The asset manager Hérens Quality Asset Management has presented its list of the world’s best stocks. BÖRSE ONLINE has filtered out six stocks that shine with a justifiable valuation and a strong chart. By Jürgen Büttner.

Shares that perform convincingly over the long term are highly prized by many investors. One index that tracks the performance of quality stocks is the MSCI World Quality Index. Since mid-1994, it has achieved an average annual increase of around 11.99 percent. Compared with this, the MSCI World Index has averaged a much lower 8.42 percent per annum.

Particularly in uncertain market phases or when the stock markets are correcting, investors appreciate quality stocks, as they then offer somewhat better protection against very large losses. Analysts at BNP Paribas generally praise the anti-cyclicality aspect. This is because quality is a particularly predictable and stable investment factor.

For a better understanding: The scientific literature typically describes quality stocks as companies with durable business models and sustainable competitive advantages. Most definitions also cite low leverage, stable earnings and high profitability. So far this year, however, quality stocks are taking a breather. This is because their performance is somewhat weaker than that of the market as a whole.

Skillfully combine

But at least things are now going somewhat better again. This fits with the typical price behavior in the past. Because, as BNP Paribas explains, quality usually performs poorly in the very early stages of an economic recovery. But this economic phase should slowly be behind us in the current cycle. In BNP Paribas’ view, now could be a good time to consider a combination of quality and value more strongly again when investing in equities.

It is therefore fitting that the asset management boutique Hérens Quality Asset Management recently presented its so-called Quality Corporate Excellence Awards. The award ceremony has become a tradition. Since 2008, the Swiss asset manager has awarded prizes to the best domestic quality companies, and since 2011, international companies have been honored.

With the awards, Hérens Quality Asset Management recognizes companies that demonstrate sustained business excellence despite sometimes adverse market conditions. The focus is on generally applicable economic and business principles in corporate management.

The peer-reviewed selection universe consists of the Stoxx regional indices, which include more than 1200 companies, and the MSCI AC World Index, which includes more than 2600 companies. In its search for winners, Hérens Quality Asset Management uses a rigorous quantitative and qualitative analysis in its methodology. The quantitative part takes into account financial parameters such as return on equity, net debt to cash flow ratio and balance sheet or earnings quality. The qualitative part complements this with factors such as business model, corporate governance, i.e. a regulatory framework for managing and monitoring a company, or the type of financial reporting.

The research for the Corporate Excellence winners is provided exclusively by the Hérens Quality Asset Management Research Center in the Latvian capital Riga. The winning decision is made on this basis by an international jury with broad academic and practical support. The final result is the “Corporate Excellence Award” winners.

Business model as trump card

But what is meant by the term corporate excellence? Hérens CEO Diego Föllmi explains: “The activities are usually based on a clearly focused, often family-run business model, and growth is largely organic. Addressing corporate social responsibility factors early on and lower CO2 emissions than the market are another common feature of the winners.”

In the experience of the Swiss asset manager, a company that does not operate sustainably in business terms cannot be sustainable for the system as a whole either. Over the years, another common thread among the winners has been that growth often occurs without major acquisitions. This year in particular, Föllmi says it was also interesting to see that the “Corporate Excellence Award” winners demonstrated extremely high resilience, even though the market environment was challenging because of the Covid 19 pandemic.

The business aspects of corporate excellence have been covered in the literature for more than 50 years. Hérens Quality Asset Management counts itself among the pioneers worldwide to have applied relevant insights from the corporate excellence debate systematically and globally to stock selection. This year’s list of winners consists of 18 stocks. However, the initiator stresses that the current awards are not a promise that the winners will retain their corporate excellence status in the future. In addition, the recommendations are not to be understood as buy recommendations.

Nevertheless, almost all winners for the past few years have shown a strong share price performance. The only exception is the Spanish elevator manufacturer Zardoya Otis, where instead of a long-term upward trend, a trend in the opposite direction can be observed. As a result, this stock falls through the cracks in BÖRSE ONLINE’s search for the most promising prize winners. After all, in addition to quality, an appealing chart is an important condition for us.

