European stocks have lagged North American stocks this year, and those with less inflated valuations are presenting opportunities for Matt Peden, vice president and portfolio manager at Atlanta-based Invesco Advisors Inc., and co-manager of Invesco Europlus.
“Valuations of companies are more reasonable in Europe, especially for small to mid-capitalization companies,” says Peden. “There is less of a valuation advantage in the large, globally-focused companies.”
Plagued by Brexit uncertainty, political turmoil in Italy and other countries and fallout from the U.S.-China trade conflict, Europe has suffered slower growth than other key areas of the world such as the U.S.
Some manufacturing and automobile exporting companies have recently been hurt by a slowdown in demand from China. Exports to emerging markets account for nearly 10% of European GDP, which makes Europe vulnerable to slower growth in these regions.
One of the brighter indicators in Europe is job creation, with the unemployment rate now around 7.5%, the lowest level since before the 2008 financial crisis and a boost for domestic demand.
Indexes overlooking opportunities
With just more than $400 million of assets in Invesco Europlus' various series, Peden has the flexibility to invest in companies of all sizes including small to mid-cap companies, without worrying about liquidity constraints. He says much of the overall flows into European stocks have recently been coming through index-related vehicles that exclude many of the smaller companies, and this preference for passive investing among many investors has left some attractive opportunities on the table in stocks that are not included in major indices.
Currently, about 58% of Invesco Europlus’ assets are in companies with a market cap of less than US$10 billion, he says, while 7% is in companies in the US$10-$20 billion range. About 16% is in large cap companies with a market cap greater than US$20 billion. Peden also holds a large cash position, which accounts for the balance of about 19% of assets.
He believes these big brand companies are vulnerable to losing market share with television advertising having less influence over buyers as social media becomes more powerful. Millennials in particular aren’t loyal to the brand names of the past and are increasingly conscious of climate and environmental impacts.
The fund’s cash position has been relatively high lately as Peden’s exited a few holdings in large cap, consumer staples companies such as Unilever PLC (UL), a British producer of famous brands such as Dove, Lipton and Hellman’s, Switzerland-based Nestle SA (NSRGY), the world’s largest food and beverage company, and Henkel AG & Co. (HEN), a German-based multinational chemical and consumer goods company. He exited because new consumers are exiting their usual markets.
New kids on the block
“Traditional retailing is seeing a lot of competition from ecommerce,” Peden says. “It’s becoming easier for up and coming brands to compete and gain shelf space through social media promotion. We’re seeing a shift on the part of many consumers to environmentally-friendly and organic products, and a preference for brands with a local niche or craft feel.”
But there’s still loyalty in beer. Peden holds a large position in Belgium-based Anheuser-Busch InBev SA/NV (ABI), the world’s largest brewery. The company enjoys strong brand loyalty and is known for such names as Beck’s, Budweiser, Corona, Stella Artois and Michelob.
“Beer is a stable business,” Peden says. “Although people are drinking less beer overall, they are drinking more of the premium, higher-margin beers, and this trend is offsetting any volume decline.”
Peden limits holdings to 15 to 20 stocks in Invesco Europlus, and currently holds 16. “We run a highly concentrated, high-conviction portfolio, putting our weight behind ideas with a high degree of certainty,” he says.
As a selective bottom-up stock-picker, he seeks businesses with growth advantages that can compound over time and he aims to hold them for the long term. “We buy at a fair price, and while we don’t overpay, valuations are not necessarily the deciding factor. You can’t always buy a high-quality business at a discount.”
Unconventional industrials and sophisticated services
Since the sale of some of the consumer companies in Invesco Europlus, the consumer staples sector has dropped to 12% of fund assets from a previous level of 30%. Industrials are currently the largest sector at 34%, followed by health care at 13%.
Peden says the industrials in the fund aren’t traditional companies such as machinery makers, but instead a mix of companies such as transportation and payments companies. For example, a top holding is Howden Joinery Group PLC (HWDN), a leading supplier of kitchen components to the building trade in the U.K. housing market, with a strong share of the renovation business.
The company doesn’t sell directly to consumers, but instead focuses on serving contractors and trade professionals through a network of showrooms and depots. It supplies everything for a kitchen, including appliances, cabinets, tiles and countertops, Peden says.
In the health care sector, a top holding is Eurofins Scientific SE (ERF), a Luxembourg-based global operator of laboratories for testing pharmaceuticals, food, and agricultural products. The company also conducts prenatal tests for various genetic conditions. It is a consolidator in the industry and has been able to benefit from scale advantages and “hub and spoke” networks, that forward testing material to centralized labs, Peden says.
Another key holding is Scout24 AG (G24), a Germany-based company specializing in online listings for real estate and automobiles. Peden says the online portal is “feature rich” with a wide assortment of tools that allow agents to promote properties and customers to conduct targeted searches.
