Hey, thanks for the mention and I enjoyed this piece a lot. I had a few of these on my watchlist already and have added a couple more.
You have captured the current market very nicely. It's not just Germany or the UK, most non-US stocks (especially value) are down and have been struggling for a long time.
I wonder if this is how the great value investors felt in 1999, when they ignored large tech, but were able to find very cheap stocks elsewhere? Except this time the opportunity is in Germany, the UK, Brazil, Hong Kong, PGMs and Nat Gas etc.
Thanks for comenting Guy. In my view, the vibes really feel like do feel like the 1999/2000 era. Money can be made in AI / crypto very quickly and seemingly easily. Jensen Huang is signing on breasts, Saylor (MSTR) is giving investment advice to Buffett. As it feels like MSTR is doubling every week or so and money can be made easily there, why should one bother to research "old economy" companies in places like Germany and the UK which have returned zero for the last five years?
Great post! I share much of your general sentiment, although I'm a bit concerned how deep a recession might cut. There are some German companies whose business seems stable or growing and that are investing right now, which I find particularly attractive. This would be e.g. Alzchem, PVA TePla or KSB. Villeroy&Boch and Basler could also be interesting titles right now.
Great write up, like some of the other comments i wouldn't go into Bayer for example. I have heard Christian W. Röhl as well, and he is right. The new Bayer CEO ist telling a lot but is not delivering or changing a course massively. You must be crazy when you have a company like Monsanto with these files. You never can be sure where the fire starts at next. I would through it out of my company. The most interesting company for me would be Funkwerk, these number are looking strong and it seems to be at a very good value. Was surprised that I like it that much, as i was biased and thought this is a boring company. But I need more research before i consider a buy. But thanks for havin one new company on the watchlist
I am not saying that Bayer is an easy one and turning around a fairly large tanker takes time. Is Anderson acting decisively enough? It is up for discussion. But I do think the situation can be fixed. GE in 2020 could be fixed. HP in 2012 could be fixed. Bayer in 2002 could be fixed (see here: https://www.spiegel.de/wirtschaft/lipobay-skandal-bittere-pille-fuer-bayer-a-222457.html ). They all looked ugly at the time and nobody wanted to own them. If nobody wants to own a business, irrespective of price, this may create an opportunity. I would not bet the farm on Bayer but I like the risk/reward here.
Funkwerk is a rock solid hidden champion with solid financials and a competent management. The one reason to not like it is that there is a majority owner and I do not really know what their plans are. Shareholders do receive a dividend so we can afford to wait a little, in my view.
I went in on Mercedes, which is probably just because I own one and like it, but I couldn't really make much of a distinction with BMW which is also a bargain, I think.
Great post, but I think there's too much optimism about Germany's future without fully considering the facts. The importance of cheap energy, once the backbone of Germany’s business model and a key driver of its economic "miracle," was only briefly mentioned. The most reliable energy source, nuclear power, where Germany once held a leading position!, has been abandoned, which I believe was a significant historical mistake with far-reaching consequences.
Renewable energy, unfortunately, can’t fully bridge that gap, even in the long run, if the goal is to maintain the current level of industrialization. We're already seeing the impacts of this across almost every metric and sector.
Additionally, the analysis barely mentioned the rising potential risk of a large-scale conflict between China and the US. While it’s not certain this will happen, but there are concerning signs, the recent tariffs impose by Trump, which might just be the beginning. Even if the Ukraine-Russia conflict comes to an end, a new conflict with China is highly likely to emerge. As a strong US ally, Germany would likely have to align with US policies, which could mean a complete disruption of some key German industries, like the automotive sector. Today, German car makers owe much of their financial success over the past 20-20 years to their presence in China.
There’s a lot more to unpack here, but I think everyone needs to make their own assessment of the situation. Especially, if your are working in Germany, earning a salary, owning a home, and investing locally, it's like taking a 3x leveraged bet on Germany, a very high-risk strategy!
