Monthly Update - July
Rotation into the small cap segment
• Weak macro figures and increased hopes for interest rate cuts
• Interest in small companies continued to increase
• Invested more in undervalued gem
Global equities started strongly but lost momentum during the month, closing at -0.5%. The conflict between Israel and Palestine went wrong, weak economic figures from China and nervousness around the Q2 reports contributed to profit taking. In general, we saw pressure on last year's large-cap winners at the same time as buying interest in the small-cap segment increased. In the US, the Russell 2000 small-cap index rose by 11.1%, while the S&P 500 rose only 0.9%.
The rotation into small caps is the theme of the summer and is primarily driven by hopes for future interest rate cuts combined with relatively attractive valuations. In addition, we see increased M&A activity and that small companies are clear targets in these processes.
The Nordic stock markets went in different directions, but here too, small companies and companies with low valuation multiples ("value companies") had a better development. The Nordic small company index rose 3.8% during the month. The gap with the large companies is still large, with the small company index lagging behind by around 30% in the last two years. We are at the end of the second quarter reporting period and so far the positive deviations are slightly outweighed, but it took a really good report to impress the market.
One of our insights from several company and macro reports is that Germany looks weak. Germany, which has long been dependent on Russian gas, is also the EU's largest exporter to China, with exports twice as high as the EU average. A strong dependence on Russia and China contributes to pressure their industry. Given the relatively high valuation of several industrial companies in the Nordics and their exposure to Germany, this is a risk that we have tried to manage.
Profoto's quarterly report turned out much as we had expected. Turnover increased by 7% to SEK 196m, of which organic growth accounted for the entire rise. Several product launches drove the increase, while the general demand from photo studios and e-commerce customers remained on hold. Profitability weakened and the operating margin fell to 18.5% (25.8), which, however, is still a level that many similar companies can only dream of. Interesting in the report is the CEO's speech, where it is made clear that the company's strong investment in innovation and focus on more product launches is fixed. We expect that these product innovations will begin to be felt in the income statement during Q4 and above all during 2025.
Profoto is a typical Origo company with high gross margins, good cash flow and a leading niche position, while the company is undervalued. A real gem. The stock has been under pressure in 2023/2024 in the wake of high interest rates and tepid consumption, but we believe macro conditions are turning and growth will pick up. We have increased the holdings in our funds during the month.
The service company Coor delivered a worse report. Again, we may unfortunately add. The operating margin of 5.1% and an underlying growth of -1% do not impress. Individual quarters can always be affected by special events, but in Coor's case, the mediocre development has unfortunately been a trend in recent years. Our investment thesis in 2018 was based on a belief that the stable cash flow would generate acquisitions, which in turn would lead to above-GDP growth and rising profitability. We have been wrong in our analysis and have gradually divested our holding during 2023/2024.
Husqvarna (short position in Quest) presented a shaky report where weak weather conditions and generally weak consumption led to sales growth of -6%. The company writes that market conditions are still tough, which is certainly true, but in our analysis we also assume that Husqvarna has structural challenges. We assess that Husqvarna's position with dealers has weakened in the last 3-5 years and that the transition from a petrol-based product range to electric drive is one of the explanations. Too low a percentage of direct sales and rental are other challenges, and in addition, the company seems to have fallen behind when it comes to the new generation of chain-free robotic lawnmowers. We have had a short position on and off in Husqvarna in recent years and the report essentially confirms our thesis.
Our funds have developed strongly over the past 24 months. Origo Quest, our absolute oriented hedge fund has delivered 9.3% while the correlation (Beta 24m) amounts to a moderate 0.45. Quest has been well paid for the company analysis and generated positive returns in both the long and short books. In percentage terms, the short book has actually delivered the best, which is quite interesting given that the market has risen by 20% during the period. The low-beta strategy means that investors get exposure in a fund that is not particularly dependent on the market trend, and that you get an asset whose movements deviate from the rest of the portfolio. The annual return, which since its inception 12 years ago amounts to 8.6%, is created with significantly lower market risk than a traditional equity fund.
Origo Seleqt, our concentrated micro/small company fund has returned 21.6% in the last 24 months, which is in line with the fund's benchmark (VINX Small Cap SEK NI). At the same time, we can state that the fund has performed significantly better than most similar funds and is currently 10-15 percentage points better than the median value of the fund category. The micro/small company segment has developed worse than the large company segment in recent years, and the valuation difference is large. It is our firm opinion that the valuation of the fund's holdings does not reflect a long-term "fair value".
ORIGO QUEST
Origo Quest returned 0.4% for the month, which means 3.4% so far this year and 158% since inception. The long book had a positive development, while the short gave a somewhat negative return. The long/short spread thus became positive. In the long book, it was primarily Freetrailer, Addtech and SparNord that accounted for the largest positive contributions. Addtech delivered a Q2 report well above market expectations, achieving a record margin of 15.3% leading to a 25% gain. Husqvarna fell sharply and contributed positively to the monthly return, while the reverse happened in NCC. During the month, we took the opportunity to increase Alm. Brand, which we financed with increased short sales.
ORIGO SELEQT
Origo Seleqt rose by 1.0% during July. The benchmark index VINX Small Cap rose at the same time by 3.8%. Since the beginning of the year, the return amounts to 17.3%, which is in line with the index. Addlife, SparNord and Freetrailer provided the best return contribution. Europris, VBG and Protector made negative contributions. Alm.Brand recently sold its Energy division and announced that the proceeds will be returned to the shareholders. At the same time, they took the opportunity to raise several of their financial targets. The sale of the energy part is an important piece of the puzzle in our investment case, but the most important thing is that the synergies from the purchase of Codan are realized. During the month, we have, among other things, increased Alm. Brand and sold ATEA
/Team Origo