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RWC's five favourite deep value picks in European equity

European equities sold off sharply last year, leaving a number of ‘standout opportunities’ among stocks now priced for a recession, says RWC Partners’ Ed Rumble.

European equities sold off sharply last year, leaving a number of ‘standout opportunities’ among stocks now priced for a recession, says RWC Partners’ Ed Rumble.

Rumble (pictured), who co-manages the RWC Continental European Equity fund, notes that on many valuation metrics, certain companies are now trading 10-15% below their 20-year averages.

‘We believe there are currently a number of standout opportunities across European markets, which are priced as though they are in recession following the recent sell-off, despite fundamentals showing the contrary,’ he said.

Over one year, the RWC Continental European Equity fund has returned -8.1% compared with a peer group average of -10.8%, ranking it 25/127 in its sector.
Here, Rumble identifies five attractive companies where he believes the worst case scenario has already been priced in.

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European equities sold off sharply last year, leaving a number of ‘standout opportunities’ among stocks now priced for a recession, says RWC Partners’ Ed Rumble.

Rumble (pictured), who co-manages the RWC Continental European Equity fund, notes that on many valuation metrics, certain companies are now trading 10-15% below their 20-year averages.

‘We believe there are currently a number of standout opportunities across European markets, which are priced as though they are in recession following the recent sell-off, despite fundamentals showing the contrary,’ he said.

Over one year, the RWC Continental European Equity fund has returned -8.1% compared with a peer group average of -10.8%, ranking it 25/127 in its sector.
Here, Rumble identifies five attractive companies where he believes the worst case scenario has already been priced in.

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Please sign in or register to comment. It is free to register and only takes a minute or two.

Faurecia

Faurecia, the French auto parts manufacturer, saw its share price fall by around 50% over the second half of 2018, bottoming at around €30 per share.

We believe this was an overreaction by the market, largely driven by a negative news flow surrounding the wider auto industry, centred on short-term concerns about a volume slowdown, as well as longer-term concerns about the industry’s ability to transition to electric vehicles.

While the company may not be immune from a slowdown in car production, there
are stock specific factors, which mean Faurecia could buck the trend.

Firstly, there is a profitability improvement occurring because the company is replacing low profit margin contracts with orders at higher margin.

Secondly, the bulk of its money is made in car interiors, like seats, dashboards and door panels, and these products will still be required by customers, regardless of whether they are producing cars with traditional engines or electric/hybrid powertrains.

We believe the stock price is not reflecting those factors and offers upside for contrarian investors.

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HelloFresh

The food delivery company peaked at €14 a share last year, having listed the previous year, but it subsequently sold off to bottom at €6.

So far this year, the clear value opportunity seems to have been recognised, with its shares rallying to nearer €9, but this company could be two to three times bigger.

The downside is that, as a concept stock, it is very easy to construct a bear case for a business like this, as there is limited track record to judge it by and it does not yet generate a profit.

Certainly it is higher risk as a result, but its earnings projections imply upside potential.

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Ambu

Ambu is a Danish company that makes medical devices for use in procedures. Recent falls in the price of camera technology have meant that it can now make single use scopes, transforming that market.

It sold off following a move by rival camera technology giant Olympus to enter the single-use medical scope market, but we see this as an overreaction.

Competition is generally healthy in a new market, especially in this case, where demand is likely to continue to grow, with the scopes having far wider practical use than the limited procedures they are currently used in.

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ST Microelectronics

A semiconductor manufacturer, this technology stock got dragged down alongside the global giants in ‘Red October’.

It is another stock where there may be a period of softer demand, but the share price already reflects this. It has gone from trading at 20x forward earnings to 10x, while the share price has dropped from €22 to €14, despite profits being upgraded throughout 2018.

The company has seen recent design wins in the electric vehicles space and has major customers, including Apple, to whom ST supply chips for camera technology and 3D sensing.

Its excellent technology, used by companies which can pick and choose their suppliers, shows the medium-term prospects remain very solid.

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DS Smith

UK-listed DS Smith is one of the leading packaging companies in the world. It has consistently traded on a price to earnings multiple, relative to the market, of 0.9 times for the last decade, until last year, when it dropped to 0.6 times P/E relative.

Such a drop discounts a substantial decline in earnings, but there has been no meaningful decline for the business.

If the business simply delivers the same level of profits as it has for the last 10 years then we believe it could appreciate 50%, and in terms of downside risks, global growth would have to slow much more to justify the current low valuation.

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