Brian Chingono of Verdad presented his thesis on European equities and Zumtobel Group (Austria: ZAG) at European Investing Summit 2024.
Two Years On: Premium members, scroll down for an automated review of how this thesis played out from October 2024 to October 2026.
Thesis summary:
Brian sees a compelling opportunity in Europe’s small- and micro-caps, born of two dislocations: Europe is under-allocated in global indices and undervalued relative to its fundamentals. The US CAPE ratio of about 36 sits in the expensive third of its history since 1926, a level that has implied 10-year returns near 5%. The US earns 55% of developed-market net income but carries 65% of market cap, and 70% after float adjustments that most investors need not follow.
Brian notes that Europe trades at multiples similar to Japan’s, about 15x earnings versus 27x for the US, yet offers better quality. European value stocks, those below 1.0x book, earn a median 19% gross profit to assets, versus 14% in Japan and 13% in North America. Valuations have barely moved in four years even as fundamentals improved, and Europe’s value-to-growth price-to-book spread is the widest since records began in 1975, about two standard deviations from average.
The size and value premiums have inverted since 2007. From 1926 to 2007, US small caps beat large caps by 2.5% a year and micro-caps by 3.2%; since then micro-caps have trailed by about six points a year, and Europe’s value premium has turned to -1.4%. Large-cap indices lean on tech in the US (21 points over small caps) and healthcare in Europe (11 points), priced at 82% and 88% price-to-book premiums for 3.6 and 3.3 points of extra expected EBIT growth.
Small caps have historically traded about 18% below large caps, matching the gap in delisting rates over ten years (19% versus 1%, per Eugene Fama). Today the discount is 62% in the US and 41% in Europe, with European micro-caps a further 8% cheaper. Zumtobel exemplifies the opportunity: an Austrian professional lighting group with components and lighting segments, 86% of revenue from Europe, and a €239m market cap, tied to European non-residential construction, forecast to grow 1.6% in 2025 and 1.5% in 2026.
Zumtobel trades at 3.5x EV/EBITDA, 8.7x earnings and 0.5x book, with 40% gross profit to assets, 11% EBIT to book and a 16% free cash flow yield. Operating cash flow typically exceeds 2x capex, and net debt has fallen 53% since FY2019/20 to 1.0x EBITDA. Brian expects margins to expand from near-trough levels. It is a 2% position in Verdad’s equal-weighted, 50-stock Europe fund. Risks include thin trading (€86k daily volume) and the timing of mean reversion, which CAPE cannot predict.
Disclaimer
European Investing Summit 2024 was held from October 29 to 31, 2024. The content of this website is not an offer to sell or the solicitation of an offer to buy any security. The content is distributed for informational purposes only and should not be construed as investment advice or a recommendation to sell or buy any security or other investment, or undertake any investment strategy. There are no warranties, expressed or implied, as to the accuracy, completeness, or results obtained from any information set forth on this website. BeyondProxy’s officers, directors, employees, and/or contributing authors may have positions in and may, from time to time, make purchases or sales of the securities or other investments discussed or evaluated herein.
