cap is 141 million Swiss francs. Sales were up 26% taking into account the rise in the franc. The operating margins have gone up, and they have 57 million Swiss francs. They are trading 5.8x historic earnings.
Close to 20% of sales in new energy. In 2009, the company got rid of cash losing business in 2009. Now it is a pure play on electronic components.
It is their 80th year of existence, and they are paying a special dividend of 15 francs, which will make it a 10% dividend yield total for their year.
Chargeurs is a cigar butt. It used to be a huge company and used to own UTA, and 67 subsidiaries. Warren Buffett would call this cigar butt left in investing.
It is starting to wind up, and is left with three great businesses. Novacell — which makes thin film business; interlining-padding for clothes and seats, wool-combing — they are No. 1 worldwide. If you take the value of these three businesses and take their tax losses it has a total value of 320 million euros versus a market cap of 67 million. I think they will sell off all their businesses, and just remain with the thin film business.
EPH — another Swiss company. It is Eastern Property Company with a 130 million market cap. It owns RE in Moscow, and St. Petersburg. It is not covered by anyone. It is a complex structure, but it is managed by Valartis bank, which is also their largest shareholder.
In the US the share price is 38 million but their RE was recently evaluated at $80.5 million. There is no catalyst, but I think value in itself is a catalyst.
For example, Storm Capital just bought at 12% holding, and they are taking an activist role. The share price went up, but is now back down to $38 again. They are in the process of selling half of their prime realty in Russia. And now this could help the share price.
Tanfield — 40 million-euro market cap. The share price was over 9 euros in 2007, now it is at 9 euros. They are a construction business at their core, which is called Snorkel. They also own 49% Smith Electric Vehicles, which is soon to do an IPO on the Nasdaq, being underwritten by Goldman Sachs (GS, Financial). President Obama recently visited one of their plants. Just the value of their market cap of Smith Vehicles 25 million, plus their net cash of 13.6 million euros is close to their current market share.
A lot obviously depends on the timing of the IPO.
If you are a value investor there is still good value to be found, with plenty of stocks below book value.
That leaves more investments under the radar screen.
The ETF trend has also helped this trend.
I do not predict the markets, but a margin of safety provides a cushion. Additionally, the best opportunities were created in 2003 and 2008, so if the market tanks it will create even more opportunities.
Q&A
Q: What is the biggest risk in these stocks? A: You can’t just put in an offer in the market; you have to go to the right type of broker. It is difficult to find a block of the stock to buy. When there is a big family investor, the best place to look is there.
Q: Are you worried about the person selling might know more than you? A: This is always a problem with investing, but you can never be 100% sure.
Screening is not a perfect method. The data a lot of times will be outdated, and you will be working on old assumptions. We look at companies with good balance sheets.
Q: Where do you find value in the balance sheet type of stocks? A: The best time it was pretty was in 2006 and 2007, and it was hard to find companies selling at less than book value. If it is a large bull market, we find it tough. But the desertion of the market cap area has been helpful.
Since 2008, sub 100 million European stocks have barely moved, but if you pick the right stocks you can hit a home room.
Disclosure: None
http://www.valuewalk.com/
