Eight bargain shares to replace the GRANOLAS

One investment theme of 2024 has been the strong performance of European shares, with a selection of the largest and most successful names being grouped together as the “GRANOLAS”: GSK, Roche, ASML, Nestle, Novartis, Novo Nordisk, L’Oreal, LVMH, AstraZeneca, Sanofi and SAP. 

According to some fund managers, this elite group of companies, which span pharmaceuticals, beauty, tech and luxury, are a viable alternative to America’s “Magnificent Seven” group of technology shares.

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Just like the Mag Seven group, these European shares have carried the market higher, with strong share price growth also backed up by earnings growth.  

European shares have been on a strong run – the FTSE World Europe ex UK Index is up 53% over the past five years. This is ahead of the 39% return from the FTSE All-Share index, but behind the 89% return from the S&P 500 basket of America’s largest stocks. 

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However, the GRANOLAS could be getting too expensive, and investors may be wise to rethink their allocation. 

This is the view at least of Paras Anand, chief investment officer at Artemis Investment Management.  

He says: “They might not be as healthy for investor returns from here on as the acronym suggests. These companies are now looking richly valued, with an average price-to-earnings (p/e) ratio of 25 times, and are perhaps a little too overconsumed by investors.” 

Instead, he says his fund group’s “SmartGARP” process can be used to identify undervalued shares that are growing attractively. This investment model screens and filters thousands of companies to identify a smaller subset for closer assessment that have the most attractive fundamentals at the best price, most of which Artemis says are overlooked by investors.  

“As a result of that analysis, the Artemis SmartGARP European Equity Fund owns just three of the GRANOLAS – an 18% underweight position versus the index. But it owns an alternative group that we think lovers of breakfast cereal acronyms might benefit from investigating: the CHEERIOS,” Anand said.  

This CHEERIOS group of shares includes businesses in the finance, industrial and healthcare sectors, as well as natural resources. 

One member is Coface, an insurance company. It has a dividend yield of 10.2% and a price-to-earnings ratio of just 8.2. 

Anand says: “This is a highly concentrated market with strong barriers to entry. Despite limited exposure to its domestic market, the recent sell-off in French stocks has left the valuation of the shares looking particularly attractive.” 

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Another company is H. Lundbeck, which develops and commercialises specialised products for the treatment of brain diseases, which Anand says gives it a strong competitive advantage within neurological and psychiatric disorders. 

The other CHEERIOS stocks are: Evonik Industries, a diversified German chemical company with a relatively high share of specialties in its portfolio; Eramet, a French metals and mining company; Spanish oil and gas company Repsol; Spanish IT services firm Indra Sistemas; OTP Bank, which is a leading regional banking franchise in central and eastern Europe; and SAF-Holland, a leading global supplier of components and systems equipment for trailers and trucks. 

But Marcel Stötzel, manager of Fidelity European fund, still likes some of the GRANOLAS. He has Novo Nordkisk, ASML, Nestle, SAP and LVMH as his top-five positions.  

Stötzel says that unlike their US equivalents, which are focused on technology, the GRANOLAS are diversified across multiple sectors, providing exposure to the healthcare, technology, consumer staples and consumer discretionary sectors, across several countries. They draw their revenues from across the world, including Europe, the US and elsewhere, he points out.  

He says: “These stocks are popular for a reason. They have many compelling characteristics, such as consistent dividend growth, a strong competitive position, pricing power, earnings stability, cash generation and strong balance sheets. These characteristics are particularly valuable in periods of uncertainty: economic and market volatility has helped draw investors to these companies.” 

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For example, he says that SAP is a key European artificial intelligence (AI) story as it is in the process of developing AI packages that could accelerate its revenue growth.  

“SAP’s focus is on using AI to answer critical business questions that will bring significant value to the customer. Given the vast amounts of customer data that SAP is in a unique position to access, this will be hard for competitors to replicate and should drive market share gains,” he said.  

JPMorgan European Growth & Income managers Alexander Fitzalan Howard and Timothy Lewis point to ASML as an AI winner.

“If you want exposure to artificial intelligence, you don’t have to buy Nvidia like everybody else. Why not consider ASML, which makes the tools needed to make the advanced chips?” he said. 

However, Stötzel is also finding opportunities outside this group of names, such as in the luxury goods sector, like Hermes.  

“The management team at Hermès has created some of the most coveted products in the world through a combination of scarcity and quality excellence. This has afforded Hermès considerable pricing power even as household incomes have been squeezed,” he said.