Small Values ​​to Achieve Big Capital Gains in the Stock Market This Year | Financial markets

While 2023 was an impressive year for the Ibex 35, with growth of close to 23%, it was not so good for Spanish small and mid-cap companies, which gained 10.5% and almost 6% respectively. The delay of less valuable firms is justified by rising interest rates: they are more expensive to finance and are more tied to the short term. According to experts, a profitability gap has been created compared to larger values, which could be closed in 2024 when rates begin to fall, provided that the expected decline…

While 2023 was an impressive year for the Ibex 35, with growth of close to 23%, it was not so good for Spanish small and mid-cap companies, which gained 10.5% and almost 6% respectively. The delay of less valuable firms is justified by rising interest rates: they are more expensive to finance and are more tied to the short term. Experts say a yield gap has opened up relative to large-cap stocks that could close in 2024 when rates begin to fall, until the expected economic slowdown ends in disaster.

But the great asset of small and medium values a priori It is their low prices on the stock exchanges that indicate altitude sickness in these early periods of the year. Although not everything goes well. As Mark Sherlock, head of US equities at Federated Hermes Limited, points out, “the key will be to focus on quality, smaller-cap companies with strong barriers to entry and pricing power, strong balance sheets and cash-generating operations.” Below, six managers select small- and mid-cap companies to help them realize their potential.

Global Dominion

Juan Huge de Receir, founder and investment director of Augustus Capital, is betting on this value, which works in growth businesses such as industrial automation and digitalization, as well as renewable energy. “It is trading at a historically low price as its debt increased in 2023 due to the consolidation of its renewable energy division. However, in 2024 they will again be debt-free or with very little debt and the value should rise. The PER (times the price contains earnings per share) is eight times with a dividend yield of 3.5%,” he explains.

Global Dominion is also one of the preferred securities of Gonzalo Sánchez Crespo, investment director of Gesconsult: “It offers highly repeatable results and sources of business, diversified by activity and country, which compensate for any failure. A good example of the balance of profitability and risk, as well as an excellent management team.”

Tubesex

This is one of the favorite securities of Xavier Cebrian, manager of the GVC Gaesco Bolsalíder fund. “The strategic shift made by the company in 2021 towards higher value-added products, together with a strict cost policy, has proven successful based on the historical results recorded in 2023, almost achieving the production targets set for 2025. This is the new year 2024. The 2027 Strategic Plan positions Tubecex well to benefit from the energy transition. With a strong order book, a strong balance sheet and a top-notch management team, we believe the company has strong growth potential,” he says.

CIE Automotive Industry

Luis de Blas, CEO and manager of Valentum, is betting on CIE Automotive. “At current prices, you can buy a company with an impeccable historical track record, which has just established its strategic goals of generating EBITDA margins of 19% with cash conversion of over 65%, for nine times earnings. (PER),” he claims.

For his part, Xavier Cebrian adds that CIE Automotive was not only able to maintain profitability, but also increased it to reach its target of 19% in 2025, well above the industry average. Its positioning in emerging markets such as India, China or Mexico, as well as its ability to offer global services both geographically and technologically, are among its main competitive advantages.” Finally, its purchasing power stands out: its net debt ratio is less than twice its EBITDA.

Vidrala

This is one of the classic values ​​in the portfolio of Julián Pascual, President and Manager of Buy & Hold. “The glass business is doing very poorly, making it difficult for countries that produce glass at lower costs to compete. The company’s latest acquisition, Brazil’s Vidroporto, late last year marked its entry into Latin America, where it has strong growth potential. Its strong pricing capabilities allowed it to pass on increased costs to its customers. It offers a very attractive PER of 11.5 times,” he explains.

Electronic dreams

Ricardo Seixas, director of the Iberian stock exchange Bestinver, believes the market is not recognizing the opportunity of the company’s new business model, from transactional to subscription, with more than five million subscribers. “This transformation is having a short-term negative impact on the group’s results and the market remains uncertain. We think the company will achieve its targets for the 2025 financial year (which ends in March 2025), in which it will generate €100 million in cash flow,” he concludes.

Colonial

Ricardo Seixas’s other bet for this year is colonial, punished by rising rates and poor expectations generated by remote work. A member of Ibex, its capitalization of about 3.2 billion euros is higher than that of a mid-cap company, but it is one of the lowest among Spanish companies. “Colonial’s management team has managed to mitigate the impact of the negative environment by indexing earnings for inflation, good development of investment projects and selling assets at valuations above their gross asset value (GAV). The premium quality of the offices, located in the best locations of three European cities, stands out. Normalization of rates could lead to expansion of valuations, which will be the lowest in the last decade,” he points out.

Alantra

Luis de Blas, CEO and manager of Valentum, counts finance company Alantra as one of his favorites. “2023 is going to be a disastrous year because of how shut down the capital market is, but we think we need to work hard to get the market back to normal. The company is worth €350 million but has €170 million in cash. In a standard year, excluding fees for the success of its funds, the company would earn more than €30 million, so its PER would trade at six times PER,” he explains.

Viscofane

According to Gonzalo Sánchez Crespo, investment director at Gesconsult, “Cellulosic casing companies have never been so cheap in multiples. It is a leader in its sector, and within a year, its clients’ stocks, which had risen due to deficit problems, would normalize, allowing them to restore profits. This is a defensive company that resists economic development.”

Catalan West

“This is one of our additions to the small-cap portfolio in the past year,” says Julián Pascual. “A well-diversified insurance company with just over half of its profits coming from the credit insurance industry, which in practice is an oligopoly. It is an extremely well-run family business with a return on equity of 14%. At a valuation multiple of just 6.5 times, this offers a very attractive opportunity,” he comments.

Straight line

Xavier Cebrian notes that the insurer is adjusting rates and prioritizing margins over volumes, with strict cost controls and an expense ratio of less than 20%, the best in the sector. The company does not require capital strengthening since its solvency ratio II is 180%. “The latest published results reflect a clear improvement in operating performance. We believe the stock is currently collecting all the negative variables and is not taking into account the change in trend at the operating level, lower inflation pressures and Linea Directa’s structural cost advantage,” he said.

CAF

Auxiliar de Ferrocarriles is another purchase option for Gonzalo Sánchez Crespo, since after particularly suffering from the chip shortage that the automotive industry experienced due to the Covid-19 pandemic, in 2024 “this situation will normalize and will contribute to increased sales of Solaris electric buses. which are the leader in Europe. It has a low valuation and offers great upside potential in the stock market.”

Fluidra

Julián Pascual is also betting on Fluidra, a company that has gained market share through acquisitions where it still has a long way to go, both in Europe and North America. “The financial cost involved in each acquisition is very small compared to the increased profits generated from each transaction. In this sense, after the fall in 2022, it became especially cheap and, despite the returns accumulated since then, at a PER of 14 remains very attractive,” he points out. Despite listing on Ibex, its capitalization does not reach $3.7 billion.

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