The American stock market has its “Magnificent Seven”. Europe has “Granolas”. First identified by Goldman Sachs in 2020, these 11 stocks reflect a broader segment of the European stock market than the tech-heavy Magnificent Seven in the United States.
In addition to being among the most valuable stocks on the continent, these companies share strong profit growth, low volatility, high and stable margins, strong balance sheets and sustainable dividends. The 11 Granola stocks are:
- GSK GSK
- Roche RHHBY
- ASMLASML
- Nestlé NSRGY
- Novartis NVS
- Novo Nordisk NVO
- L’Oreal LRLCY
- LVMH Moët Hennessy Louis Vuitton LVMUY
- AstraZeneca AZN
- SAP SAP
- Sanofi SNY
In their April 2020 report, Goldman Sachs strategists wrote: “In the United States, technology will likely remain the long-term winner. In Europe, it is more likely to be a combination of structurally strong and/or stable sectors: healthcare, consumer staples and technology… They may not ALL succeed, but they generally show some profit growth and/or stability and [dividend yields] in the range of 2.0% to 2.5%.
As is the case with the Magnificent Seven in the United States, Granolas have dominated their market. Goldman analysts noted on February 12 that they accounted for 60% of all gains in European stocks over the past year. In fact, “from a global perspective, Granolas have even outperformed Magnificent 7s over the last two years… They largely explain the good performance of European stocks despite sluggish domestic GDP. »
Starting with Goldman’s research and working back to 2021, we looked at the most valuable companies in the Morningstar Europe Index, as well as valuation and fundamentals data from other databases, to understand the drivers underlying reasons for the outperformance of Granolas shares.
The Magnificent Seven vs. Granolas
There is no company with a trillion-dollar market value on the list of top European stocks, while six of the Magnificent Seven are valued at this level: Nvidia NVDA, Meta Platforms META, Apple AAPL, Amazon.com AMZN , Microsoft MSFT and Alphabet GOOGL/GOOG. The exception is Tesla TSLA, which is worth around $630 billion.
Europe’s most valuable company is Novo Nordisk, the Danish pharmaceutical company whose obesity drug Ozempic helped propel its profits to new heights. Novo is valued at $555 billion. (For a complete look at the biggest European stocks, see the table at the bottom of this article.)
The second big difference between the Magnificent Seven and the Granolas is their diversity of sectors. The Magnificent Seven are all technology-focused, although Morningstar only ranks three (Microsoft, Apple and Nvidia) as technology stocks. Amazon and Tesla are consumer cyclical stocks, while Alphabet and Meta are in the communications services sector.
Granolas represent a much broader cross-section of the economy, with names from the healthcare, consumer defensive and consumer discretionary sectors. ASML, a global provider of semiconductor production equipment, is the only technology stock. Several Granolas companies are world leaders in their respective fields: Nestlé for food, LVMH for luxury, L’Oréal for cosmetics and Novo for diabetes. The list also includes some of the largest pharmaceutical companies in the world. Besides Novo, there are Roche, Novartis, Sanofi, AstraZeneca and GSK.
Granola performance
Since 2021, the average yield of Granolas has been very solid. On a total return basis in euros, an equally weighted portfolio of these companies would have doubled in value, with a cumulative total return of 103% as of February 19, compared to a cumulative total return of 128% for their US counterparts.
We looked at historical returns on equity as a measure of profitability. This measure is far from perfect, especially for companies whose profitability relies primarily on intangible assets. This nevertheless gives an idea of the profitability of the main stocks in Europe and the United States.
Both groups have seen their returns on equity improve in recent years. And although they are more volatile, the Magnificent Seven have been significantly more profitable than Granolas.
European stocks at a discount
We also examined traditional valuation ratios using consensus data to assess whether the Magnificent Seven’s higher profitability is justified and whether their securities are trading at a premium to their European peers. The chart below shows that thanks to rising returns on equity, valuation ratios have declined in recent years. Despite this, both sets of stocks trade at significant premiums to their respective markets.
Granolas shares currently trade at 31 times their expected earnings for the next 12 months. In comparison, the European market trades at 13-14 times expected earnings. In the US, the Magnificent Seven currently trades at 34 times earnings (at a premium to the US market, which trades at around 20 times earnings).
The Magnificent Seven’s historical premium over their European counterparts makes sense, given their higher return on equity. The equally weighted European listing is influenced by the very high valuations of certain companies, notably ASML and Hermès International, which trade at price/earnings multiples of around 43 and 49 times respectively.
Comparing the Granolas’ valuations with their Morningstar fair value estimates, five are undervalued. The US-listed stocks of GSK, Nestle, AstraZeneca, Sanofi and Roche are rated 4 stars, while Roche is significantly undervalued as a 5 star stock. LVMH and Novartis are considered fairly valued 3-star stocks.
Among the Magnificent Seven, only Alphabet is considered undervalued, with a 4-star rating. Microsoft, Nvidia, Amazon and Tesla are quite valued.
Overall, Granolas shares have provided strong returns to investors, not far behind their U.S. counterparts. The subset is on average smaller but more diverse than the Magnificent Seven. Their high profitability justifies their valuation premiums compared to the rest of the market, but the fact that the American cohort is even more profitable explains why the European version trades at a discount compared to it.