The outlook for economic growth in Spain continues to be good and domestic small and midcap stocks should reflect this. Above all, the cyclicals – particularly industrials – and consumer stocks. The four big S&M Cap funds in the Spanish market – Santander, Bankia, Mediolanum and Gescooperativo – tell us their strategies and stock picks.
“The small and mid cap companies in Spain will perform well in 2017. Their debt levels are lower and they grow more than the bigger firms. Growth in Spain is still strong, supported by both consumption and investment. So we look for companies with local exposure, which are benefiting from the economic recovery,” says Lola Solana, who manages the S&M Caps fund in Santander AM.
Iciar Puell, manager of Bankia Small & Mid Caps fund, takes this idea one step further. “For the last two years or so Spanish S&M caps have performed better than the big stocks. We believe this trend will continue.”
The team which manages Mediolanum Small & Mid Caps Spain has a similar view. “There are some 80 companies in the universe of Spanish small and mid caps and they are in very heterogenous sectors. The important thing for us is to do some good stock picking more than focus on one sector or the other. That said, the industrial, as well as the cyclical and non-cyclical consumption sectors are well represented in our fund. They make up over 65% of the fund.”
Fund managers at Gescooperativo believe that “S&M caps, which normally have their business concentrated in Spain, will benefit” from “domestic demand, which will continue to be the driver of the Spanish economy.” They also think “soft financing conditions help these kind of companies.”
Stocks in the portfolio
The individual companies with greater weighting in Santander AM’s sectorial fund are Barón de Ley, Miquel y Costas, Cie Automotive, CAF and Fluidra. “We want to position our fund to take advantage of this economic recovery in Spain, the increase in air traffic, in the number of tourists, the improvement in consumption, the recovery in the property sector and the take off in the industrial sector. So we are betting on cyclical sectors as opposed to defensive ones,” the fund managers say.
Bankia flags the following companies as the ones “we are currently more convinced by”: CAF, Axiare, Pharmamar or Logista. They have various reasons for being overweight in these stocks in their portfolio. “But in short, we are talking about good fundamentals, solid balance sheets, a proven management team and short/medium-term catalysts.”
The main positions held by Mediolanum’s S&M fund and the reasons why they have a greater weighting in their portfolio are as follows:
- CIE Automotive: “A global provider of components for the automotive sector which is exposed to growing markets (Asia and LatAm), with a balance sheet and strong cash generating capacity. It has a very diversified client base and participates in the sector’s consolidation process.”
- Catalana Occidente: “An insurance company which combines the traditional business with loan insurance. It is worth highlighting sector-beating growth in premiums from the traditional business, as well as solid combined ratios in both activities.”
- Laboratorios Almirall: “A pharmaceutical company which is dedicated to research, development, manufacturing and marketing of its own pharmaceutical products and those of others. In the last few years, it has adapted its business model for the dermatological sector, reorganised its product portfolio and grown inorganically.”
Gescooperativo’s S&M fund managers choose companies which “generate a lot of free cash compared with their capitalisation. If possible with little or no debt and with a return on capital employed which is above the cost of capital. All of that with management teams whose interests are aligned with shareholders.” Like other funds in the sector, they have Catalana Occidente –a 5% stake– and Cie Automotive, as well as stocks with a bigger weighting like Euskaltel. On its holding in this company, Gescooperativo says “we have been adding this since the big drop (in the stock price) last year. We think the market is punishing the company for a hypothetical capital increase in the event it buys its rival Telecable. Our view is that if this operation happens, it’s not certain it will have to make a capital hike. We like the quality of the company, particularly its high margins and strong cash generation which allows it to deleverage quickly.” Its stock selection also includes Atresmedia, Parques Reunidos, property firms Lar, Hispania and Colonial and paper companies Ence and Miquel y Costas.