That doesn’t mean some German stocks won’t perform well, as markets can often decouple from reality, like we've are seeing today in US.
Your criticism is fair. The purpose of the article was not to fully analyze all the issues Germany faces and I do agree that cheap energy is one of the big issues. I also agree that closing down nuclear while trying to cut CO2 emissions has been a big mistake. At the same time, it is not that nothing could be done about this. It has been a political decision and there can be political decisions to cheapen energy. Importantly, politicians today are more aware than say in 2021 that this is a problem.
I also understand and share your point on concentration risk and I do not advocate for a 100% Germany concentration. My point was that the sentiment and the narrative may be worse than the situations, which may create some opportunities to pick up shares for cheap.
100%! In all my pessimism about the situation in Germany, I forgot to mention that Amadeus Fire and SIXT are both on my top watchlist, as I believe they could be major beneficiaries of developments in AI.
Bayer is also paying a lot! of severance payments. Factor 1.5x is on the higher end of such offers if I understand correctly. Hundreds of unproductive people will probably take this offer (if they can find similar well (over)paid jobs in Germany) if my insider is right. If that is true, it might indicate the high pressure on top management to turn the tanker around or at least do something (signaling). Of course that sich high payments are needed to cut an unproductive workforce is another effect of German (social) regulations/laws as is common in Europe.
Yep and this restructuring cost is currently weighing on their results (and will continue to do so in 2025). At the same time, the way I understand it, there are some lasting efficiency gains to be found without really hurting the business.
It is not the first time this is happening at Bayer, below is an article from 2002. History does not repeat itself but similar patterns are interesting:
I identify very much with the first verse of Heine's "Nachtgedanken":
Denk ich an Deutschland in der Nacht,
Dann bin ich um den Schlaf gebracht,
Ich kann nicht mehr die Augen schließen,
Und meine heißen Tränen fließen.
:-D
Though admittedly the poem is about a longing for, rather than a despair about, Germany. But the good thing about poetry is that you can make it your own.
Thanks for commenting. This is true and the above is very famous by Heine. He was generally very sentimental and tearful when it comes to Germany (understandable give his times). At the same time, big chunks of the Wintermärchen and Heine's work are really ironic and funny.
Bayer is doomed, debt is too high. People have said that German small caps are cheap end of 2022, end of 2023 and now again. It reminds me of Chinese equities. Party goes on in US, esp. with Trump now. You will regret not investing there.
Thanks for sharing your view. Bayer has issues and I do not like their debt load. My point is that they have slowly and painfully started to reduce it and will continue to do so as therir primary use of funds. Also, the yield on their Jan-2030 benchmark bonds in EUR stands at 3.6%. This is a ~150 bps spread vs riskfree Bunds, not nothing but it means they still have access to the market at a reasonable cost. It is still a risky situation.
For me, the US is a prime location for investing, but not at any price and the market has become comparatively expensive. I am not looking for a party, but rather for neglected places nobody cares about or even those which everbody hates. Trump's announced economic policies (in my view) are a mixed bag. The deregulation part holds some promise but the DOGE is a joke IMHO and tariffs and mass deportations are clearly inflationary. Let's see what really gets done.
Great write up. Thank you. Agreed on VW, the government hand is too heavy there. Leadership in SIXT is a turn off for me. Bayer I think has a shot of making it through. I have also been looking at German real estate co’s that have been beaten up. VIB Vermögen? The catalyst could be the Feb election, but regional elections are showing how challenging it will be to form a coalition. Someone will have to work with the AfD and who knows whether they could because capable of running the economy any better…
Thank you for commenting. I have routinely stayed away from German real estate companies as I do not understand real estate very well (though I like to own the house my family lives in).
