European equities: NUTS are healthier than GRANOLAS

Over the past decade, growth investment styles have dominated returns, while ‘value’ has underperformed.

Here, Chris Garsten, co-manager of the Waverton European Capital Growth fund, tells us how European GRANOLA stocks have lead markets much like their US counterparts, the FAANGs. But will they continue to dominate, or will other companies come to the fore? Chris tells us more.

The times they are a-changin’

Times change. Winning investment strategies change. When Charles [Glasse] and I started our investment careers in the early 1990s (!) the winning strategy was to buy last year’s dogs. It had a lot of logic as the previous year’s losers had become very cheap and it only took a small amount of good news for the stock to do well.

Over the last ten years or so this has been a disastrous investment strategy, as the dogs got ever cheaper, and growth companies became ever more valuable. Consequently, many investment managers have, one by one, become growth managers. We are neither growth nor value, but capital cycle investors, on which we will expand later.

The companies leading European markets higher

In the same way that the FAANG stocks – Facebook (now Meta), Amazon, Apple, Netflix and Google (now Alphabet) – grew to lead US equity returns in recent years, a similar effect has taken place in Europe with the GRANOLAS (a Goldman Sachs invention, which we have altered somewhat to exclude the UK), consisting of Givaudan, Roche, ASML, Nestle, Novo Nordisk, L’Oreal, LVMH, Air Liquide and SAP.

We have to admit that we have a little bit of granola in our portfolio (Nestle and Air Liquide) but we have kept the exposure low. And at client meetings one of the most frequently asked questions is why we don’t own ASML or LVMH. There is also some surprise that we have just sold Novo Nordisk.

At Waverton we are trying to keep the GRANOLAS to a minimum for the following reasons:

• Simply put we think we can find more interesting stocks elsewhere. We pride ourselves in not only having great returns but achieving this in a low-risk manner. Low volatility comes through doing well in bear markets or when stock leadership rotates. Momentum investors nearly always get whacked when times change as everyone heads for the exit at the same time.

• Our belief is that high returns/low risk is best achieved through capital cycle investing – that is buying into structural change early. Very briefly, most markets do not remain in perfect demand and supply balance for long. Greed increases capacity in good times and fear reduces it in bad times. The key is to invest in change just before it becomes obvious that things are about to improve. This is getting the so called ‘margin improvers’ right. They are often cheap, unloved, and under-owned stocks. If one can get these stocks right – as the market for their products tightens up – it can prove very profitable.

• The GRANOLAS are a million miles from being these ideal margin improvers. It is very difficult for them to surprise on the upside as so much is already expected from them, and earnings are already at elevated levels. We only buy fresh positions in what we consider momentum stocks if there has been an earnings scare, as there was a few years ago in Novo Nordisk. The stock subsequently more than doubled, but we feel the stock on P/E 32x this year’s earnings is very expensive. Sure, it has great franchises, particularly in the booming weight loss area, but Novo’s molecule concentration and dependence on semaglutide (Ozempic, Rybelsus, Wegovy and CagriSema) is at 64% for 2027 sales. It goes off patent in 2032.

We prefer NUTS

So, what do we like? Our acronym is NUTS:

N: Nat Ned, (Dutch life insurance consolidation)

U: UPM (Non-fossil aviation fuel)

T: Technip Energies (carbon reduction focused)

S: Siemens (Automation, AI).

Together, these NUTS make up 14.3% of the fund. All are capital cycle stories, but each in a different way. At one extreme is Nat Ned, where there is no sales growth in Dutch life insurance. Indeed, much of it is in run off and run for cash. Hence little investor interest but as the number of industry participants is declining fast through recent consolidations, profits are improving nicely. The market is now dominated by three players, the largest being NN.

At the other end of the scale is Siemens. Its biggest division is Digital Industries and is the jewel in the crown. Growth is plentiful but access for new players is difficult as customers are very loyal for critical infrastructure. It has possibly the strongest and most integrated automation portfolio in the world, outperforming peers in an accelerating market. Siemens is the world’s tenth largest software company. Following the spin-off of Energy, ‘New Siemens’ has a definitively higher organic sales growth, margin and FCF conversion than ‘Old Siemens’. We don’t think this is reflected in the stock market rating.

Taking a 50-year investment view may be a slightly quirky conclusion as to how the mighty fall. Apologies. In 1870 Britain was a thriving agricultural nation virtually self-sufficient in food. Aristocrats’ main concern was to have a good ‘summer season’.

In the last quarter of the 19th century the cultivation of the prairies of the New World, combined with the development of purpose-built refrigerator ships and cheaper rail transport led to a global glut of grain products and chilled meats, causing the prices of British agricultural produce to plummet. Many estates, burdened by mortgages secured in the boom years, fell into negative equity.

This, the Great War, and social change, forced estate after estate onto a saturated market. Many were impossible to sell. One, Sudbrooke Holme in Lincolnshire, with its Robert Adam ceilings and great gardens, was very nearly sold in 1920 to a film company to be burnt ‘in order to produce a spectacular scene on the cinematograph’. It was merely demolished. Times change. Winning investment strategies need to be forward thinking.

The views and opinions expressed are the views of Waverton Investment Management Limited and are subject to change based on market and other conditions. The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. All material(s) have been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy of, nor liability for, decisions based on such information.

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