European tech stocks are on their way to experiencing levels of growth last seen at the height of the 1990s tech boom, according to Argonaut Capital Management’s Barry Norris (pictured), except that they are now trading on far more attractive valuations. 
The FE Alpha Manager, who heads up the Argonaut European Alpha and Argonaut Pan European Alpha funds, has more than triple the amount of exposure to IT stocks across both his vehicles than the MSCI Europe ex UK index, which currently has a 6.05 per cent weighting to the sector.
“Our biggest overweights are in IT because I think there is a range of opportunities in terms of semiconductors, software and video games,” he said. “It’s really a sector I think that is experiencing phenomenal acceleration in growth opportunities in a similar way to what we saw at the end of the 1990s but without the nosebleed valuations.”
The dotcom bubble of the mid-1990s coincided with greater access to the internet, which led to rife speculation as to how technology companies would fare over the medium term.
Data from FE Analytics shows that, between the start of 1998 and the end of 1999, the NASDAQ 100 index gained 180.71 per cent. In the three years following the turn of the millennium, it plummeted by 73.42 per cent.
Performance of index 3yrs after 2000
Source: FE Analytics
However, Norris believes that technology stocks – which have the same growth capabilities – are now being undervalued by the broader market.
“I think what’s different about today’s European market compared to many markets is there’s certainly no big sector which is in a boom,” the manager reasoned. “Even if we look at a market like technology – which I would say is probably the most exciting market at the moment – it’s only [around] 5 per cent of the European market.
“The amount of sheer innovation in technology at the moment is very equivalent to the late 1990s and you’re certainly not paying the valuations of the late nineties. I think probably, technology is the sector where I would say earnings expectations are too low.”
An example of a technology holding in his portfolio is Aixtron, which is a German-based manufacturer of components for the semiconductor industry.
The stock, which has a market cap of €1.3bn, was the best performer in the Argonaut European Alpha fund over the last quarter, having appreciated in value by 80 per cent over this time frame.
“The story here is very much the fact that it’s a leading supplier of manufacturing tools – particularly for use in compound semiconductors which are generally more high-performance than traditional Philips semiconductors,” Norris explained.
“A new CEO has come in and restructured the company – particularly cutting back on R&D which was absurdly high under the previous managers – and has streamlined costs.
“It also has a potentially strong growth dynamic within its OLED [organic light-emitting diode] business, which is being carved out of the company for a joint venture with a leading Asian supplier of OLED TVs.”
Another area of the European market the manager is currently positive on is the oil & gas sector. Argonaut European Alpha currently has a 2.1 per cent overweight to energy stocks versus the MSCI Europe ex UK index.
“If we look at what happened in terms of sector trends over the quarter, energy was the only sector to receive meaningful downgrades. That’s generally because analysts were anticipating a higher oil price than what actually came through,” he explained.
Performance of index over 3months
Source: FE Analytics
One of the energy stocks within the portfolio is MOL Group, a Hungarian multinational oil and gas company headquartered in Budapest.
“It’s an integrated oil company but its main business is downstream refining,” Norris said. “Refining margins have been very good – this should drive positive earnings surprises given the robust pricing for product relative to crude.
“The company trades on only 8x earnings which is incredibly low – it’s half the multiple of integrated oil companies in western Europe.”
Not only is the manager positive on the industry it operates in, he also said the stock is a great example of why he thinks eastern Europe presents a wealth of opportunities as a region.
He currently has a 10 per cent weighting to eastern European equities, both as a geared play on western Europe and because valuations are attractive.
“I find it slightly bizarre that, going back 10 years, nobody wanted to buy western European equity funds and everyone wanted to buy eastern Europe, but now we certainly see eastern European valuations as a lot cheaper than western European valuations but with more growth, hence we have some opportunities there,” he explained.
“[MOL Group] is a good example of what we find attractive about eastern Europe in that it is full of very cheap stocks which are getting good earnings upgrades.
“In a world where everyone is complaining there aren’t that many cheap assets any more, we certainly see some very attractive asset prices in eastern Europe. If these stocks are receiving earnings upgrades, they are unlikely to be value traps.”
Generally speaking, Norris said the continental European economy remains robust. He reasoned that the European Central Bank is managing tapering expectations well and that corporate earnings should continue to see modest upgrades over the remainder of 2017.
“The market has become less macro driven,” he manager concluded. “I think the big re-ratings that we have seen over the last 18 months – particularly in the banking sector for example – are now over and returns from here will instead be driven by earnings; this is obviously good for our strategy.
“We’re very focused on adding value from our stockpicking and I’m pleased to announce we’ve also had a very positive start to Q4.”
Year-to-date, the £223m Argonaut European Alpha has returned 13.37 per cent compared to its average peer and benchmark’s respective returns of 18.49 and 18.37 per cent.
Performance of fund vs sector and benchmark in 2017
Source: FE Analytics
It has a clean ongoing charges figure (OCF) of 0.91 per cent.
The €41.6m, offshore Argonaut Pan European alpha fund is up by 17.85 per cent, meanwhile, outperforming its MSCI Pan European index return of 15.35 per cent. It has an OCF of 1.13 per cent.