The elections will be interesting indeed and I hope there will be a clear mandate for economic reform. Without getting too much into politics, I am confident the AFD will not be part of the next government and they also have no convincing policies for the economy (they just want to limit migration and stop supporting Ukraine). However, there is a perspective that economic policies might change from centerleft/social democratic to centerright/conservative, led by the CDU which is running on a very different platform compared to the Merkel years. FDP and to some extent the Greens have also understood the urge to improve incentives to work and cut red tape.
Thank you for the feedback. I enjoyed this video. To be clear, I do think that there are big issued for the German economy, but I think they can and will be addressed. This will equire work and potentially some sacrifice, but it is doable. MTU is an interesting name I have not looked at for some time but might well refresh.
This is a very convincing case. Moat is the key imo in times of crisis… are product irreplacable? No real alternatives? Which one of those names can we state this? I bought hermle not irreplecable - grob and mikro competes well - but high switching cost - can be a pain to train on another precision machine. Which name of the list do you feel irremplaçable or real pain to replace thus pricing power?
Thank you Govro. I believe all of them are strong names because it can be seen in the numbers (high returns on capital for an extended period). But they are to some extent cyclical, meaning that they will not just add year after year but there will be a down-quarter or year. Bayer is very hated because it is down the most and many people got burned, and everybody focuses on the risks (legal cases). BMW has high brand value, it has some after-sale business and in my view pricing power. It also has a sizeable China risk. Amadeus Fire will swing with the German labour market and some people say it may become replace by AI. Funkwerk is overall a stable business with nice margins and I believe there will be infrastructe spending (including for trains) for many years to come. It has a majority owner so a potential takeunder is the biggest risk in my view.
I am not sure why you orientate your thoughts on (or blame) Germany/Europe. I think you mainly introduced shares of cyclical businesses and that's mainly why their stock prices suffer.
Sixt AG is a highly cyclical business (personally I don't think the biggest risk is the new generation, it is doing business in US which is a lot tougher)
Hermle is a cyclical business as well
Amadeus Fire is a cyclical business, too.
I don't know much about cars, but isn't BMW a global company?
The same also holds for Bayer.
I think your problem is not about Germany or Europe, but more rather choosing the wrong industries.
Have a look at the euro_stoxx_bank Index (European banks), it is up ytd.
Compare it with Amadeus Fire (-36% ytd), Hermle (-26% ytd), Sixt (-29% ytd).
So it is not that German small stocks are recognised as bad per se by investors, or Europe is bad per se; it is more some companies had high valuations in the past and they did not fulfill the expectations.
Thanks for commenting. You clearly have a point that not all German companies are on their knees and the pain largely sits with the cyclicals. Financials like bank and insurance companies, some consumer companies (think Adidas), defence (Rheinmetall) and utilities have done pretty ok this year.
At the same time, the auto, mechanical engineering and chemical industries have a high importance for the country. The index returns you cite are no desaster on an absolute basis, but they are very poor relative to US index returns (and even weaker if you take into account the currency). There clearly is a sense of German/European decline in discussions and the media and it is well justified.
Are the 2025 elections going to have an impact? What will move German stocks (especially ones with little international exposure) is stimulus and deregulation. If the new coalition continues on the same path those low growth 9x PE companies will continue to be low growth 9x PE companies.
But if they go on a new deal like infrastructure spending spree and go into a more industry friendly direction it could create a nice bull market in Germany and lift earnings and valuation multiples.
Curious if you have any insight on the political side here.
Hey, thanks for the mention and I enjoyed this piece a lot. I had a few of these on my watchlist already and have added a couple more.
You have captured the current market very nicely. It's not just Germany or the UK, most non-US stocks (especially value) are down and have been struggling for a long time.
I wonder if this is how the great value investors felt in 1999, when they ignored large tech, but were able to find very cheap stocks elsewhere? Except this time the opportunity is in Germany, the UK, Brazil, Hong Kong, PGMs and Nat Gas etc.
