My Recession Buy List - Sweden

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Includes: AARHY, ADDHY, ALFVY, ATLKY, AZN, ERIC, ESSYY, HXPLF, ICCGF, IDDWF, SASDF, SKFRY
by: Wolf Report
Summary

Once a real downturn hits, many quality companies will finally be fairly valued or on sale.

I show you what companies I intend to buy once this occurs.

In this article, we'll strictly focus on companies in Sweden or with their head offices in Sweden.

It's no secret that once a recession hits, such as during 1999-2000, or 2009-2010, quality companies are on sale just like other companies. For many companies, one could argue that a general downturn is the only time when the company is actually undervalued, or fairly valued, barring something truly devastating that's company-specific.

Many excellent contributors and writers share with them their buy lists for a recession. Companies that belong to this category - companies that are time-tested, recession-proof/resistant or in such a business that they're virtually guaranteed to outlive all of us - at least in specific geographies.

That may be considered a bit of a sweeping declaration. Let's instead put it like this.

Companies you should buy in a Recession

In this article, we'll focus on Swedish companies. A few rules apply.

  • I will focus on companies that are purchasable through ADRs or are listed on the NA stock exchange somehow. Companies without an American/OTC ticker MAY be included, but if so, I will justify it.
  • The reasons for their place on the list may vary. Most common is chronic overvaluation or lack of volatility outside of a recession.
  • As a result of their rare undervaluation, annual rates of return outside of buying them in a downturn is simply too small to justify an investment into the company.
  • For many of the mentioned stocks, specific articles will be written to cover what makes the company such a great company (beyond the short descriptions here)
  • Their current yield is usually extremely small at today's prices (<2%) and barebone-acceptable in a recession (~3.5%).

Sweden - characteristics as an economy

Sweden's companies tend toward the industrial segment. The country has a strong forest, metal and technical industry which produces everything from paper pulp, steel, motor vehicles, telecommunications, industrial machines, precision equipment to appliances and chemicals.

Internationally, Sweden is competitive with companies like Ericsson (ERIC), ABB (ABB), SKF (OTCPK:SKFRY), Alfa Laval (OTCPK:ALFVF) (OTCPK:ALFVY), AGA (Leading gas company in Scandinavia, now part of the Linde group) (OTC:LIN), and Dyno Nobel.

Unlike most European nations, we have never had to rebuild our internal (as in, our current borders) infrastructure as a result of war/destruction for almost 250 years (Beyond losing territories, Sweden has been neutral for over 200 years) since the sunset on the Napoleonic wars back in 1815 when almost a third of Sweden's dominion was lost.

Because of this, Sweden was relatively quick in achieving a generally high standard of living, an extensive welfare system, and a working industrial production that could keep going when other nations were essentially destroyed.

We have a modern distribution system, excellent internal and external communications in the forms of shipping lanes and a nation-wide, well-maintained railroad system that's in the process of being expanded, as well as a public-funded and extensive road system.

We're a rich nation, in terms of natural resources, not only in timber but also in metals.

(Source: Wikipedia)

As of today, much of these resources are actually untapped due to a wide-spread resistance against prospecting and further development. However, our nation is no stranger to the execution of massive projects in order to harvest our riches. We're one of the few nations that actually physically move an entire town in order to mine iron.

Much like other Scandinavian nations, many of our companies are part, or wholly-state owned. The best example is LKAB (no symbol) which is in charge of all iron mining, a completely state-owned company. State ownership, as you can read in many of my articles, come with both benefits and drawbacks. The degree of state ownership in Sweden has lessened considerably in the last 30 years. The state has let go of Nordea (OTCPK:NRBAY), Vasakronan (No symbol), OMX exchange (No Symbol), and Vin & Sprit (No symbol). Privatizations of Telia (OTCPK:TLSNF) and SAS (OTC:SASDF) are ongoing.

The Swedish central bank is the oldest central bank in the world - founded in 1668 - and we focus on price stability with an inflation target of 2%. We rejected the euro in 2003 and maintain our own currency, the SEK, or Svensk Krona. Our largest export/trading partners in terms of trade flow are Germany, USA, Norway, UK, Denmark, and Finland.

Trade Unions

A big drawback (from the investor's view, at least mine) is the degree of trade unions in Sweden. Around 70% of our workforce is unionized which in some cases can severely limit company profitability or complicate things with strikes and other things.

