Sola's opinion on the Swiss stock market (Episode 30)

The Plutos Switzerland Fund In an environment marked by fund redemptions, ETF sales and a buyer strike, the company must make a decline of 6.6% The Swiss stock market continues to see sell-off prices for small and mid caps, with the index falling by around 0.6%.

Fund managers, investors and asset managers do not seem to want to show the losers of the year in their portfolios, which has led to significantly lower prices, especially for the stocks that have performed weakly this year. The sell-off does not stop at high-quality stocks and cash appears to be the preferred positioning.

The US presidential election, in which Donald Trump and the Republicans celebrated a trifecta victory, led to a price explosion on the US markets. In Europe, too, things started to head north, but profit-taking soon set in. This is entirely understandable, as Trump will hold Europe more accountable and also rekindle the trade conflict with China, from which Europe will suffer more than the US. It also turns out that the European markets in particular are suffering more from the increased market interest rates. If the Fed does not make further cuts, the ECB will not do so either - even though the European economy urgently needs this support.

However, with the increasing pressure on many quality stocks in the SPI Small/Mid, the chance of a strong start to the year is increasing. We are not expecting a year-end rally, but the time for a trend reversal in small to medium-sized stocks is undoubtedly approaching. The US small cap index Russell 2000 has performed better than its counterparts with large market capitalization since the beginning of November and has risen by around 10% since then, and by as much as 20% since the beginning of the year. A similar picture could emerge in Europe next year, with a slight delay.

Accelleron, the largest position in the Plutos Switzerland Fund was once again convincing and will be one of our favorites again next year, as decarbonization and intelligent takeovers support the business sustainably. Cembra Money Bank benefits from its clear dividend policy and will continue to operate in an environment of falling interest rates. The positive monthly performance of Komax: the investor day brought more clarity here, even if the sales target was pushed back. Read more in our Sola Capital blog.

The high quality values SFS, Belimo and Bucher were also doing well in the market and are now the second largest fund position Straumann found buyers again.

Still moving Aryzta significantly below our fair value assumption and is trapped in performance no man's land - we assume that investors will position themselves more strongly again at the beginning of the year. The semi-values VAT and Comet did not get going, Temenos was not convincing enough on its Capital Markets Day – 'Show me first' seems to be the motto of investors at the moment. For once, the R&S Group a monthly decline - after a very strong year, profit-taking is understandable and gives us an opportunity to increase as the Kyte Tech acquisition will begin to take effect next year.

Some stocks that were real stock market darlings in the past and will be again in the medium term came under greater pressure with low volumes: LEM Holding, Forbo or Kuehne + Nagel are quality stocks that will undoubtedly appear on everyone's radar at current price levels. If the cycle turns, these stocks can move very quickly.

There was nothing positive about Pierer Mobility to read: after the failure of the interim financing, KTM filed for insolvency. Stefan Pierer will fight for his life's work and we are convinced that he will succeed. After an initial drop in share price, follow-up purchases were made.

Even worse, but without any company news, was ams OSRAM in the reporting month – the share definitely suffered from the above-mentioned influence that a big loser does not look good in the portfolio at the end of the year. This is a very short-term view, as the share is trading at a level that promises a lot of upside for 2025, because a solution for the fab in Kulim will certainly be communicated sooner rather than later. At the beginning of the year, investors will be looking at ams OSRAM reposition.

The Plutos Switzerland Fund sold four positions in November: Bystronic – the restructuring takes longer than previously expected and business in China has become noticeably weaker; Lonza we took profits in time before the 'Kennedy bear market'; Sandoz could soon be affected by this malus and we have realized a nice profit; Holcim has become a consensus buy and has seen many rating increases. All of these stocks will of course remain on our watchlist and we will re-evaluate a re-entry in the medium term.

The last week of the month showed us how strongly the Plutos-Switzerland Fund performs when sentiment in our stocks improves: the fund gained around 1.6%, while the SPI Small/Mid fell 0.8% - a small consolation for 2024, but a big promise for 2025.

People who exit the stock market to avoid a decline are odds-on favorites to miss the next rally.

Peter Lynch, philanthropist and former fund manager (1944)

Komax – don’t believe everything you read…

That's what I call perfect timing: shortly before my visit to Komax, the company was portrayed in a somewhat distorted light in an article in the Swiss financial press with regard to electromobility, growth opportunities in China and new, competing technologies.

Of course, I also addressed these topics in my conversation with IR Roger Müller – and the answers were clear and not entirely surprising to me.

The statement that Komax explicitly sees itself as a beneficiary of electromobility, which requires 20-30% more cables, is 'completely wrong'.

