Thoughts following the impact of the french legislative elections on french small and mid caps

Keep walking, keep calm and carry on!

I have been asked a lot for my thoughts about what is going in France with the ongoing legislative elections.

I will not speak about politics as it is not my role here but I will just say that I am extremely sad to see that the extremes are getting very high scores. Extremes have never worked out well as history has shown us… 

The best French companies have been here for ages, tend to be family owned who have a very long term approach (think multiple generations if not centuries). Their aim is that their companies survive and can be transmitted to the next generation. The best ones will adapt and transform themselves. They consider that they are merely managing the company for the next generation and this responsibility guides them. These companies do not fall into the traps of the next fad, they aim to keep improving in what they are good at. When you see all the regulations, taxes, change of rules which have taken place in France this helps to put forward the best companies with great management teams.

These companies share some common traits:

-they have a strong balance sheet (understand net cash position or a low debt level), 

-tend to focus on where they are good at and use most of the capital allocation tools which are available (buybacks, dividend, special dividend, finance organic growth, spin offs and M&A),

-employees are shareholders of their company,

-don’t over communicate (not necessarily a bad thing to over communicate but always ask yourself as to why they are doing it and why is there a change of approach),

- have strong know how developed through the years and strong R&D investments (expensed of course and not amortized),

- have hidden assets (real estate, carry forward deficits, treasury shares, self-controlling loops…)

- are quick to react when something is not working out.

I admit that in France that the buyback dimension is still not used by most of the companies but some do and they do it on a regular basis. 

Clearly management is decisive in creating shareholder value but also in building the culture within some companies. When I meet management I try to see if they are humble, will respect me as a private investor (one company board member asked how much I managed after I respectfully asked why they were not buying back shares as the price was fantastic, I wanted to react but my mentor told me to not react. Needless to say that I sold the shares of this company the next day). Ego is the enemy.

If you have done your homework you know that your holdings will do fine in difficult or unpredictable times. Keep looking at the management incentives.

Clearly the french small and mid cap market is highly impacted by inflows and outflows which affect French small and mid cap specialized funds. I can see it on many small and mid caps where volumes suddenly increase. We can use it to our advantage when they offer us nice prices or by simply not being worried by redemption requests as I am an individual investor my capital is permanent capital.

If I do not have cash to invest, I hold my positions. If I have cash I invest in the company which gives me the best margin of safety and which respects minority shareholders. Time in the market beats timing the market.

French markets went down following the dissolution but not excessively.

Having multiple sources of cash flow helps to put the snowball in place and reinforces the antifragile dimension of an estate. On a side note, I consider real estate rents as a sort of float. I can invest it but know that at one point I will need some of it back to cover expenses linked to real estate.

Cheers!

Jeremy