(Source: SVT, Uppdrag Granskning)

This can be seen among other things, in the virtual destruction of the Gothenburg harbor due to strikes. The trade unions retain very strong political ties to the leading social democratic party, though these ties are in the process of weakening.

We have no minimum wage set by legislation, but instead have minimum wage standards for various sectors set by collective bargaining processes, covering almost 90% of our workforce (85% in the private sector). Important to note is that these collective agreements are in no way demanded by legal regulations/laws - they are essentially self-inflicted result of labor market party regulation. This is often brought up as an example of the success of self-regulation as opposed to governmental regulation of collective bargaining/agreements.

The Future/Risks

The export sector has acted as our main growth engine since the mid-1990s, proving robust despite global trouble due to the export mix/sales mix and structure in terms of sectors. The previous raw material-reliant export industry has shifted to include IT and telecommunications, increasing its recession resistance. The current trouble here is inflation and FX, as the SEK due to smaller rates of inflation and a conservative fiscal policy is worth a lot less than 2-3 years ago. Export companies are suffering and receiving less money for their product.

We're also experiencing a dire situation in our real estate sector with soaring property prices and a 170% debt/income ratio, with a high degree of interest-only loans that will take 100+ years to repay. The challenge is, however, Sweden requires almost 500,000 (Source: Boverket) new housing units/apartments nationwide until 2025 to accommodate our increase in net population, and only ~50 000 are being built, very little of which accommodate low-income demographics (only condos and houses). Due to zoning regulations and requirements in terms of the permit and build quality, building rental units is not a profitable venture in Sweden (unless you set rents of 1400-2000$ for even small units, virtually unpayable for most), and as such, only houses and high-cost condos are being built.

In addition, to combat the loans situation, the state has instituted amortization requirements that put most younger people (under 30) vastly outside the possibility of buying a home due to a 20-30% downpayment requirement, depending on your income situation. A house in Gothenburg will cost you upwards of 2-4 million SEK, a down payment represents 400,000-1,200,000 SEK. The average income in Sweden is around 300,000 SEK net/annually, giving the average Swede the option of saving perhaps 50,000-100,000 SEK a year depending on your situation.

Back in the 1960-70s, the solution for a similar problem was the building of the so-called Millions program (1 million units in 10 years) under the control of the social democrats.

(Source: Svensk Byggtidning)

Some call for a similar program once more - but the interest from the political direction is next to zero. So, those without the means to buy are left in limbo. I personally do not view a real estate crash/bubble as even remotely likely because if people were forced to sell, others would buy. The proof in the pudding is the crash back in -09. While there was some rotation on the real estate market, the crash ultimately had limited effect on the market as a whole. There is too much demand and too little supply to even consider the risk of a widespread bubble, should prices start dropping. I personally own a company that, in such a case, would start gobbling up some property.

In this article, I've elected not to focus on the social challenges faced in the nation - I don't view them as relevant here.

Sweden in a nutshell

We're a strong export economy with quality companies experiencing a real estate crisis as well as some currency risks. The currency risks are, in my view, short term and will shift once our central bank changes the currently-negative interest rates in 2019/2020. The real estate challenge is a big one but not one necessarily affecting our companies as such (other than building demand/immediate tenancy)

So, with this out of the way, let's look at the list.

The list

When the recession hits and a general downward trend starts affecting the OMXSPI/OMXS30, the following companies are companies I will be looking to either buy or increase my exposure to.

