Sola's opinion on the Swiss stock market (Episode 24)

May 2024 showed us that the Plutos-Switzerland Fund is now correctly positioned for our 'Play-Book': The Plutos Switzerland Fund ended the month under review of 5.4% higher and therefore even better than the SPI Small/Mid Cap Index, which gained a brilliant 5%. The large cap index SMI was up by 6.5%. A head -to- head race is developing between small/mid and large caps.

In the reporting month, investors seemed to focus solely on the interest rate issue in the USA again - although there was definitely positive macroeconomic data. The PMIs in Europe and Asia were more positive and inflation is declining. European equity funds have received inflows again after more than a year - these capital flows also made the EUR stronger. The IMF has raised its growth forecast for China and now expects GDP in the world's second-largest economy to reach 5% in 2024 and 4,6% in 2025. Both estimates are 0,5% higher than the previous forecast. In particular, China's return to higher growth plays an important part to our positive market assessment for Swiss cyclicals.

The Plutos Switzerland Fundhas a weighting of over 60% in cyclical Swiss stocks, which are also divided into the segments of value, growth or quality.

Many of these cyclicals were able to gain significantly in May: Sensirion. OC Oerlikon, ams OSRAM, Comet, SFS, u-blox, Bystronic and medmix won by double-digit percentages.

However, the highlight of the month came from the R&S Group: Once again the forecasts for 2024 and beyond have been significantly increased - the company is finally receiving more attention from investors.

While this stock has finally awoke, other of our investments seem to be somewhat in hibernation: Ascom, Belimo, Forbo, PIERER Mobility, Komax, Kuehne + Nagel were still not convincing enough.

Straumann lost disproportionately despite a strong Q1 report - the outlook was 'only' confirmed and growth came increasingly from Asia and not from America, which was criticized as 'low quality growth'.

Some of the previous top performers like Accelleron, Holcim, Rieter, Sandoz are consolidating strong profits, which seems healthy to us. However they all still have a lot of potential to offer.

After analysts nearly toppled Lonza with price target increase until recently, there was major profit-taking in May. We leveraged this correction to modestly enhance the weighting.

DocMorris was also under pressure - in our opinion, investors lack foresight here. Find out more in the Sola Capital blog.

In the month under review, no new positions in the Plutos Switzerland Fund were entered into or completely sold .

'Don't say everything you know, but always know what you say.'

 Matthias Claudius (1740 – 1815), German poet, editor, storyteller

SKAN – why less is more

I think I'm repeating myself here when I say that SKAN is a Swiss company that can hardly be surpassed in terms of quality - so I was of course very pleased to recently read the headline in 'Finanz & Wirtschaft': 'Invest in a world champion with SKAN' and see my opinion confirmed.

At this year's AGM, I had the privilege to meet two of the founders' family members. Having grown up with the company and now serving on the board of directors, it was impressive to sense the long-term nature of the plan and moderate satisfaction with what had been accomplished. The management team led by CEO Thomas Huber and CFO Burim Maraj has a high level of trust, which is understandable. Because having a clear plan for how SKAN will expand in the future is increasingly crucial.

Some investors struggling with valuation and waiting for a 'cheaper' entry point may have seen their assumptions confirmed by the sharp decline in new orders (-28%) and backlog (-13%) for 2023. Of course one always want to see more orders, more customers, more sales - but sometimes this happens at the expense of the customer experience, i.e. delivery times and your own company.

But SKAN does not make this mistake: the book/bill ratio in 2022 was simply too high at 1.5x and although no customers were lost, SKAN did not receive some projects due to the long delivery times. SKAN can allow itself to engage in 'cherry picking' to a certain extent; i.e. selecting fewer projects but strategically better ones. The book/bill ratio was only 2023 in 0.9x and offers good planning security for over a year. So less is more.

Sensirion – why more is more

At this AGM I also had the opportunity to talk to one of the founders - and here as well I was convinced by the arguments for further, more profitable growth. Just days before, Sensirion had introduced a new sensor platform for subcutaneous drug delivery, which will improve patient safety, make error detection more reliable and reduce device downtime- in my opinion, this new product has brought back the creativity in the last few weeks. Sensirion was the strongest winner in the Plutos Switzerland Funds in May.

Overall, the applications of Sensirion's sensors are becoming increasingly broader and are used in many areas such as: medical technology, industry and logistics, household appliances, consumer electronics and of course in vehicles. While Sensirion was quite overwhelmed with orders for ventilators and their flow measurement during the pandemic, these are now being supplied with a CO₂- Measurement upgrade – since the installed base is high, plenty new orders will be generated from it. In refrigerant sensors, which are legally mandatory because the new refrigerants are more flammable and even in EVs that are equipped with a heat pump (which was also new for me) Sensirion sensors are being used.

