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“Cheap is not enough” – finding value in a muted market

If attractive valuations for smaller companies aren’t enough to gain investors’ attention in the current cycle, just what else can small caps offer investors as a potential source of value?

Ollie Beckett

Ollie Beckett

Portfolio Manager

May 23, 2024
4 minute read

Key takeaways:

  • Larger caps and thematic investments remain favoured by investors, despite supportive economic conditions for smaller companies.
  • In this context, capital discipline – the practice of improving the financial value of a company through careful management of its assets – is vital.
  • Another route to generating value in a malign market environment is to make significant strategic changes.

There is no rationality in the current market environment. Passive buyers are a growing market constituent, while the pool of long-only equity buyers for smaller companies is steadily shrinking. Economic conditions are reasonably benign – Europe’s economies have broadly steered clear of significant contraction in the current cycle (thus far), and EU inflation in the region has steadily fallen from its peak of 11.5% in October 2022 (10.6% in the euro area)[i]. This should be a positive backdrop for smaller companies, which are typically sensitive to higher costs for borrowing. And yet larger caps and thematic investments remain in favour, attracting constant interest from investors.



European smaller company valuations currently look attractive, relative to history (Exhibit 1). And yet, in this environment, we cannot simply trust that companies trading on low valuations will generate strong future performance. If a positive earnings report isn’t leading to higher share prices, where else can we look for returns at the smaller end of the market cap scale?

Exhibit 1: MSCI Europe Small Cap Index – 12-month forward PE ratios are low

Source: Bloomberg, Janus Henderson Investors, at 31 March 2024. The price-to-earnings (PE) ratio is a popular measure used to value a company’s shares, compared to other stocks, or a benchmark index. It is calculated by dividing the current share price by its earnings per share.

Note: There is no guarantee that past trends will continue, or forecasts will be reached. Past performance does not predict future returns.

Corporate activity may not be the hottest topic when it comes to investing. However, in lean times it can make all the difference for companies and investors. In this context, capital discipline – the practice of improving the financial value of a company through careful management of its assets – is vital. But how can this be achieved?

Internal optimisation

One potential way for a company to generate value in a difficult market environment is to make significant (material) strategic changes. German-headquartered KSB[ii], for example, which manufactures pumps for multiple industries, has always had a resilient client base. However, a change of management led to a streamlining of the business’ product offering. Shares in KSB have moved significantly since the start of 2023, to reach EUR670 at market close on 20 May 2024. The market’s positive reception to the company’s active efforts to improve its value has been notable, although investors should bear in mind that past performance does not predict future returns.

Elsewhere, French cable manufacturer Nexans[iii], is undertaking a broader plan to improve profitability, as part of a structural transformation of the business. Similarly, spring manufacturer Stabilus has used acquisition activity to move into new markets, the recent acquisition of Destaco as a case in point[iv]. This kind of activity – proactive, sensibly targeted, often driving expansion, is a well-trodden route for smaller companies aiming to generate a share price uplift.


Another example of how smaller companies can generate value for investors is share buybacks. If a management team believes that the stock for their company is undervalued, and they have plenty of cash on the balance sheet, one of the most cost-efficient things that businesses can allocate money towards buying is… themselves. Given where valuations stand at present – low relative to recent history – it is no surprise that we see many smaller companies currently engaged in buyback activity.

A good example among companies we see doing share buybacks is Danish shipping company DFDS[v], which is undertaking a fairly sizeable repurchase programme for the duration of 2024. Another company pursuing a buyback programme is Irish drinks distributor C&C, which commenced a €15 million share buyback programme in February 2024, due to complete at the end of June[vi]. C&C owns Bulmers and Tennants, among other brands, and saw strong sales during the hospitality recovery.

Criteo is a Nasdaq-listed French online advertising operator. It has been the subject of attention from an activist shareholder and is now strategically engaging with their input, offering a seat on the board. It has also committed to repurchasing $150m of its stock in 2024[vii], a significant return of capital to shareholders.



[ii] KSB’s new brand identity

[iii] Nexans makes a strong start to 2024

[iv] Acquisition of Destaco by Stabilus

[v] DFDS share buyback: DFDS share buyback

[vi] C&C repurchase: C&C repurchase

[vii] Criteo stock buyback: Criteo buyback