High but treacherous discounts in summer sales on the stock market

European stock markets were rarely so discounted compared to the US, and small and medium stocks were rarely so cheap compared to megacaps. But not all fair prices are interesting. How do you prepare for a sale?

It will probably sound familiar to bargain hunters. Seduced by a high discount on the new price, you buy that one dress or shirt, while the fabric or cut is not quite comfortable and you have no idea how to combine the pattern. Result: the garment stays in your closet, is ballast in your wardrobe and you're not enjoying it. Even on the stock market, cheap is often not the best buy. As tempting as some discounts may seem, they're often there for a reason.

And those reasons can be diverse. An undervaluation of a company compared to its own long-term averages or peers can result from financial difficulties, management problems, loss of market share, or other weaknesses that cannot be solved easily or quickly. Elements outside the company's control can also have a long-term impact on valuation, such as recessions, inflation or rising interest rates.

At the moment, stock market discounts in large parts of the market are much higher than usual, so it's time to take a closer look at that phenomenon. We selected the most discounted Belgian stocks, based on various parameters: their price-to-earnings ratio, the market value compared to book value, the discounts on their underlying assets and the level of the gross dividend yield (see table).

'Eternal discount'

The largest, most persistent and most frequently cited “supersolden” is that of Europe compared to the United States. European stocks have historically traded at a lower price-to-earnings ratio than US stocks. This means that investors in Europe pay less for every euro of profit a company makes, compared to what investors in the US pay for every dollar of profit.

There are various reasons for that contrast. In recent years, Europe has experienced slower economic growth and political uncertainties, such as Brexit and the euro zone debt crisis, while the US economy grew much more strongly. The U.S. stock market also has greater exposure to fast-growing, global technology companies, which often receive higher valuations. Europe has many companies that are active in finance and energy, sectors that traditionally have lower valuations.

Although the European discount has been in place for many decades, it is now considerably higher than usual. On average, European stocks now trade at a price-to-earnings ratio of 12 versus 20 for their US peers. That makes them 40 percent cheaper, versus an average discount of “only” 25 percent over the past 15 years.

A lot has to do with the gigavaluations of major US tech companies that steal all investor attention. To illustrate, the market value of the chip giant Nvidia has become greater than that of the entire French, German or British stock market (see graph). Supercompanies like Nvidia, Apple, Microsoft, Alphabet and Amazon are dwarfing the rest of the market.

As a result, the gap between the top tier and the broad market has also increased in the US. Companies in the U.S. small cap index Russell 2000 have a price-to-earnings ratio below 16, while they have posted an average annual turnover growth of 12 percent over the past three years. That's exactly the same as companies in the S&P500, which houses the largest 500 US stocks, for which you pay 20 times the profit.

“We're in a sandcastle economy that works on two tracks,” says Peter Garnry, Saxo's chief strategist. “A handful of booming sectors, such as AI, defense and obesity medicine, stand out against other sectors that receive hardly any attention.”

“Despite the exuberance in the US thanks to the leading AI companies, we think European stocks will excel in the coming period, with the European Central Bank's interest rate cut in June and a growth recovery in the third quarter,” Garnry continues. Energy, healthcare, banking and IT are in his beloved European grab bag for summer bargains.

“We are mainly buying in the UK and Spain,” says Wouter Verlinden, who manages a fund with small and medium-sized European stocks at Ghent asset manager ValueSquare. “These are two interesting markets with very depressed valuations. Part of that is also France, but the problem there is that the companies are often very focused on the domestic market. That is a vulnerability. In Spain and the UK, we see highly internationalized companies. This includes a lot of dollar earners, or companies with exposure to growth in Latin America. '

Spain and the UK are two interesting markets with overly depressed valuations.
- Wouter Verlinden
Value Square Fund Manager

“I think France is worth exploring, after the downgrades in recent weeks,” said Guy Sips, the small-cap analyst at KBC Securities. “The gap between the German DAX and the French CAC40 has become above average.” Sips mentions Bonduelle, a vegetable producer that is below its book value after recent price weakness. “You can see that the Belgian Greenyard came down with me. The bad weather is a factor there, but you may wonder if those kinds of reactions are not an exaggeration. '

In the Benelux, many companies are struggling with suspicious investors who see the glass half empty. “In their guidelines, several Belgian companies indicate that they back-end loaded are, in other words, that the second half of the year will be better than the first,” says Sips. “But you can see that investors don't believe that today.”

The KBC Securities analyst cites Kinepolis as examples. “Those companies are in the same negative narrative. The investor wants to see proof first. So when it comes to their half-year results, they are extra vigilant about the outlook they provide,” says Sips. “If it's not too bad, the market can see that it has been too negative.”

In the summer, small investors have extra opportunities to take advantage of different price declines.
- Wouter Verlinden
Value Square Fund Manager

Summer is the best time for retail investors to study discounts and undervaluations, says Verlinden. Professional investors are then on vacation and investment committees at fund houses and asset managers do not make big decisions. “At the same time, funds must sell in the summer if there are outflows, without a buyer being opposed at that time. This gives small investors an advantage to take advantage of different price declines. They never take a vacation (laughs). '

Attention is always required. “In recent months, buying at discounts has not yielded the desired results, because the market's focus is so one-sided,” says Verlinden. When will that turn around? “It's ebb and flow. If the AI craze subsides tomorrow, that will change. But you can't predict it. '

Read the further article via De Tijd: High but treacherous discounts in summer sales on the stock market

Source:

• The Time: https://www.tijd.be/tablet/newspaper/beleggen/hoge-maar-verraderlijke-kortingen-bij-zomersolden-op-de-beurs/10554526.html
• Author: Ellen Vermorgen
• Date: July 05, 2024