And then of course there is the big neighbor in Hinwil, BELIMO, which constantly has more demand for sensors, but has so far been a small customer of Sensirion - we hear here that the demand for the sensors from Stäfa has increased noticeably. Sensirion has the capacity to do this and so 'more' may soon become 'much more'

DocMorris – Once in a Lifetime opportunity

DocMorris was under pressure in May - it may have had something to do with the sell rating of a major Swiss bank, with the CFO change or with the constant, irritating criticism from the pharmacists' association ABDA and its mouthpiece 'Apotheke Adhoc' - all of that does not seem very relevant to me as, in my opinion, investors lack a bit of foresight. So let’s figure out the big picture.

If we compare different online segments, their size, number of providers and market penetration in Germany, it quickly becomes clear why DocMorris speaks of a 'once in a lifetime opportunity':

'Electronics' is a very competitive market with a market size of around EUR 65 billion, many providers and a 25% penetration.

'Fashion' is hardly a simpler online market: with a market size of EUR 60 billion, the penetration of 27% is even higher than for electronics. Here as well, many providers are fighting for German customers.

The market for e-prescriptions and over-the-counter medication is just as huge as the two previously mentioned segments: the addressable market in Germany is around EUR 65 billion. However, the other two parameters highlight the opportunity: penetration is currently at a mere 0.7%. And the number of providers seems even more revealing to me - two. In addition to DocMorris, there is space for the second online pharmacist, Redcare.

What was it like with Amazon over 25 years ago? Losses were made, but the market share was constantly increasing, the first mover advantage was used and the margin lever was applied - do you see what I'm getting at?

Roche – Newsflow is turning positive

Have you noticed it too? While Roche made headlines in 2023 and Q1 in 2024 because the stock continued to slide lower, the tide seems to have turned, at least as far as the news flow is concerned, in the last two months.

Here are some headlines since the beginning of April - you don't have to read everything, it's just to illustrate how often Roche was able to report positive news:

10.04.24: Roche receives CE marking in Europe for a breast cancer companion diagnostic +++ 11.04.24: Roche receives “Breakthrough Device” status from the FDA for its blood test for diagnosing Alzheimer’s disease – enabling accelerated testing and approval. +++ 15.04.24: Roche's Columvi study achieves its goals. the primary endpoint in a phase III study +++ 19.04.24: Roche receives approval for its lung cancer drug Alecensa in the USA +++ 24.04.24: Roche misses the estimates with its Q124 figures, but the outlook is confirmed -> a few days later the share falls to a new 52-week low of CHF 212.90 +++ 29.04.24: Roche is taking an important step closer to a possible approval of the subcutaneous variant of its MS drug Ocrevus +++ 15.05.24: Roche receives approval for self-diagnosis of the human papilloma virus (HPV) +++ 16.05.24: Roche achieves goals with GLP-1/GIP candidate CT-388 in phase I study. +++ 21.05.24: The breast cancer drug inavolisib receives “Breakthrough Therapy” designation from the FDA. +++ 22.05.24: Roche receives “Breakthrough Device Designation” status from the FDA for a blood test +++ 29.05.24: Roche is granted priority review by the FDA for inavolisib (breast cancer).

Since reaching an all-time high of nearly CHF 400 in early April 2022, the share, which is considered defensive and of excellent quality, has lost 43% of its value. Of course, there was a lot of attention around Covid19 at the time, which resulted in large sales and profit decreases. However, for me, the stock has now reached an incomprehensible valuation:

With a P/E of 12x, Roche can rarely be acquired cheaply at the moment; the competition is trading at over 20x. Roche continues to achieve high ROE/ROCE results of over 36% and has low debt - with equity of over CHF 33 billion, it significantly exceeds its debt of CHF 29.3 billion. The dividend is over 4%.

Although Roche is currently under pressure as investors struggle to find key pipeline drivers to negate the known medium-term generic risks for Actemra, Xolair, Perjeta and increasing competitive pressure on Hemlibra and Kadcyla, I am confident that Roche will achieve enormous success - or make a brilliant acquisition.

The Diagnostics investor event on May 22nd was a success and one for the pharmaceutical division will follow on September 20th, 2024. These are opportunities to present Roche's strategic direction more clearly to investors.

Best regards,

Stephan