Thanks for comenting Guy. In my view, the vibes really feel like do feel like the 1999/2000 era. Money can be made in AI / crypto very quickly and seemingly easily. Jensen Huang is signing on breasts, Saylor (MSTR) is giving investment advice to Buffett. As it feels like MSTR is doubling every week or so and money can be made easily there, why should one bother to research "old economy" companies in places like Germany and the UK which have returned zero for the last five years?
Great post! I share much of your general sentiment, although I'm a bit concerned how deep a recession might cut. There are some German companies whose business seems stable or growing and that are investing right now, which I find particularly attractive. This would be e.g. Alzchem, PVA TePla or KSB. Villeroy&Boch and Basler could also be interesting titles right now.
Great write up, like some of the other comments i wouldn't go into Bayer for example. I have heard Christian W. Röhl as well, and he is right. The new Bayer CEO ist telling a lot but is not delivering or changing a course massively. You must be crazy when you have a company like Monsanto with these files. You never can be sure where the fire starts at next. I would through it out of my company. The most interesting company for me would be Funkwerk, these number are looking strong and it seems to be at a very good value. Was surprised that I like it that much, as i was biased and thought this is a boring company. But I need more research before i consider a buy. But thanks for havin one new company on the watchlist
I am not saying that Bayer is an easy one and turning around a fairly large tanker takes time. Is Anderson acting decisively enough? It is up for discussion. But I do think the situation can be fixed. GE in 2020 could be fixed. HP in 2012 could be fixed. Bayer in 2002 could be fixed (see here: https://www.spiegel.de/wirtschaft/lipobay-skandal-bittere-pille-fuer-bayer-a-222457.html ). They all looked ugly at the time and nobody wanted to own them. If nobody wants to own a business, irrespective of price, this may create an opportunity. I would not bet the farm on Bayer but I like the risk/reward here.
Funkwerk is a rock solid hidden champion with solid financials and a competent management. The one reason to not like it is that there is a majority owner and I do not really know what their plans are. Shareholders do receive a dividend so we can afford to wait a little, in my view.
Thanks for a great write up!
Surprising how quickly some of those stocks are dropping. I prefer to buy cyclical stocks at a high pe though.
Have a feeling some of the stocks can fall quite a bit more making long term returns even better from that lower base 🤔
I went in on Mercedes, which is probably just because I own one and like it, but I couldn't really make much of a distinction with BMW which is also a bargain, I think.
warum der Kommentar mit den meme stocks und social media postings? Dürfen andere Märkte nicht steigen?
Gerne soviel sie wollen.
Aber ich darf in diesem Fall der subjektiven Meinung sein, dass die gestiegenen Kurse und die fundamentalen Werte nicht zusammenpassen.
Aus meiner Sicht erleben wir momentan in einigen Bereichen des Marktes irrationalen Überschwang. Aber ich kann natürlich daneben liegen.
Great post, but I think there's too much optimism about Germany's future without fully considering the facts. The importance of cheap energy, once the backbone of Germany’s business model and a key driver of its economic "miracle," was only briefly mentioned. The most reliable energy source, nuclear power, where Germany once held a leading position!, has been abandoned, which I believe was a significant historical mistake with far-reaching consequences.
Renewable energy, unfortunately, can’t fully bridge that gap, even in the long run, if the goal is to maintain the current level of industrialization. We're already seeing the impacts of this across almost every metric and sector.
Additionally, the analysis barely mentioned the rising potential risk of a large-scale conflict between China and the US. While it’s not certain this will happen, but there are concerning signs, the recent tariffs impose by Trump, which might just be the beginning. Even if the Ukraine-Russia conflict comes to an end, a new conflict with China is highly likely to emerge. As a strong US ally, Germany would likely have to align with US policies, which could mean a complete disruption of some key German industries, like the automotive sector. Today, German car makers owe much of their financial success over the past 20-20 years to their presence in China.
There’s a lot more to unpack here, but I think everyone needs to make their own assessment of the situation. Especially, if your are working in Germany, earning a salary, owning a home, and investing locally, it's like taking a 3x leveraged bet on Germany, a very high-risk strategy!