  • AarhusKarlshamn (OTC:AARHY) produces vegetable oils and fats for food, confections, pharmaceuticals, cosmetics, chemicals and animal feed.
  • Addtech (OTCPK:ADDHY) is a technology trading group with over 100 operating companies striving to be market leaders in specific niches.
  • Alfa Laval (OTCPK:ALFVF) deals in solutions for heavy industry to heat, cool, separate and transport a variety of products, compounds, liquids, and solids.
  • Assa Abloy (OTCPK:ASAZF) is a company in access solutions (locks, gates, entrance and entrance automation).
  • AstraZeneca (AZN), a biopharma and pharma company.
  • Atlas Copco (OTCPK:ATLKY) manufactures industrial tools and equipment in segments such as compressors, vacuum and construction/industrial.
  • Boliden (OTCPK:BDNNF) is a Swedish mining and smelting company focusing on copper, zinc, lead, gold and silver production. It once held Europe's largest and richest gold mine, now defunct.
  • Essity (OTCPK:ESSYY) is a global hygiene and health company which produces things like tissues, diapers, feminine care, orthopedics, and wound care.
  • Fabege (OTC:FBGBF) is a real estate company with a focus on Stockholm.
  • Getinge (OTCPK:GNGBF) is a med-tech company, providing equipment and life science solutions/systems, and is the world's largest producer of surgical tables.
  • Hexagon (OTCPK:HXGBF) a company focused on precision measuring and active in GPS, industrial metrology and similar technologies.
  • Hexpol (OTCPK:HXPLF) is an industrial conglomerate, a spin-off from Hexagon, and one of the world's largest companies in the business of rubber blends/mixes.
  • Hufvudstaden AB (OTCPK:HUFAF) is a real estate company with a focus on Stockholm.
  • Indutrade (OTCPK:IDDWF) is an industrial conglomerate consisting of about 200 companies in 27 nations and 4 continents. The company/ies are active in the sale of industrial technical trade as well as manufacturing of proprietary technology.
  • Investor (OTCPK:IVSXF) is one of the largest companies in Scandinavia, a conglomerate investing in several major Swedish companies, many of them on this list. It is owned by the 6th-richest family in Sweden, the Wallenbergs.
  • Latour (No symbol) is an investment company showcasing a ~100 000% growth since the mid-'80s and owns a majority stake in Assa Abloy, a large portion of Securitas and otherwise consists of 70 industrial companies with proprietary or leading products in specialty segments. Segments include hand tools, hydraulics, air treatment, and friction bolting.
  • L.E Lundbergföretagen Aktiebolag (OTC:LBGUF) is a large Swedish investment company active in owning large Swedish companies, many of them on this list.
  • Nibe Industrier (OTCPK:NDRBF) is a company in the heating business, producing heat pumps, ovens, heaters, and similar products.
  • Sandvik (OTCPK:SDVKF) is a global conglomerate active in solutions, tools, and systems for metalworking as well as machines and technical solutions for mining and construction, advanced products made from steel, special compounds as well as solutions for industrial heating as well as significant R&D into material compounds and alloys. The company commercialized the Bessemer method.
  • SCA (OTCPK:SVCBF) produces paper, pulp, pellets, and wood and is Europe's largest owner of forest properties, owning 2.6M hectare worth.
  • Thule Group (OTC:THLPF) produces logistical solutions, such as cases, toolboxes, beds for truck and snow chains.
  • Trelleborg (OTCPK:TBABF) Is a global Industrial conglomerate producing sealants, attenuation products, sound-proofing and protection for demanding industrial applications.
  • Wallenstam (OTC:LNWBF) is a Swedish real estate company with a focus on Gothenburg, Stockholm, and Helsinborg.
  • Vitrolife (OTC:VITIF) sells products related to in-vitro fertilization (IVF), among other things, growth/IVF cultures.

A few notes to this list.

  • Some companies you may expect to be on, like Nokia (NOK)/Ericsson, is either on or not on, but I do not own the stock directly. This is because in Sweden you can own investment conglomerates that invest in the company, and as such, offset company risk through an investment in the conglomerate instead. Nokia will be on my list for Finland.
  • Some companies I've written about, such as ICA (OTC:ICCGF) and Axfood (OTCPK:AXFOF) are not on the list, because they can become appealing outside of a recession. Historically, very few or none of these companies can. This list is about companies rarely undervalued.

As you can see, many of the companies on this list are extremely basic in terms of their industry. This is the type of companies I love. This is also the type of company the market seems to love, seen by their relative valuation. While not 100% future-proof, they're future-resistant to a degree that's ridiculous compared to some of the more volatile segments on the market. Every single one of these companies listed are companies I would gladly own until the day I die.

So, there is my list.

I will write articles specifying some of these companies further - what exactly they do, their business, their valuation and when to invest - but this serves, I believe as a basic overview. Interested investors would do well to keep an eye out for this.

I hope I've shown you somewhat why Sweden as a market is extremely appealing. We're a very mature economy with technical proficiency and many global companies. There are problems, but very few of these directly affect the way these companies do business long-term.

I've mentioned some of the strongest companies that exist within our borders.

Let me know if you have any questions and I'll do my best to answer them.

Disclosure: I am/we are long AXFOF, ICCGF, TLSNF, SKFRY, IVSXF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.