Sola's opinion on the Swiss stock market (Episode 27)

The Pluto-Switzerland Fund can only partially make up for the severe market correction on the first trading day of the reporting month and is listed at the end of August 2024 3% lighter, SPI Small/Mid Cap Index up 0.4% .

While weak US economic data has boosted the markets and interest rate cut hopes so far this year, the tide turned in the short term when fears of recession arose following weak economic data and shook the global markets. Fed Chair Powell has been criticized for waiting too long to ease interest rates and for not pursuing a credible interest rate policy. The consensus now sees a Fed interest rate cut of 0.25% in September - a cut of 0.5% could be interpreted as an admission of a hard landing. Powell's choice of words will probably be even more relevant than before.

The European purchasing managers' indices (PMI) do not see any light at the end of the tunnel, particularly in Germany: in August this value surprisingly fell for the second month in a row, to the lowest level in five months. Inflation in Europe is settling at 2.6% and so, in our opinion, nothing stands in the way of a further interest rate cut by the ECB, which is even necessary in order to give the European economy a certain tailwind.

The latest indications on the US economy continue to make a US soft landing seem realistic. If this picture is confirmed, especially in conjunction with slowing inflation, the Fed can initiate a 'proper' rate-cutting cycle without the economy falling into recession, and history shows that this is an extremely positive environment for the stock market. Until then, we are preparing for increased volatility.

The R&S Group was the performance star of the month: With the announcement of the strategically intelligent and attractively priced acquisition of Kyte Powertech, some investors seem to have finally discovered the value for themselves. There was also good news regarding the share surplus: Veraison is withdrawing as a shareholder and has sold all of its shares to long-term investors in Switzerland and abroad. This increases the free float by 1.76 million shares or 6,1% of the share capital. 

Straumann presented strong figures for H124 and is getting rid of a loss-maker with the sale of DrSmile. Straumann surprisingly increases its 2024 guidance. Straumann is and remains a classic compounder: high organic growth with increasing margins.

Belimo continues to benefit from the convincing H124 results and delivers an impressive performance: for a long time weaker than the index, Belimo now clearly outperforms it.

Accelleron was also a highlight for us: not that we were surprised by the strong result again - but more details on the intelligent acquisitions in H124, the margin that was significantly above expectations and the solid outlook will give the value a boost again. All the more so as Accelleron is also characterized by a certain defensive quality - due to the high service share - and represents a good investment for ESG-savvy investors.

Aryzta showed a flawless set of H124 figures: the large bakery impressed with a clear EBITDA margin improvement and faster than expected debt reduction, which is reflected in lower interest costs. 'Weeding out' of low-margin business led to lower organic growth, but will of course be beneficial to the margin in the future.

The 'flash crash' of the Nasdaq 100 at the beginning of the month particularly slowed down Swiss technology stocks VAT, Comet, u-blox and LEM. Also ams OSRAM continued to suffer enormously - even though Apple seems to be ordering over 10% more iPhones than last year and Nvidia increased automotive sales by 37%. We remain 100% confident in the success of this company.

GAM is expanding its US business with a second office, as demand from US offshore customers, mainly from Latin America, is high - the headquarters will be in Miami. The price increase must be seen as coincidental, as volumes are still very low - new investors would of course be very good for the intact turnaround story - many will probably only expose themselves with the capital increase.

DocMorris slowed down the performance noticeably, because the share is suffering from the guidance reduction for FY24 – here too we see the medium-term opportunity intact, because breaking the stick over DocMorris because of one semester seems unintelligent to us.

In the reporting month of August, we completely sold four positions in the Plutos Switzerland portfolio:

Ascom has disappointed us with the H124 results one too many times and remains an eternal talent without being able to deliver the corresponding results. Sensirion also takes significantly longer than we expected. Although we are convinced of the success of OC Oerlikon are still convinced and the performance is consistent, the position was clearly too small. The investment in Roche GS was also worthwhile, but unfortunately it puts a strain on our large cap quota.

"Close your mind to the opinions of others, do not let yourself be influenced. Do not worry about rumors and empty chatter. Rely on your own judgment, stand or fall by your decisions."

Humphrey B. Neill, American author and economist, “The Art of Contrary Thinking” (1895-1977)

SKAN delivers consistently – more to come

Things are going well for the Allschwil-based market leader for insulators: the H124 order intake has stabilized at a good level, sales growth is over 17% in line with the company's own expectations - in local currencies, growth is even above the guidance at almost 21%. EBITDA grew by 15,7% with a margin of 13,1% - although this is at the lower end of the guidance of 13-15%, it is highly dependent on the status of the projects. The order backlog of over CHF 300 million is still stable and healthy.

The book/bill ratio, i.e. the ratio of orders on hand to orders received, has settled at 1,1x (see also my article 'SKAN – why less is more' from blog episode 24), which allows high visibility for the rest of the year, as SKAN continues to expect significant order intake in H224.

In the Services and Consumables segment, the growth curve only started about five years ago. So most isolators are still quite new and probably only about 20% of the installed base is older than 10 years. Since SKAN has seen exponential growth in the past, I expect this number to grow exponentially as well. The big momentum is yet to come because retrofitting is not just about retrofitting machines because they are old. There is also a strong trend of machines being retrofitted from an ESG perspective.

Overall, the importance of services is increasing, because if the customer cannot fill a product within 72 hours, it can be disposed of - and it becomes very expensive.

