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JPM's €2bn duo: six small cap picks to play the European recovery

JPM's €2bn duo: six small cap picks to play the European recovery

With Europe seemingly on the road to recovery, small cap companies are positioned for long-term outperformance, according to JPM duo Francesco Conte (pictured) and Jim Campbell.

However, picking the right names is easier said then done.

Here the European small cap veterans, who run the JPM Europe Dynamic Small Cap  and JPM Europe Small Cap fund, and €2 billion of assets in all, pick their six small cap winners to play the European recovery.

1. Yoox Group

The Italian group is a partner to luxury apparel brands and has a unique business model in that it sells the unsold stock of luxury brands through its online stores.

In parallel it also manages the online business of 30 leading luxury brands and a further seven brands through a joint venture with Kering.

Campbell said: 'We bought the stock in January 13 as it is growing at 20-30% a year, and the sector is still under-penetrated and it has no credible competition.'

'It has performed very well [but] we are still holders given that the current business is still growing strongly, margins are improving and there are potential new areas of growth.'

2. Geox

Geox is a leading player in the footwear market. It has a strong brand and attractive patents but had been underperforming for a number of years due to a poor business strategy.

Campbell says a new CEO was appointed in September 2012 and after reviewing the company’s strategy a new long term plan was announced in November:

Campbell adds: 'We bought the stock soon after this announcement and it has outperformed strongly since. We believe there is plenty of upside left given management are still in the very early stages of executing their new strategy.'

3. Trigano

Trigano is Europe’s leading manufacturer of motor caravans which had been under-performing as European domestic demand collapsed during the financial crisis.

The duo purchased the stock in September 2013 as a play on a European consumption recovery after the company had reported encouraging demand at trade shows.

Since then the stock has outperformed as the demand outlook has continued to improve and the company has won market share.

Campbell said: 'We still hold the stock as decent Q4 2013 results indicate that demand should strengthen further and the company has self help potential. '

'It intends to reduce production capacity in loss-making business units, optimise working capital (inventory management) and grow international sales in Spain, Scandinavia and Germany.'

4. Wirecard

Wirecard is one of the leading players in the online payments market. The pair bought the stock in November 2011 for the following reasons:

  • Exposure to a structurally growing and still under-penetrated market (2006-2012 sales CAGR of 30%)
  • Its banking license gives it a unique positioning: unlike competitors it can directly settle credit card transactions with card organisations without the need for another intermediary. The resulting savings can be passed on to customers, strengthening customer retention.
  • New partnerships in China set to provide significant leverage for market share gains in the Asian region

5. Gamesa

Gamesa is one of the global market leaders in the wind turbine manufacturing sector with particular strengths in India and Latin America.

Campbell said it had been an extremely unloved stock for a number years as it operated in a tough market environment characterised by industry overcapacity and falling prices. Additionally, the company was very highly leveraged so there were concerns that a capital increase would be needed.

In response to this a new executive chairman and CEO were appointed in May 2012, both with experience of restructuring businesses in the competitive automotive sector. A detailed restructuring plan was announced in October 2012, ahead of its major competitors.

Campbell said: 'We first purchased the stock in April 2013 for a number of reasons: The restructuring had started well leading to earnings upgrades by analysts. Restructuring processes were also started by Gamesa’s peers.'

'Industry demand was expected to bottom out through 2013 and then grow slightly from 2014. This was supported by the expected extension of the US tax credits (given President Obama’s support) and tariff increases in India.'

6. Kingspan

Kingspan is a global leader in performance insulation materials for the construction sector.

The pair first bought it in March 2013 as a high quality play on a recovery in UK and European construction. Downside protection came from the strong performance of the company in the US and Germany.

Additionally, Campbell said that long term growth potential came from increasing exposure to the US and Australia and tighter energy regulation in Europe driving demand for Kingspan’s insulation products.

Campbell said: 'Since we purchased the stock the UK construction market has shown signs of recovery and the US has continued to perform well which drove earnings upgrades through 2013 and resulted in the stock outperforming.'

Conte and Campbell have returned 36.8% versus the average manager return of 29% over the three years to the end of December 2013 in euro terms.

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