Small players join European stock market gains and beat big names

The Covid crisis, supply chain problems, runaway inflation and, above all, aggressive rate hikes are some of the reasons behind the poor performance of small-cap stocks in recent years. But this trend is slowly beginning to reverse and in the latest recommendations from analysis firms, one of the ideas that is gaining strength is the commitment to small stocks.

Since the beginning of December, the Ibex Small Cap (Spanish index that groups together small stocks) has gained 16.57%, above the 10% of the Ibex 35 in the same period and also higher than the 11.64% of the Euro Stoxx. The last time the small ones did better than the big ones was in 2020, a year in which the main index of the Spanish Stock Market fell by 15.45%, compared to the gains of 18.93% of the small firms. With this comeback, the Ibex Small Cap has overcome the aggressive rise in rates. After rebounding by 42% from the lows of October 2022, when the ECB was immersed in its crusade against inflation , the index has made the most of the renewed appetite for European equities and, like its older brother, returns to 2008 levels. “The Stock Market always gets ahead. The recovery in European equities and small stocks is due to investors anticipating that the bottom has been reached and that negative news has already been priced in," says Julián Pascual, president and equity manager at Buy & Hold.

The prospects that the worst is over and that now we can only hope for a recovery are compounded by the low valuations of small stocks. “The historical valuation gap between small and large-cap companies in the US and Europe suggests that diversification into small stocks could be an interesting opportunity in 2025,” say analysts at Crédit Mutuel AM. An idea that is shared by Pascual, who believes that, despite the recovery they have experienced in recent months, small stocks are still far behind. “We may be on the verge of a change in sentiment as occurred at the beginning of the 2000s (end of the dotcom bubble) and in 1973 (end of the Nifty Fifty bubble), leading to many years in which the profitability of small stocks is much higher than that of large stocks,” the fund manager points out in its half-yearly letter. The firm believes that the negativity towards small names is as extraordinary as the optimism towards big names is surprising.

Ángel Fresnillo, director of variable income at Mutuactivos, points out that, although small and medium-sized stocks are more volatile due to their cyclical profile, in the long term their returns have been higher. With inflation no longer the main threat and expectations that rates will continue to fall, the manager believes that the perfect conditions exist for these firms to prolong their increases. The fall in the cost of financing has a special impact on small stocks that are financed for shorter periods and that in years of high rates have been forced to refinance at higher prices, thus penalizing margins. Along with the potential offered by monetary policy, Fresnillo highlights more structural advantages, such as the larger universe of companies, the greater presence in subsegments of the value chain that do not exist in the general indexes and the probability of corporate operations taking place due to their small size.

In addition to the issues that are common to all markets, in the Spanish case there are also the stories behind the companies. Unlike other markets where companies with a capitalisation of less than 6,000 million are considered small, in the case of the Ibex Small Cap, Aedas is the company with the highest value, with a capitalisation of barely 1,190 million, and the one with the lowest value, Nyesa, with less than 10 million. Within the Ibex 35 it is possible to find up to 13 stocks that are worth less than 6,000 million.

The low valuations of many of the small Spanish stocks mean that with very little money they experience strong fluctuations. At times when the stock markets rise, as has been happening in recent weeks, these listed companies can multiply the gains of the indices. But just as they rise, they can also fall. Along with volatility, one of the reasons why more conservative investors should refrain from betting on them is due to the low liquidity. Investors can face problems when they want to sell the shares. It is precisely this last characteristic that is one of the reasons why many institutional investors (large investors who pool the capital of many others) do not have a presence in these firms.

Earnings of more than 30%

Of the 30 stocks that make up the Ibex Small Cap, only eight (Nyesa, Urbas, Reig Jofre, Cox, Audax, Deoleo, Prim and Ezentis) have escaped gains since December 2024, one remains unchanged (Adolfo Domínguez) and seven have recorded gains of more than 30%. The gold medal goes to Oryzon Genomics. After four consecutive years of falls in which the shares fell by 60%, in the last three months they have recorded a 92.41%. The bulk of this recovery has taken place at the start of the year. Despite Tuesday's correction (-21.55%), the pharmaceutical company has appreciated by 110%. The good results achieved by its first molecule, vafidemstat , have aroused the interest of American pharmaceutical companies. The drug intended for the treatment of brain diseases has entered the last phase of the trial. On February 28, Oryzon Genomics holds the general shareholders meeting. Among the agenda items, in addition to the re-election of Carlos Buesa as CEO, is the appointment of four independent directors.

One of the weak points of small stocks is that they are hardly followed by analysis firms. The entry into force of the Mifid directive in 2018 left small stocks without recommendations because the law requires a breakdown of the cost to the client of the purchase and sale operations and the analysis reports. Despite this, up to six analysis firms follow Oryzon. Although the number is small, all of them recommend buying shares of the company and set a target price of 5.77 euros. In other words, they believe that the company still has room to set records and they give it a potential of 96%. Its highest price to date was recorded in November 2016 when its shares reached 5.14 euros.

OHLA and Airtificial are far behind Oryzon. The construction company led by brothers Luis and Mauricio Amodio has risen 65.34% in just three months. The company is reaping the benefits of two capital increases worth a combined 150 million and will rise 26.4% in 2025 alone. In addition to the rises on the stock market, the rating agencies are leaving the door open to an improvement. Moody's, which maintains the rating at Caa2 with a probability of default and a 'negative' outlook, has put the firm under review. The agency believes that the recapitalisation has alleviated refinancing pressures. The capital injection allows the debt to EBITDA ratio to fall from 4.3 to 3.3 times and improves liquidity.

Airtificial, the company operating in the automotive sector, has been boosted by the contracts signed in India and China. The two projects, which include high-precision systems, contribute to deepening the geographic diversification strategy and represent the landing in Asia, one of the objectives included in the business plan. In just three months, it has made 43% progress.

Dia is off the podium, up 37% . At the end of December, the supermarket chain refinanced the 885 million euros with maturities of between three and five years. In addition to this measure, the listed company launched a reverse split (grouping of shares), whereby 1,000 current shares will represent a new share. The ultimate goal of the measure was to raise the nominal value of the shares from 0.01 euros to 10. After the stumble on the first day of trading of the shares after the exchange, Dia has managed to take off and today the shares are around 18.5 euros.