Each week, a professional investor tells us where he'd put his money. This week: Richard Pease, FP CRUX European Special Situations
European markets are in vogue this year and we remain fairly positive in our outlook. Small- and mid-cap valuations are up quite sharply, but the "reflation" trade in banks and resource stocks, particularly, has begun to lag. Compared with last year, there are some economic green shoots emerging: employment is tightening in some European countries and industrial capacity is stretched in some areas.
We focus on high-quality, cash-generative European businesses, typically with significant barriers to entry, conservative balance sheets and proven, well-incentivised management teams. These are often global players with relatively low exposure to western Europe, and which benefit from secular (long-term) trends which are largely independent of the broader economy. We hold a number of stocks that are of much better-than-average quality but which trade at average or below-average prices.
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We like Stroeer (Frankfurt: SAX), the dominant out-of-home advertising business in Germany. About half of its business is devoted to billboards and digital signage and the other half to digital and performance marketing. It serves small firms which may not have any advertising capability of their own. This is its way of competing with companies such as Google and Facebook, providing a local "high-touch" service. Stroeer has seen growth of around 5% in its out-of-home business and 10% in digital advertising. Stroeer is currently trading on about 15 times forward earnings, a discount to the wider market.
Ceconomy (Frankfurt: CEC) is the largest electronics retailer in Europe. It performs well against companies such as Amazon, chiefly because the electronics world is very brand-driven. Big brands like Ceconomy because it draws attention to the products rather than the price. Hardware sells at a very slight premium to equivalent hardware on Amazon, but we believe this is more than justified by the level of service. Operating margins are at 3%; we believe they should be 5% over time. The company was a neglected part of a German cash-and-carry business, Metro, but was spun off in July. It has a very strong balance sheet and owns 10% of Metro and 25% of French peer FNAC. The stock trades on about 15 times next year's earnings; about 12 times on a cash-adjusted basis. We think earnings could go much higher.
Finally, we own Tarkett (Paris: TKTT), a flooring business with commercial, residential and sports divisions. The firm is still half owned by its founding family, has stable demand patterns and pricing power, and the industry's highly fragmented nature leaves plenty of room for mergers and acquisitions. The shares have sold off following an anti-trust fine and pressure on its Russian business which now represents only a small part of earnings as well as rising raw-materials costs. We see these as transitory issues, however, and at 15-16 times next year's earnings the stock looks highly attractive.
Richard Pease is manager of the FP CRUX European Special Situations Fund at CRUX Asset Management.
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