That doesn’t mean some German stocks won’t perform well, as markets can often decouple from reality, like we've are seeing today in US.
Your criticism is fair. The purpose of the article was not to fully analyze all the issues Germany faces and I do agree that cheap energy is one of the big issues. I also agree that closing down nuclear while trying to cut CO2 emissions has been a big mistake. At the same time, it is not that nothing could be done about this. It has been a political decision and there can be political decisions to cheapen energy. Importantly, politicians today are more aware than say in 2021 that this is a problem.
I also understand and share your point on concentration risk and I do not advocate for a 100% Germany concentration. My point was that the sentiment and the narrative may be worse than the situations, which may create some opportunities to pick up shares for cheap.
100%! In all my pessimism about the situation in Germany, I forgot to mention that Amadeus Fire and SIXT are both on my top watchlist, as I believe they could be major beneficiaries of developments in AI.
Bayer is also paying a lot! of severance payments. Factor 1.5x is on the higher end of such offers if I understand correctly. Hundreds of unproductive people will probably take this offer (if they can find similar well (over)paid jobs in Germany) if my insider is right. If that is true, it might indicate the high pressure on top management to turn the tanker around or at least do something (signaling). Of course that sich high payments are needed to cut an unproductive workforce is another effect of German (social) regulations/laws as is common in Europe.
Yep and this restructuring cost is currently weighing on their results (and will continue to do so in 2025). At the same time, the way I understand it, there are some lasting efficiency gains to be found without really hurting the business.
It is not the first time this is happening at Bayer, below is an article from 2002. History does not repeat itself but similar patterns are interesting:
https://www.spiegel.de/wirtschaft/lipobay-skandal-bittere-pille-fuer-bayer-a-222457.html
I identify very much with the first verse of Heine's "Nachtgedanken":
Denk ich an Deutschland in der Nacht,
Dann bin ich um den Schlaf gebracht,
Ich kann nicht mehr die Augen schließen,
Und meine heißen Tränen fließen.
:-D
Though admittedly the poem is about a longing for, rather than a despair about, Germany. But the good thing about poetry is that you can make it your own.
Thanks for commenting. This is true and the above is very famous by Heine. He was generally very sentimental and tearful when it comes to Germany (understandable give his times). At the same time, big chunks of the Wintermärchen and Heine's work are really ironic and funny.
Bayer is doomed, debt is too high. People have said that German small caps are cheap end of 2022, end of 2023 and now again. It reminds me of Chinese equities. Party goes on in US, esp. with Trump now. You will regret not investing there.
Thanks for sharing your view. Bayer has issues and I do not like their debt load. My point is that they have slowly and painfully started to reduce it and will continue to do so as therir primary use of funds. Also, the yield on their Jan-2030 benchmark bonds in EUR stands at 3.6%. This is a ~150 bps spread vs riskfree Bunds, not nothing but it means they still have access to the market at a reasonable cost. It is still a risky situation.
For me, the US is a prime location for investing, but not at any price and the market has become comparatively expensive. I am not looking for a party, but rather for neglected places nobody cares about or even those which everbody hates. Trump's announced economic policies (in my view) are a mixed bag. The deregulation part holds some promise but the DOGE is a joke IMHO and tariffs and mass deportations are clearly inflationary. Let's see what really gets done.
Great write up. Thank you. Agreed on VW, the government hand is too heavy there. Leadership in SIXT is a turn off for me. Bayer I think has a shot of making it through. I have also been looking at German real estate co’s that have been beaten up. VIB Vermögen? The catalyst could be the Feb election, but regional elections are showing how challenging it will be to form a coalition. Someone will have to work with the AfD and who knows whether they could because capable of running the economy any better…
Thank you for commenting. I have routinely stayed away from German real estate companies as I do not understand real estate very well (though I like to own the house my family lives in).
