Analysis | A 35000% Stock Market Return in Europe? Here's How – The Washington Post

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Henrik Larsson Lyon told me he doesn’t “pay a lot of attention” to Hexatronic Group AB’s share price.
If I was chief executive officer of the Swedish fiber-optic cabling group I’d think of little else. Acquisitions and booming sales in the US, UK and Germany have boosted its value more than tenfold (900%) in the past two years and generated a 35,000% return since 2012 in US dollar terms (an astonishing 55,000% in local currency). 
Hexatronic is one of 55 European companies worth more than $1 billion whose value multiplied by 10 in the past decade with dividends reinvested, Bloomberg data show. With returns like these, who needs crypto?
Many of these so-called ten-baggers – the “holy grail” of stock investing — are unfamiliar names, which is a pity because there’s a lot investors might learn from them.
Europe’s haul isn’t far behind the US, where 71 companies have achieved the same feat in the past 10 years, belying the notion the corporate landscape here is sclerotic. It shows investors can still make astonishing returns in Europe provided they know where to look.
Hopefully, this guide will help you identify the next ten-bagger early and change your mind about Europe’s “dull” business landscape and capital markets.    
Think Small , With One Exception
Investors have to search harder for outperformance in Europe because the continent has a dearth of tech giants; Tesla Inc., Netflix Inc. and Microsoft Corp. increased ten-fold in the past 10 years. 
ASML Holding NV, a supplier of lithography technology to the semiconductor industry is the only recent European ten-bagger worth than $100 billion. 
ASML is the sole firm capable of producing extreme ultraviolet machines that cost around 160 million euros ($171 million). (See this fascinating Odd Lots episode for more). Even now it’s hardly a household name.
Essential Ingredients 
Companies that increase tenfold in value in a short period tend to have rapidly expanding revenue and profit margins, and are rewarded with a higher price-earnings multiple, according to a recent Bernstein Research analysis (which used a slightly different methodology to mine).
Our European ten-baggers are valued at more than 40 times this year’s estimated profits on average (more than three times the valuation of the Stoxx Europe 600 index). On average, their operating margins have increased from 9.5% to 23% since 2012 and they achieved average annual sales growth of 24% in the past five years. Overseas expansion is often needed to grow this fast: UK equipment-hire firm Ashtead Group Plc generates almost 90% of its sales in North America.
Of course, a stock has a better chance of rising tenfold if it’s undervalued to begin with. Investors needed to ignore heaps of bad news to buy wind turbine maker Vestas Wind Systems A/S in 2012; those who did have been rewarded with a 2720% return (notwithstanding this year’s disappointing performance).
Do Hard Stuff
Besides ASML, the Netherlands boasts two other ten-bagger semiconductor-equipment companies: chip-packaging specialist BE Semiconductor Industries NV and ASM International NV, which controls more than half the global market for atomic layer deposition equipment (whereby ultra-thin films are added to a silicon wafer). Because few companies can produce such complex machinery, they can charge high prices without fear of losing business to competitors.
Similarly, Mycronic AB has a global monopoly in advanced laser-based mask writers for manufacturing television and smartphone displays (it also serves the semiconductor industry). The Swedish firm’s machines create ultraprecise patterns akin to a photo negative; a top of the range model costs up to $45 million each.
Contract pharmaceutical manufacturing has also been a rich source of investor returns: Lonza Group, Bachem Holding AG and Dottikon ES Holding are all ten-baggers. These Swiss firms’ high profit margins reflect the boom in biotech/pharma company drug development and the trend towards outsourcing. Lonza is helping make Moderna Inc.’s Covid-19 vaccines, and Bachem is a market leader in therapeutic peptides, while Dottikon specializes in “ hazardous reactions.”
Find Attractive Niches
Life-sciences equipment is another area where European companies excel. Sartorius Stedim Biotech SA, the Paris-listed subsidiary of Germany’s Sartorius AG, makes bioreactors and filtration kit for the biopharmaceuticals industry. The sector is highly regulated and following several takeovers there are few alternative suppliers. Replacing reusable stainless-steel components with its cheaper single-use technology has boosted recurring revenue, which investors value more highly.
Chemometec A/S, whose shares have climbed 20,640% in the past decade, controls more than one-fifth of the global market for cell-counting machines, which are used in cancer and stem-cell research as well as the production of animal-semen doses for insemination. The Danish group’s operating margins reached 47% in the fiscal year to June.
French group SES-imagotag SA has a 50% share of the global market for electronic shelf labels — used by retailers including Walmart Inc. to display prices digitally and warn store managers of empty shelves. The stock has gained 67% just this year when most tech stocks sank.Niches needn’t be high-tech: Games Workshop Group Plc sells miniature orks, space warriors and goblins for table-top game play. Expansion in North America and licensing its intellectual property for computer games have helped the British company increase operating profit margins from around 15% a decade ago to almost 40% last year. The shares surged 16% on Friday after the announcement of a potential television and film partnership with Amazon.com Inc.
Clean  Energy 
Europe has led the way on efforts to curb climate change, so it’s no surprise there are several clean energy ten-baggers: In the wind industry, there’s turbine makers Vestas and Siemens Gamesa Renewable Energy SA, plus German wind park developers PNE AG and Energiekontor AG; sustainable-fuel companies Neste Oyj and Verbio Vereinigte BioEnergie AG; solar-power generator Solaria Energia y Medio Ambiente SA and British sustainable investing specialist Impax Asset Management Group Plc.
Here too niches can be highly lucrative: Sweden’s Nibe Industrier A/B has been making heat pumps for four decades, a once-obscure technology that is set to play a key role in decarbonizing home heating.
The sector’s outperformance also reflects the huge inflows into clean tech in recent years, which pushed up the valuations because there were comparatively few stocks available to buy. Nibe is valued at around 50 times estimated earnings.   
Financial Engineering 
Like Hexatronic, several European ten-baggers are serial acquirers. Nibe, Vitec Software Group AB, Lagecrantz Group AB and Beijer Ref AB have each competed scores of acquisitions in the past decade. Beijer Ref, a Stockholm-listed refrigeration wholesaler, last week announced the $1.275 billion takeover of Heritage Distribution Holdings to enter North America.  
While consolidating a fragmented market boosts earnings growth, “roll-up” strategies sometimes rely on stock market voodoo: Investors apply a higher earnings multiple to the acquirer than the smaller businesses it acquires, providing a cheap source of funding for more deals. As the acquirer gets bigger, finding reasonably priced targets can became harder and cost savings sometimes don’t materialize.
A Final Word of Warning
High valuations can crumple if investors suspect growth might weaken. In-vitro fertilization device and reproductive-genetic services company Vitrolife AB has shed two-thirds of its value this year. Nemetschek SE, which sells specialist software used by architects and civil engineers, has declined 59% due to worries about construction-industry slowdown.
Even Hexatronic may be falling out of favor, with hedge fund Marshall Wace LLP shorting the shares this year. When sentiment changes, that which has gone up fast can come down even faster.
Elaine He contributed the ten-bagger stocks chart
More From Bloomberg Opinion:
• Big Tech Stands in the Way of the Next Bull Market: John Authers
• Tiny Space Warriors Trump Tesla in Stock Market Race: Chris Bryant
• Musk Drags Twitter Down a Dangerous Rabbit Hole: Parmy Olson
–With assistance from Elaine He.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Bryant is a Bloomberg Opinion columnist covering industrial companies in Europe. Previously, he was a reporter for the Financial Times.
More stories like this are available on bloomberg.com/opinion
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