Investors’ shortsightedness and the risk of a sell-off of our best companies
The so-called “real economy” cannot ignore the support of finance in an indispensable interdependence highlighted in the opposing section balance sheets: on the left the company, with fixed assets in machinery and capital goods, the warehouse, trade credits; on the right finance, with the capital invested by shareholders, financing provided by banks and holders of credit titles and so on.
Analysts and managers of equity investment funds, tired by more than a year of liquidity hemorrhage, which abandons the national equity attracted and distracted by fixed income financial instruments and low-tax BOTs, are now focusing on reading the income statement of the first six months of 2024 of our listed companies that support much of the national social economic ecosystem, in an attempt to identify winners and losers and trying to predict how fiscal year 2024 will close.
The climate is one of unresolved general tension, exacerbated by the economic situation dominated by continuous swings in the cost of many raw materials in a context in which there is fear of a drop in the spending capacity of European consumers. Then something is happening that worries us at a level that has not yet been rationalized: “our neighbor” took a shorter vacation this year because rumors are that the company he works for, important in the district, is transferring its function to the headquarters of the new foreign ownership.
Insiders compare and sometimes try to find in a simplistic way the “X” factor, the characteristic sign of business champions in the jungle of stocks on the list, often seem particularly restless and unfocused and, with a certain surprise, I have heard some analysts and some managers express very resolute considerations regarding the need to abandon investments in medium-sized Italian companies, too small to guarantee the rapid liquidation of positions to respect stringent liquidity ratios imposed by compliance.
The few who persist in directing ever more modest investments towards them, “fly high” and seem to seek companies capable of delivering increases in turnover from year to year, regardless of systemic variables, as if the first line of the balance sheet were, regardless of the type of company, the only discriminant capable of qualifying virtuous companies and problematic companies.
This growing desertion and trivialization frankly surprises me and especially as an Italian it worries me, because our economy needs financial investments to grow and because “turnover growth”, considered in isolation in the short term, is absolutely not always suitable for distinguishing between good and bad companies and does not do justice to the strategiesto the work and commitment of people who daily animate and direct our manufacturing SMEs and to the consequent ability to expand their profitability.
We are in Italy and we have a qualified economy mostly in small and medium-sized “transformation” companies, which should be judged on their ability to determine margins and cash generation in the medium and long term. Stopping at a cursory consideration of their size or the evolution of their turnover, without going into the merits of their positioning and the detail of their fundamentals, is a big mistake and leads to evaluation considerations that are often unfounded and erroneous.
A processing company buys raw materials, works by transforming/assembling them to create complex products, from the sale of which it generates its turnover and its gross and net margin; if the raw materials, which are an important part of the formation of the price of the finished product, fall in price, it buys them at a lower price and consequently invoices less, if they rise in price, it buys them more expensive, with consequences that often increase the turnover independent of how much it marginalizes and of the fact of having increased or decreased its customers.
If a manufacturing company wanted to satisfy the requirement of turnover growth without worrying about anything else, it could reduce its margins by “giving away” the transformation work and consequently selling a greater number of finished products at the cost of the raw materials without an adequate margin.
I’ll give you an extreme example, just to make it clear: the gas station attendant, if oil goes up, invoices more, if it goes down, invoices less. But to understand if the gas station attendant is capable and resilient, you don’t have to look at how much he invoices! You have to dig deeper and understand if he has earned more or less in terms of margins and if he has increased or decreased the liters of fuel sold and if he operates on a road with increasing traffic or not.
The stock markets for SMEs cannot be influenced solely by those who approach the analysis of balance sheets with excessive lightness: stopping at “high” considerations such as the growth or decrease in turnover in the short term makes no sense and, given the nature of our industrial fabricends up to endorse a pessimistic preconception about processing companies and therefore unconsciously an anti-Italian approach.
We defend our performing companies and invest in their ability to marginalize (which they sometimes preserve by giving up sales at rock-bottom prices). There are Italian companies on the stock exchange today that have free cash flow yields of 15-25% (which means that they are listed at values contained in 4, 5 times the cash they generate in 12 months).
If these companies are not given a more competent analytical eye, if they end up being expelled from the attention screens of open-end fund managers, if they do not soon find investors free from the obsession for daily liquidity, they will inexorably become the object of delisting sponsored by foreign capital and, over time, with governance that will end up becoming non-national, they will lose that Italian sensitivity that has made our community wealthy and comfortable.
What strikes me is that, while our SMEs are debased and mortified on the markets, regardless of their fundamentals and their potential, we do not find the necessary general call to action, except for short articles that discuss the “imminent” support of CDP for the creation of closed-end funds that will operate on the market with a few hundred million euros, which we have fought for as a financial community, but which is a bit little for Europe’s third largest industrial economy.
On the contrary, we hear on all networks the owners of famous clubs and “exclusive” pizzerias pontificating on every economic issue, as if they really represented the entrepreneurship that supports our country, reducing it to the idiom “pizza spaghetti and mandolin” in a proposal reformulated for the rich, or we focus media attention on examples coming from the USA, with newspapers dedicating pages to “Truth” which debuts on the star-spangled markets with a valuation of billions (with a turnover of 5 million dollars and a loss of 15 million) or to the idols Nvidia and Musk.
We too often forget that “our neighbor” gets up every morning to go to work in a mechanical processing or Italian food company, but we don’t care about those, so much so that the companies that qualify the national industry, which give work to a large part of Italians, they languish on the price lists at laughable values, forgotten by those who manage our savings, ready to be packaged in the next takeover sponsored by foreign capital that identifies them as succulent morsels to accelerate and guarantee themselves, yes, a future of performance and growth.
I can’t believe it: I invest and will continue to invest in virtuous Italian SMEs together with a group of passionate Italians, hoping that this group will expand because investing in our businesses is an economic opportunity and a necessity to preserve collective well-being. Earning in the medium to long term, sharing the successes of our excellent SMEs and seeing the smiles return to the faces of our neighbors, is the best prospect for directing our savings with conviction.
*President Electa Ventures
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