CAC 40: Is it a good situation to enter the CAC 40?

(BFM Bourse) – The last eight stocks to enter the Paris index have seen varying fortunes since the date of their inclusion. This reminds us that an entry on the CAC 40 can very well be made at a time when the title has already experienced its stock exchange zenith.

Edenred has given the CAC 40 a bit of a face lift. An independent company since 2010, the specialist in payment solutions for the world of work has seen a spectacular rise in the stock market with a rise of 136%

in five years.

Can the company led by Bertrand Dumazy climb even higher now that it has joined the elite on the Paris stock exchange? If the analyzes are optimistic, recent history calls for some caution.

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As the infographic below shows, half of the last eight stocks included in the index, from STMicroelectronics in September 2017 to Eurofins four years later, are moving up from their previous price in the Parisian flagship index. and four down, with in addition a shade to bring for Thales (even lower). Note that we have obviously excluded Stellantis, which took over PSA at the beginning of 2021, and Euroapi, as a result of a spin-off from Sanofi, which only very briefly remained on the CAC 40 for technical reasons, and the index then counts 41 values.

Sometimes more misfortune than blessing

“Entering the CAC 40 does not guarantee a good stock market performance. By joining the CAC 40, the stock is then subject to index logic, which during up cycles can lead to a progression of the title disconnected from fundamentals. But conversely, when the cycle turns, the decline can be very severe for the stock. It is sometimes a blessing in a period of stock market growth and a curse in a period of decline”, develops Frédéric Rozier, manager at Mirabaud France.

“The risk of integration into the CAC 40 is bringing in stocks that are at or near their stock highs, with good news already behind us and a valuation that is already stretched. This is often the case with industrial stocks, which can return while their activity is at the peak of the economic cycle”, adds the expert.

“There was food and drink, but we remember difficult journeys, with the case of Vallourec for example”, emphasizes the leader. Vallourec joined the CAC 40 at the end of 2006, driven by a 160% increase over that year. The action is so close to its all-time high. The tube specialist then leaves the index in June 2014 with a price divided by more than 3.

Hermès, the brilliant journey of a thousand lights

For the eight recent examples, the stock market fates are therefore varied. Hermès’ growth is impressive (+244%). Like LVMH, the luxury group has experienced rock-solid growth in recent years, each year pushing back the debates about its valuation that already existed when it entered the CAC 40 in June 2018. Luxury has become the key sector on the Paris Stock Exchange to the point that attracting the US Coty to a dual listing. Bank of America continues to appreciate in value, which is one of its favorite stocks in the luxury universe.

STMicroelectronics (+169%) was particularly supported by the boom in electric vehicles, which consume a lot of semiconductors, and by its good execution. A quality also demonstrated by Dassault Systèmes (+57.4% since September 2018). The professional software publisher is positioned in the lively niche of computer-aided design and manufacturing, with the development of digitization of the industry and diversification towards health and life sciences. Like Hermès, its valuation remains a subject of recurring debate.

Thales (+26%) is a somewhat special case. The technology and defense group has long advanced on the course that saw it join the CAC 40 in June 2019. Especially since the group issued a sell warning a few months later. But as with all defense stocks, the outbreak of war in Ukraine shuffled the cards. This conflict has put this sector back on the market radar, which had previously been largely neglected by ESG (environmental, social and governance, extra-financial criteria) investors, and operators have predicted increased orders for these groups. Thales had the highest increase in the CAC 40 (+59%) last year.

Teleperformance’s latest difficulties

Arriving at the CAC 40 in March 2020, Worldline (-32.3%) above all had a complicated year 2021 with a particularly difficult investor day and poorly received by the market. It was also in late 2021 that the payments group saw a major “derating” movement (a depreciation of stock market multiples). This was caused by a perception problem on the part of the market, which fears that the traditional payment players (such as Worldline, but also the Italian Nexi) are suffering significant losses of market share from new players such as the Dutch Adyen. Although these fears have not materialized, this market perception is struggling to disappear.

Teleperformance’s problems (-28.8% since June, when it joined the index) are more recent. At the end of 2022, the company suffered from an ESG and social polemic with the working conditions of employees in Colombia at the heart of the matter. Transparent and successful communication to the market made it possible to return to the price before this episode at the beginning of the year. But then the title fell again, punished by publications below expectations in terms of growth, the announcement of a large-scale acquisition (Luxembourg Majorel for a total of 3 billion euros) not necessarily well received by the market, with a small dilution to key, Teleperformance partly plans to pay this redemption in securities. But also out of fear that the rise of generative AI, personified by conversational bots like ChatGPT, will disrupt the company’s business model.

Eurofins crashes

Alstom (+34.3% since its entry in September 2020) seemed to have the assets to tell a good stock market story with a promising theme, namely the growth of railways, a mode of transport that essentially promotes the energy transition. But the purchase of Bombardier Transport, which was completed in early 2021, has produced some unpleasant surprises. The integration of this acquisition, which made it possible to strengthen Alstom against the Chinese giant CRRC by giving it complementarity in terms of products and geographical areas, was painful for Alstom, the group that inherited several contracts with difficulties to perform. This weighed on its profitability and, in particular, had forced it to invest heavily to restore the difficult projects in Quebec society. In the first half of the financial year 2021-2022, Alstom had thus burned 1.46 billion euros in free cash flow. However, the company turned things around, with a nice series of increases in May.

Eurofins seems to perfectly illustrate the case of the value arriving at the CAC 40 at the “bad” moment. The drug, food and environmental analysis laboratory entered the index in September 2021. At the time, the stock was near its all-time high. Except that at the time, Eurofins was benefiting from strong growth driven by demand for its wide range of products and tests that were crucial to dealing with Covid-19. With the end of the pandemic and the normalization of the health situation, this buoyant wind apparently ended up losing its power. Since then, the post-Covid shift has not been easy to negotiate, at least in the stock market. For example, the 2022 results (and forecasts for 2023) were a source of disappointment to analysts, and the market had heavily sanctioned those financial statements.