Quality has its price

A high rating stands out for most award winners. For an award by Hérens Quality Asset Management, it does not matter whether a company is highly or lowly valued. Moreover, quality stocks are traditionally valued comparatively ambitiously on average. This is because many investors are willing to dig deep into their pockets for quality.

Since a combination of quality and value is likely to be particularly rewarding in the current environment, we still only consider stocks with justifiable valuations measured against the business outlook as buy tips.

Therefore, the U.S. financial services provider Marketaxess (estimated 2022 P/E of 50) and the Swedish manufacturer of probiotics Biogaia (estimated 2022 P/E of 40.5) are not included, although they are the top gainers globally and for Europe, respectively.

Six stocks have survived the selection process, which we present on the following pages and from which we expect not only sustained quality but also future price gains.

ASM International share: customers feel the urge to expand

In the Netherlands, Hérens Quality Asset Management has selected ASM International (ASMI) as its top quality stock. ASM is a mechanical engineering specialist that develops and builds equipment for the production of semiconductors, such as machines for wafer processing or advanced packaging solutions. If everything goes according to plan, ASMI should benefit from the ongoing capacity expansions of major customers such as TSMC, Samsung or Intel. Growth trends such as the expansion of 5-G mobile networks, artificial intelligence and machine learning, cloud and edge computing, and autonomous driving mean that data volumes are exploding. That means faster, more powerful and more energy-efficient processors are needed. This bodes well for ASMI’s business prospects in the long term. Especially since the company has succeeded in significantly improving its position in the semiconductor industry in previous years. All major leading semiconductor manufacturers use ASMI’s atomic layer deposition equipment for 10nm/7nm/5nm processes.

The analyst consensus sees earnings per share rising from EUR 6.04 to EUR 12.07 from 2020 to 2023. On this basis, the price/earnings ratio for 2023 is 18.5. This valuation makes the takeover rumors circulating around ASMI appear credible. The Executive Board also considers the company’s own shares to be too cheap. Recently, the company announced another share buyback program with a volume of 100 million euros. We remain optimistic and increase the price target and stop price.

EQ OYJ share: Small, fine Finnish asset manager

As the sixth buy tip from the winners of the Quality Corporate Excellence Awards, we present EQ Oyj. Although it is a second-tier stock and the 15.5 percent free float shares are only traded on the Helsinki Stock Exchange, the title is still worth a review. This is supported by a record share price, which has risen from 1.49 euros to 20.85 euros since 2011. In addition, the asset management and corporate finance-focused group has posted 28 consecutive quarters of profit improvement. Its offering includes a wide range of services (including private equity funds and real estate asset management) for institutions and individuals. Through Advium Corporate Finance, the firm also offers services in mergers, acquisitions and real estate transactions. Assets under management amount to approximately 9.9 billion euros. The strict focus on the domestic market enabled a respectable return on equity of 37 percent last year. This is also thanks to the cost/income ratio, which has fallen steadily since 2016 to 46 percent. The Management Board aims to create shareholder value with profitable and high-quality businesses. The strong market position helps in this regard. For example, 66 percent of the 100 largest institutional investors in Finland are also customers. A survey among them last year ranked the company first in overall quality. According to analysts, earnings per share are expected to rise from 64 cents to 1.05 euros from 2020 to 2024. Added to this is a dividend yield of 4.5 percent.

Games Workshop share: fantasy worlds provide price fantasy

Games Workshops shares are not too well known to German investors. But that didn’t stop the company from winning the Quality Corporate Excellence Awards for Great Britain. The share price, which has risen from 1.19 pounds to 121 pounds between mid-2008 and today, already speaks for quality. According to the awards jury, Games Workshop has practically created its own market, which did not exist before in the board games sector. The company, which focuses on younger audiences and the family-oriented market, produces fantasy miniatures, creating medieval fantasy worlds. Its best-known tabletop game is “Warhammer 40,000,” which was a top product that played a key role in the company’s rise to become one of the world’s biggest players in fantasy role-playing games. The fanatical devotion of customers to the game is an important asset for the company. The Board of Directors tries to maintain this at a very high level by focusing on product quality, marketing, active customer engagement, and constant innovation. Overall, this results in a range of offerings that is difficult to replicate. The business environment is lucrative – interest in tabletop games and fantasy worlds is growing worldwide. Tabletop miniatures games are considered the fastest growing segment of the non-digital gaming market. The company also senses growth in increased licensing revenue, which is expected to become the largest source of revenue, as well as in licensing video games and merchandise. In terms of earnings per share, analysts expect an increase from 2019/20 to 2023/24: from 2.18 pounds to 4.96 pounds.

