Small cap trip to Copenhagen
At the beginning of January, we flew to Copenhagen where we spent three intensive days meeting about 30 Nordic small caps, both existing investments and potential new ones. The purpose of the trip was to get a sense of both the short-term development of the companies and the long-term opportunities that the companies have in a world full of changes. We also wanted to get a sense of how the global geopolitical situation affects individual companies. The companies’ sustainability strategy was also high on our agenda. These companies were mainly active in sectors like industrial technology, energy, consumer, IT and software and healthcare. The companies’ current focus is on profitability, cash flows and organic growth. On the cost side, the pressure has eased, and we are now entering 2024 with lower energy, logistics, component and eventually also lower financing costs. On the wage side, there is still some upward cost pressure, while it seems easier to find skilled staff (which has not been the case in recent years), which in turn should curb wage inflation in the future. Thus, we do not see the cost side as a large problem anymore.
As for demand, customer inventory levels now seem to be “normalizing”, which should mean that demand will start to pick up again in 2024 (our guess in Q2/Q3). In the short term, companies see a pent-up investment need in Europe as a result of the relocation of production to Asia in recent decades, combined with today’s geopolitical uncertainty and the logistics and component problems of recent years. Companies with operations in China are currently very cautious about making further investments there. A focus on research and development and investments in digital solutions and automation seems to be what the companies see and want to invest in in the future. As for energy supply, there is also a lot to do here. Despite the circumstances, consumers are feeling pretty good, as unemployment remains low. If we also get a lower interest rate, this should strengthen the consumer’s view of the future.
The fact that small caps are at historically low valuation levels, combined with the fact that the valuations in relation to large caps are at levels last seen in the early 2000s, had attracted many large cap- fund managers to the Copenhagen seminar.
Among others we met with the management of the ventilation company Systemair, whose demand continues to be good, especially after the Covid pandemic, which has meant an intensified focus on improving air quality in buildings and not at least in hospitals in the United States. Pump and flow specialist Concentric also has a bright future ahead of them, not at least after the acquisition of two companies in the United States, Allied Enterprises and EMP. After this over 20% of the company’s revenue can now be related to electrification solutions. The company benefits from the fact that electric vehicles will eventually replace diesel and petrol-powered vehicles. Norwegian Crayon, a reseller of Microsoft’s software and IT solutions, sees accelerating demand over time, driven by digitalization in society. The company’s sales will also be boosted by increased demand for AI-related solutions. All companies’ focus was on improving their cash flow, which we also see as probable as the inventory situation normalizes.
On Wednesday evening we flew home with our bags full of new ideas and strong confidence in our existing small cap investments. We are confident about 2024 for small-cap stocks after two weaker years.
Markus Larsson & Kenneth Blomqvist