There are some interesting stocks in the SPI Small Companies Index

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  Serge Nussbaumer
  Chefredaktor

How do you currently assess the marketopportunities for small and microcaps in the various regions (USA, Europe, Switzerland) and do the drivers differ in each case?

Since the outbreak of the coronavirus pandemic, small caps have lagged significantly behind large caps in all regions, which in principle offers catch-up potential. However, this requires a sustained economic recovery. In principle, small caps are more dependent on the local economy than globally active large caps. If, for example, specific economic or infrastructure programs are launched in certain countries, the companies concerned will benefit disproportionately. In this respect, a detailed macroeconomic analysis of the individual countries and regions is highly relevant. US tariffs are also a challenge for many smaller companies. In contrast to global corporations with various production sites, they often produce locally and are therefore directly affected by the tariffs.

In your view, what have been the main reasons for the underperformance of small caps in recent years – and what will change now in 2025?

One of the main reasons is certainly the weak global economic recovery since the pandemic. The industrial sector in particular remains in a state of stubborn stagnation with recessionary tendencies in some cases. As industrial stocks are significantly overrepresented in the small-cap segment, the underperformance is therefore not surprising. In addition, many smaller companies have been less able to cope with the sharp rise in inflation and profit margins have come under pressure accordingly. Based on our economic forecasts, we do not expect the economy to brighten up this year. The valley of tears could therefore continue for a while yet. However, there is some hope of an improvement in 2026 due to the planned infrastructure programs in Europe.

Which sectors or business models are particularly attractive for small and microcap investors particularly attractive in the current environment?

For small listed companies in particular, it is crucial that they are world market leaders in their niches and offer high-quality products. This automatically gives them a certain amount of pricing power. In terms of sectors, we currently consider the healthcare sector to be attractive, but also increasingly companies in the construction and infrastructure sectors.

Which features are decisivedecisive for you to distinguish between attractivemicrocaps and “value traps”?

The decisive factor is whether a company succeeds in earning its cost of capital in the long term. If the return on invested capital (ROIC) is higher than the cost of capital, value is generated. However, stocks that are not yet able to achieve this are also interesting, but where there is a clear strategy to achieve such value generation in the future. Such stocks often offer the highest potential for value appreciation.

How do you find new companies that have not yet received much attention (“hidden champions”) and what does your research process look like?

The first step in the pre-selection process is a quantitative screening. This involves analyzing and sorting out the companies according to various key figures. The interesting stocks are then subjected to an in-depth SWOT analysis. It is also important to assess the competitive situation. Ideally, the companies have a moat, which secures them a good market position. The “fair value” of the remaining shares is then determined with the help of a DCF model. If this is significantly higher than the current price level, the share is added to the buy list.

What role does direct management discussion play and how do small and microcap managers differ from those in large caps?

Experience has shown that the management of smaller companies is more open in its dealings with analysts and direct access is often possible. This allows an analyst to get a better and more personal picture of top management. In large corporations, on the other hand, communication usually takes place via the respective investor relations department and is therefore generally more anonymous.

Are there specific risks associated with small and micro caps that investors should pay particular attention to?

A very relevant issue is the significantly lower liquidity. Certain stocks are only traded sporadically, which means that building up or reducing positions takes a long time and is also more expensive due to the wider bid-ask spreads. On the other hand, it is precisely this illiquidity premium that leads to the outperformance of smaller stocks in the long term.

To what extent do interest rate and inflation inflation currently influence your allodecisions in the small-cap sector?range?

Allocation decisions are more dependent on economic assessments. Small caps tend to significantly outperform the broad market during economic upturns. Falling interest rates are generally a harbinger of a future economic recovery and reduce companies’ (re-)financing costs. In this respect, they also have a supportive effect on the investment segment.

Do you think it makes more sense to invest via individual stock selection or broadly diversified funds/ETFs – and why?

For diversification reasons, we recommend an allocation to small caps via actively managed funds. However, the choice is limited, as many funds are labeled as mid/small caps, but in reality are only marginally invested in the small cap segment. This applies in particular to larger funds, which have a clear focus on mid caps for liquidity reasons alone. So if you really want to invest primarily in the small and microcap sector, you have to take a very close look at what you are really investing in.

What valuation ratios and financial criteriacriteria are the focus of your selection focus on?

In addition to ROIC, the price-to-book ratio (P/BV) is also an interesting valuation indicator. In the small cap sector, there are some stocks that are trading well below their book value. A solid dividend yield can also increase the attractiveness of a share. However, balance sheet ratios are also important: Companies with high levels of debt should generally be avoided.

How long do you hold on to a small or microcap position on average and when do you decide to sell?

A fair value and corresponding price target should always be defined at the time of purchase. Once this has been reached, the position should be systematically reduced or sold. This can sometimes happen quickly or take several years. The holding period varies accordingly.

Can you name specific titles or examples that have aroused your interest and which currently seem particularly seem particularly exciting?

There are some interesting stocks in the SPI Small Companies Index. For example, the precision machine tool manufacturer StarragTornos is exciting. The company will be able to benefit from the significant increase in defense spending by NATO countries. A good 20% of sales currently come from the defense industry. The share is also trading well below its book value (P/B ratio: 0.6) and is correspondingly cheap. The household appliance manufacturer V-Zug is also worth buying. The company has invested heavily in its production site in Zug in recent years and suffered accordingly from low margins. However, the investments have now been practically completed, which will lead to a significant increase in cash flow. V-Zug will also be able to benefit from an upturn in construction activity in Germany. The share has a solid balance sheet and is also trading below its book value. Coltene, which operates in the dental sector, is also interesting. The share is cheaply valued and has an attractive dividend yield of almost 5%. In addition, the new CEO has brought a breath of fresh air to the company. Jungfraubahn Holding shares are also recommended. The renewal of the mountain railway infrastructure is bearing fruit and the “Top of Europe” brand is attracting tourists from all over the world. Although the share has already recovered significantly since the slump in the wake of the pandemic, it is still attractively valued. However, these stocks are only suitable as a small addition to a broadly diversified portfolio.

Thank you very much.

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Matthias Geissbühler
CIO Raiffeisen Switzerland

Matthias Geissbühler was born in Bern in 1975. After studying business administration at the University of St. Gallen, he worked at various banks in the areas of equity research, portfolio and fund management. In 2010, he took over as Head of Investment Strategy at Bank La Roche in Basel and was also responsible for this area after the merger with Bank Notenstein. Matthias Geissbühler has been responsible for Raiffeisen Switzerland’s investment policy as Chief Investment Officer (CIO) since October 2018. Geissbühler holds a lic. oec. HSG degree as well as the titles Chartered Financial Analyst (CFA) and Chartered Market Technician (CMT).