SKAN has a very high services ranking and offers FDA compliant documentation – something that many competitors cannot demonstrate.

SKAN has an enormously strong project pipeline in the 'Equipment and Solutions' segment - not to be confused with order intake - of around CHF 1.5 billion. Old cleanroom facilities are being upgraded with isolators. The GLP1 or obesity trend, which of course requires more aseptic filling worldwide, is also positive for SKAN, as this raises the bar and generally increases demand. The fact that Catalent was acquired by Novo Nordisk alone has led to an increase in the order pipeline of around 30% to CHF 1.5 billion. At the beginning of the year, this pipeline was around CHF 1.2 billion, so it is even higher today. Of course, 100% of this will never be converted into orders. However, it can be assumed that 12-18% will become orders in the next 25 to 30 months. A certain proportion of the products are not approved, some projects are won by the competition. SKAN can therefore look to the future of its existing business with confidence.

The roadmap to a high-margin new business, Pre-Approved Services, has also been determined: the concept was introduced in early 2023 and construction of a plant started. This will be validated in the coming weeks, which should take about 12 months. In H225, an application will be made to Swiss Medic for regulatory approval in order to start commercial production in early 2026. The entire plant should generate a volume of around CHF 50 million with an EBITDA margin of up to 50%. It seems logical that the CHF 50 million will not be generated on the first day.

My personal opinion: CEO Thomas Huber and CFO Burim Maraj speak of the 'century of biology' - SKAN is the undisputed market leader in a very relevant niche of drug production and will undoubtedly benefit from this. SKAN will always remain 'highly' valued, but is growing more and more into the value - SKAN delivers consistently.

Aryzta – Index recordings as the next trigger?

As already mentioned in the monthly report, Aryzta’s H124 report was flawless for us:

Despite flat volume growth, a clear EBITDA margin improvement and solid cash generation were achieved, enabling debt reduction. Five of the six medium-term targets for 2025 have already been achieved ahead of schedule, with the last hurdle (EBITDA margin of >14.5%) expected to be reached in 2025. The outlook for FY24 (low to mid single-digit organic growth and improved financial performance across all metrics) was confirmed.

However, the share did not show a satisfactory reaction and even closed lower on the reporting day. 'Sell on good news', you might say. Only a broker's rating increase a few days later led to a modest price increase. All three analysts now recommend buying the stock, with price targets of CHF 2.08-2.30 - an upside of 20-35%.

While Aryzta was barely found in portfolios until two years ago, the successful turnaround has now become a darling and is represented in every Swiss fund – which is why new buyers are currently lacking.

My personal opinion: Aryzta is not (yet) represented in the Swiss indices, apart from the SPI Extra - but it is represented in some less relevant ones: the ISEQ All Share Index or the STXE Mid 200 Index are foreign to me. Therefore, the inclusion of Aryzta in other Swiss indices would be an important trigger for me.

The September Phobia

The "flash crash" at the beginning of August really hit many investors. This is understandable, because the Nikkei's loss of over 12% on August 5, 2024 was the biggest drop in prices since the stock market crash in October 1987. And the infamous month of September is still ahead of us...

From a tactical point of view, I hear that late summer is not a good time to enter with a lot of risk. No other month on Wall Street has had such a negative record over the past ten years, and this also applies to election years, I read.

Since 2000, the probability of success for September has been less than 50%. Anyone who bought in mid-September was on average 12% down by the end of the month, a clever guy told me.

We have developed a real September phobia through the media.

Nevertheless, one month after the shock wave, the stock markets in many places are higher than before and everything seems to be back to normal. How come?

The "Frankfurter Allgemeine» explains this on August 30th in an article which, being lazy as I am, I am happy to share here in a slightly shortened version, because it largely corresponds to my opinion:

"The most important reason is likely to be inflation. In June, the ECB cut its key interest rates for the first time in almost five years. At the time, however, it was unclear whether further interest rate cuts could follow. In June, ECB economists themselves had raised their expectations for the inflation rate for 2024 from 2,3 to 2,5% and for 2025 from 2,0 to 2,2%. This made the target of 2% inflation in the euro area seem difficult to achieve with further lower interest rates. Things are looking better now: In Germany, the annual inflation rate fell from 2,3 to 1,9% in August, the lowest it was last in 2021.

A figure of 2,2% was reported for the eurozone on Friday. This means that further interest rate cuts by the ECB seem possible. Stocks in particular, which compete with bonds for investors with high dividends, then appear more attractive.

Even more important for the stock markets than the ECB's interest rate policy is that of the American Federal Reserve Bank. At the beginning of the year, up to seven key interest rate cuts were expected, but none have taken place so far. Inflation in the USA has proved more stubborn than expected. But there was never any doubt that the Fed's next interest rate move would be lower. This is likely to happen in September, now that the risks of layoffs in the labor market due to the slowing economy in the USA are considered to be as high as the inflation risks.

Investors' expectations of (declining) interest rates, which have been fairly stable over the year, explain to some extent the unusually low price fluctuations on the stock market and the record prices now in August."

My personal opinion: A possible late summer correction on the stock market can also be seen as a long-term opportunity. November and December are, on average, good stock market months 😉

For fans of statistics, here's a bon mot: If two people are in a room and one eats a whole chicken, then statistically both have eaten half, but only one is full 🙂

Best regards,

Stephan