The elections will be interesting indeed and I hope there will be a clear mandate for economic reform. Without getting too much into politics, I am confident the AFD will not be part of the next government and they also have no convincing policies for the economy (they just want to limit migration and stop supporting Ukraine). However, there is a perspective that economic policies might change from centerleft/social democratic to centerright/conservative, led by the CDU which is running on a very different platform compared to the Merkel years. FDP and to some extent the Greens have also understood the urge to improve incentives to work and cut red tape.
That was a great read!
one of my favorite interweb economists just posted on this topic :
https://www.youtube.com/watch?v=cg43s4PkPX0
of course, the catch is that macro catalysts are more unpredictable, other than they take longer than even value investors can tolerate.
so as a longterm holder of MTU aero, have been looking for for something more on the larger mittelstand side with sufficient u.s. liquidity. help!
Thank you for the feedback. I enjoyed this video. To be clear, I do think that there are big issued for the German economy, but I think they can and will be addressed. This will equire work and potentially some sacrifice, but it is doable. MTU is an interesting name I have not looked at for some time but might well refresh.
This is a very convincing case. Moat is the key imo in times of crisis… are product irreplacable? No real alternatives? Which one of those names can we state this? I bought hermle not irreplecable - grob and mikro competes well - but high switching cost - can be a pain to train on another precision machine. Which name of the list do you feel irremplaçable or real pain to replace thus pricing power?
Thank you Govro. I believe all of them are strong names because it can be seen in the numbers (high returns on capital for an extended period). But they are to some extent cyclical, meaning that they will not just add year after year but there will be a down-quarter or year. Bayer is very hated because it is down the most and many people got burned, and everybody focuses on the risks (legal cases). BMW has high brand value, it has some after-sale business and in my view pricing power. It also has a sizeable China risk. Amadeus Fire will swing with the German labour market and some people say it may become replace by AI. Funkwerk is overall a stable business with nice margins and I believe there will be infrastructe spending (including for trains) for many years to come. It has a majority owner so a potential takeunder is the biggest risk in my view.
I would say BMW3 is very tempting. Moat it has. Bayer is outside my circle… pharma agri
I am not sure why you orientate your thoughts on (or blame) Germany/Europe. I think you mainly introduced shares of cyclical businesses and that's mainly why their stock prices suffer.
Sixt AG is a highly cyclical business (personally I don't think the biggest risk is the new generation, it is doing business in US which is a lot tougher)
Hermle is a cyclical business as well
Amadeus Fire is a cyclical business, too.
I don't know much about cars, but isn't BMW a global company?
The same also holds for Bayer.
I think your problem is not about Germany or Europe, but more rather choosing the wrong industries.
Have a look at the euro_stoxx_bank Index (European banks), it is up ytd.
Just to add:
Check out SDAX (-2% ytd) and MDAX (-1.3% ytd).
Compare it with Amadeus Fire (-36% ytd), Hermle (-26% ytd), Sixt (-29% ytd).
So it is not that German small stocks are recognised as bad per se by investors, or Europe is bad per se; it is more some companies had high valuations in the past and they did not fulfill the expectations.
Thanks for commenting. You clearly have a point that not all German companies are on their knees and the pain largely sits with the cyclicals. Financials like bank and insurance companies, some consumer companies (think Adidas), defence (Rheinmetall) and utilities have done pretty ok this year.
At the same time, the auto, mechanical engineering and chemical industries have a high importance for the country. The index returns you cite are no desaster on an absolute basis, but they are very poor relative to US index returns (and even weaker if you take into account the currency). There clearly is a sense of German/European decline in discussions and the media and it is well justified.
Are the 2025 elections going to have an impact? What will move German stocks (especially ones with little international exposure) is stimulus and deregulation. If the new coalition continues on the same path those low growth 9x PE companies will continue to be low growth 9x PE companies.
But if they go on a new deal like infrastructure spending spree and go into a more industry friendly direction it could create a nice bull market in Germany and lift earnings and valuation multiples.
Curious if you have any insight on the political side here.