Understandable, because the only difference between an EV and a combustion engine is the engine - the wiring harnesses are no different. There are also some cables in the engines, but none of them are complicated - not necessarily Komax-Turf.

In an average EV, there are 15-18 high-voltage cables that have to do with the flow of electricity, so manufacturing is more complex, requiring more specialized machinery – this is the only way electromobility is a driver for Komax.

EVs have so far been vehicles in the premium segment, which is why they often have more complex functionalities. Now the electric car is also increasingly moving into the value segment - but just because EV growth has slowed, this does not have a decisive negative impact on Komax.

China is and remains an important pillar in Komax's strategy, as the company wants to manufacture more products in the country. The takeover of Hosver, the global and therefore also Chinese No. 1 for high-voltage cables (the importance of which I mentioned above), has significantly increased the Chinese market share in one fell swoop. Hosver is not only a technological expansion - the company is currently working on a cable processing machine for data cables, which are particularly important for autonomous driving - but is also expedient in terms of the China business as a whole and alternative production processes.

The Tesla Cybertruck - an impressive vehicle without question, but certainly not a mass product - is said to use a technology that can reduce the amount of cabling by up to 40%. German car manufacturers are also increasingly relying on modularized, less cable-intensive architectures.

Innovations in wireless data transmission could also reduce demand for traditional cable systems, the article says.

The zonal architecture project, in which functionality is shifted from domain controllers to zonal control units and central processors, works with smaller cable harnesses - Komax was involved in its development at a very early stage and is driving it forward. This is because zonal architecture does not require fewer cables, but shorter ones. Tesla is effectively working on shortening the cables - but Komax benefits from the number of cables, not their length. More cables - more cable processing. Complexity decreases, automation increases - that is what Komax wants.

The car production figures of 80-90 million are only a limited indication for Komax, because 15-18% of sales are replacements for older machines. In addition, production figures are stable. I would be surprised if the order intake in H224 was not higher, because the order intake since July shows exactly that.

The service share of sales is rising steadily and is expected to reach 25% - the service theme has been strengthened over the last two years. The range of services has increased significantly, and salespeople are increasingly offering services. The service area will therefore also see an improvement in 2024 compared to 2023. The non-automotive share (control cabinets, trains, aircraft, etc.) should rise from 2024% to 25% of sales in 30. The equity ratio is still above 50%, and net debt of CHF 100 million should decrease rapidly.

Komax, indeed the entire industry, is in a cyclical low, as has often been seen before. Komax is not losing any customers, automation is continuing. So it is not a low specific to Komax, but rather a low of the cycle.

And the negative effect of an extremely weak December 2023 will not be repeated in 2024 due to the basis. The FX effects and Schleuniger's inventory correction will not be repeated either. Visibility has not worsened, but capacity utilization is currently still too low at 60%. In my view, despite the crisis, Komax is in a better strategic position than it was a year ago. The positive operating level has increased, which should be quickly noticed in a cyclical upturn.

My personal opinion: It is very obvious that the current price does not reflect the value of Komax. Even if the share price had perhaps 10-20% downside, how much greater is the upside? And of course I don't blame any journalist for an incorrect article, but you should check it briefly with the company beforehand to see if there are any misunderstandings

Year in Review 2024

I don’t want to sugarcoat it: 2024 was for the Plutos Switzerland Fund not a good year. December would have to come up with a huge year-end rally to do any better here.

My assumptions regarding the economic cycle were simply wrong, as I had expected interest rate cuts by the Fed and the ECB much earlier, which would inevitably have led to a better environment and a small/mid cap rebound. The rebound of the global and especially the European PMIs, which I have often called for, has not yet taken place. Despite the extremely forward-looking SNB interest rate cuts, the Swiss franc has not weakened against the euro as I had hoped. The German economy is too battered, trust in German politics is too low - and Germany is still Europe's biggest engine, but it is sputtering at the moment. Added to this are the ongoing crises in Ukraine and the Middle East.

Am I just looking for explanations for the weak performance? No, I would rather show what could be better next year and what lessons we have learned from this year:

The Plutos Switzerland Fund is positioned for an upturn, including some companies that faced significant problems in 2024: GAM, ams OSRAM, Pierer Mobility, medmix, DocMorris are required to a varying degree in order to find their way back to success. If this happens, and I assume it will, otherwise the shares would not be included in the fund, they are shares with enormous potential.

Our lesson number 1: When there are few signs of a cyclical upturn, one must reduce opportunistic exposures to a minimum and also hold a few defensive stocks.

