MW When market concentration bites. Europe's GRANOLAs offer a lesson for U.S. investors, says Goldman.

By Barbara Kollmeyer

Goldman says Europe's dominant stocks may be worth another look

Europe's cream of the crop stocks have seen better days, and for U.S. investors therein might lie a lesson.

That's according to strategists at Goldman Sachs who took a fresh look at a group of large European companies that they first dubbed the GRANOLAS in 2020, the continent's answer to the U.S's Magnificent 7.

Those stocks earned that grouping due to their dominance as international names with strong earnings growth, low volatility, high and stable profit margins and solid balance sheets, said a team led by Guillaume Jaisson, in a note that published Friday.

Accounting for around one-quarter of Europe's market cap, the GRANOLAS members are: GSK $(GSK)$ (UK:GSK), Roche (CH:ROG), ASML $(ASML)$ (NL:ASML), Nestlé (CH:NESN) (NSRGY), Novartis $(NVS)$ (CH:NOVN), Novo Nordisk (DK:NOVO.B) $(NVO)$, L'Oréal (FR:OR), LVMH (FR:MC), AstraZeneca $(AZN)$ (UK:AZN) and SAP $(SAP)$ (XE:SAP).

The GRANOLAS stocks have at times kept pace with the U.S. technology giants, such as in early 2024 and even fared better at times in 2023, but that gap, as Goldman's chart shows has recently begun to "dramatically" widen:

They point out that European equities since January 2024 are up just 11% in total returns, while the S&P 500 index SPX has risen 27% in that same period. Since January 2024, the Magnificent 7, which account for half the rise in the U.S. benchmark index, are up 50%, versus a flat performance by GRANOLAS.

"Last year, many of these large European companies fell short of high consensus expectations. So, although their earnings continued to grow(at a faster pace than the rest of the market), their valuations experienced a significant decline. And, given their size, this negatively impacted the overall market," noted Goldman.

And their message to U.S. investors is pay attention when it comes to putting your eggs in one particular basket. It's a warning that has been heard steadily in some corners of the investment world, even as high-flying U.S. tech stocks continue to be one of the favored trades for investors and Wall Street.

Goldman's strategists note that over the past year, GRANOLAS' valuations are down 6% from an average price/earnings of 19 times to 17.8 times, in contrast to the rest of the market whose valuation is up.

The biggest underperformers have been Novo Nordisk, down 42% from its peak last year, suffering a blow in late in 2024 from disappointment over its CagriSema weight-loss drug. Trade tensions weighed on chip-equipment maker ASML, down 26% from its 2024 peak, while worries over China's economy knocked L'Oréal and LMVH shares, by 20% and 26%, respectively.

Still, the strategists regard most of these issues as "idiosyncratic," and aren't exactly giving up on the group for a few reasons.

For starters, earnings for the GRANOLAS has continued growing faster than the rest of the market, yet valuation isn't driving their performance, as their P/E ratio has dropped 6%, with only consumer staples seeing a bigger derating. As well, given GRANOLAS are largely defensive stocks, their performance has not been reflecting a modest pickup in Europe's economy. Those international names have not benefited from euro weakness versus the dollar, they say.

They see potential catalysts for the shares to move higher, such as lower interest rates in Europe, as higher rates impacted the GRANOLAS more than their peers such as the Magnificent 7, which are now positively correlated with interest rates. Potential for positive earnings surprises, improving consumer confidence out of China and whether the group can "re-establish their premium growth narrative" and earn some re-rating of valuations would also help shares, says Goldman.

They add: "Our conversations with clients often highlight the lack of liquidity as a concern when investing in Europe. Despite this, we believe the GRANOLAS are among the most liquid companies in Europe, making them attractive to global investors looking to invest in the region."

-Barbara Kollmeyer

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January 17, 2025 05:43 ET (10:43 GMT)

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