Mayr-Melnhof share: Successful with cartonboard and boxes

In Austria, Hérens Quality Asset Management named Mayr-Melnhof the top quality stock. This has mainly to do with its positioning. This is the world’s largest producer of coated recycled cartonboard with a growing position in virgin fiber cartonboard, as well as the leading producer of folding cartons in Europe. The award was also given because the company stands out positively from a financial point of view. According to the report, sales margins and profitability are roughly at the average level of competitors, while the company is less leveraged than its peers. The jury assessed the existing customer base as proof of the existing competitiveness. After all, the company serves major brands such as Mars, Nestlé, P & G, Unilever, and McDonald’s. Cooperation with these international groups, as well as favorable social trends – such as urbanization or e-commerce – help the group to expand its global presence. According to Hérens, the fact that the Mayr-Melnhof family is the main shareholder supports the stability and excellence of the company’s management. The share price has risen from €15.30 to €183.00 between April 1996 and February 2021. Every setback during this period has ultimately proven to be a buying opportunity. This is also how the recent share price declines should be classified. The valuation does not stand in the way of rising prices again in the medium term. Based on the BÖRSE ONLINE estimate of earnings per share for 2022, the price/earnings ratio is relatively moderate at 13.

Melexis share: More automotive electronics, more growth

Melexis is a so-called fabless company in the semiconductor sector. This means that the Belgian microelectronics specialist does not have its own production facilities. The company develops integrated semiconductor components mainly for automotive electronics systems and is one of the world’s leading companies in the field of magnetic sensor devices.

The strengths? lie in innovation and offering zero-defect quality. Melexis operates in a quality-driven market and can therefore charge a premium for its high-end products. Margins have historically ranged between 15 and 20 percent. The growth in electronic equipment for cars calls for increasingly powerful sensors in the form of integrated circuits. Numerous new and existing products in the field of sensors – such as magnetic, inductive, optical or pressure as well as temperature sensors – support this growth. Consumer electronics, wireless and industrial applications as well as personal healthcare are added as additional business drivers.

After two difficult years marked by global trade tensions, things should start looking up for Melexis from this year. For 2021, the company expects sales growth of 15 to 20 percent with margins improving to around 19 ?percent. Analysts expect earnings to improve by 1.72 euros to 4.86 euros per share in the period from 2020 to 2024. This outlook should help the stock to end the sideways trend that has existed on balance since the first quarter of 2017.

TSMC share Dominant position, good prospects

Hérens Quality Asset Management has declared Taiwan Semiconductor Manufacturing Company (TSMC) as the top quality stock for China/Taiwan. For years, numerous analysts have been praising the company. No wonder, after all, TCMC has a dominant market position as the largest pure-play semiconductor contract manufacturer. In 2020, its market share was 55.6 percent.

The company differentiates itself from the competition through its technology leadership and excellent manufacturing. As a contract manufacturer for customers such as Apple, Nvidia or Qualcomm, TSMC is at the forefront of the ongoing outsourcing trend in the semiconductor industry. In addition, the most dynamic boom in the semiconductor sector to date has not yet come to an end. For example, the TSMC Management Board forecasts average annual growth of ten to 15 percent for the contract manufacturing industry from 2020 to 2025.

Despite these good prospects, the share price has corrected in recent months. This should be seen against the backdrop of a general weakness in tech stocks, concerns about negative production consequences due to the water shortage in Taiwan, as well as fears that TSMC could overreach itself with the planned massive investments. That being said, the stock was simply ripe for a setback. After all, at its record high in January, it had to digest a 1729 percent gain since November 2008. In the meantime, however, the note seems to have found a bottom. We believe that investments will continue to pay off in the future, as they always have in the past. The current price level offers a good entry opportunity.