Anyone who has followed my blog over the year (thank you very much for that!) knows that we had to deal with some bad news at the beginning of the year: ams OSRAM Apple announced that it was canceling the microLED project. This was perhaps the last bubble of the old management that had burst, but the costs for the fab in Kulim remained and made restructuring the already struggling company much more difficult. At this point, ams OSRAM was the largest fund position, as I had also stated in the media that ams OSRAM would become a stock market high-flyer in 2024. Of course, it would have been

Our lesson number 2: An opportunistic value must not represent the largest fund position.

And yet we have not sold the position because my trust in the ams OSRAM team under CEO Aldo Kamper and CFO Rainer Irle is so high that I remain convinced of future success. Everything negative has now been factored into the share price, short positions are high, investor confidence is low - for me, a perfect mix for a strong price increase - perhaps as early as 2025.

The price development of a 2024 winner was also sobering: DocMorris. After the share was still trading at just under CHF 100 in mid-February, meaning we had almost quadrupled our entry price, the value is now back at around CHF 30. After the introduction of the e-prescription on January 1.1.24, 65, there was a lot of euphoria, which we should have used to sell. Well, and I repeat myself, the e-prescription market in Germany is around EUR XNUMX billion, just as big as the electronics or apparel sectors - in contrast to the thousands of companies fighting over these two sectors, there are exactly two in the e-prescription sector: DocMorris and Redcare Pharma. So I am convinced of future success here too - but I would never dare to promise that things will only go up from now on. DocMorris will remain a volatile stock, but is simply significantly undervalued at the current valuation.

Our lesson number 3: You can at least take home a nice win in part.

It was also not a good year for some verified equity stories – probably in terms of business, but not in terms of the stock price. Aryzta, which under CEO Urs Jordi was able to achieve five of the six targets set for 2024 in 2025. Was this reflected in the stock price? Not at all. There is still enormous potential in this value. It is rightly a top 3 position in the Plutos Switzerland Fund. I could also mention Straumann – the share price has lost 12% compared to the beginning of the year. This despite the fact that the high analyst expectations were always met – but the penalty that the growth was recorded in China and not in the USA served to portray the growth as 'low-quality'. If there is a company that consistently generates value as a market leader and can thus be considered a compounder, it is Straumann – also a top 3 position.

Other companies simply lost order intake, which led to underutilization that cannot be completely rationalized away – Komax, Forbo, LEM, medmix and Zehnder are just some of the examples. The attack by Hindenburg Research on Temenos will go down in history. Who is behind it? The fact is that the value has barely recovered from this blow.

Our lesson number 4: We paid too little attention to momentum when purchasing the cheaply valued quality stocks (LEM Holding, Forbo, Komax, Bucher) – even with a fundamental approach, we will take this into account in our decision in the future.

The weak performance of our fund naturally also had a negative impact on the assets under management – ​​in the middle of the year, as a young fund, we were still able to manage around CHF 18 million – by the end of the year it will probably be CHF 6 million.

I can certainly understand and appreciate the disappointment with the performance. However, our investment philosophy and strategy requires the right time horizon and the right risk assessment. If short-term investors withdraw, we have to accept that they were not the right investors in our fund.

Our lesson number 5: We obviously did not explain our absolute approach and in particular the necessary time horizon well enough to some investors.

Discussions are underway with new, larger investors who understand our approach and will give the development time – the Plutos Switzerland Fund will recover, both in terms of assets and performance.

But enough with the negative comments, because we have also managed to make many good investments. Above all, our commitment to R&S Group since December 2023 - the Sissach transformer manufacturer has turned out to be a real gem, delivering around 100% share performance. After the intelligent takeover of the Irish Kyte Tech, I am more than excited to see what impact it will have on the results in 2025. It would be presumptuous to expect 100% again - but who knows?

Also Accelleron, which has been part of the fund since its launch in October 2022, is a company with spectacular prospects - decarbonization on the world's oceans is nowhere near yet, but the Baden-based turbochargers are enormously important for achieving the CO2 targets that the industry has set itself. Here, too, we have seen two intelligent, value-enhancing and strategically clever acquisitions, the impact of which is yet to be felt.

Sandoz, now no longer part of the fund, was a lucrative investment. Belimo has proven its quality. SFS also brings a lot of imagination to our portfolio.

The timing of some of our divestments, particularly Roche GS, Holcim, Lonza, OC Oerlikon, Rieter or the TX Group was, to put it modestly, almost perfect – only some of the positions were a little too small to make a difference.

The stock market year 2024 would have a lot more material for experiences, but I don’t want to exaggerate – on the whole, I can only agree with Warren Buffet when he says: «I make no attempt to forecast the market- my efforts are devoted to finding undervalued securities.»

I wish you and your families a peaceful, happy Christmas and a good start to a successful 2025!

Stephan