Cac 40: Why entering the CAC 40 is not always a good sign in the stock market

(BFM Bourse) – Of the last ten groups to enter the index, six have dropped significantly from their inclusion and three have dropped out (or nearly so for Alstom). Which shows that the arrival at CAC 40 could very well happen the moment the stock finishes eating its white bread in the stock market.

This is the best return for a stock that has been present in the CAC 40 since its inception in 1987. The Accor hotel group returned to the top tier of the Paris stock exchange on Monday, a little more than three years after leaving in September 2020. , in the midst of an epidemic.

This “comeback” marks the resurgence of the Sebastien Bazin-led company in a few years. The group was able to capitalize on the recovery in tourism and published a record gross operating profit of more than 1 billion euros for 2023. Both UBS and Jefferies have recently switched to value on buying, and have decided the group still has potential, particularly to build on its stock market discount compared to its British peer IHG.

However, we will see if Accor succeeds in transforming the test after its integration into the CAC 40. Certainly in the short term the entry into the reference barometer of the Paris Stock Exchange is positive because of the index fund managers (ETF) that follow the CAC. 40 stocks must be bought to continue replicating the index.

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But in the medium and long term, joining the CAC 40 does not necessarily equate to a sustained rally in the stock market. Edenred knows something about this. The last group to enter the CAC 40, the specialist in restaurant vouchers, fuel cards and inter-company payments, lost around 20.7% in mid-June 2023 (with the exception of Vivendi which only returned last December). Threats by the executive to limit the commissions of restaurant voucher issuers in France (which were not followed through) and the recent opening of an investigation into calls in Italy led to a disappointing net profit for the group in the first half. The tenders were launched in 2019 and were potentially false.

Edenred is hardly an isolated example. Of the last ten stocks to join the CAC 40 (we’ve excluded Vivendi which has only been around for three months), six have shown major declines in their prices since their integration. Two of them, Atos and Worldline, have left it, in 2021 and 2023 respectively, and Alstom will be excluded on Monday.

Sometimes bad timing

“Access to the CAC 40 does not guarantee a good performance of the stock market. The action by joining the CAC 40 is then subject to the index logic, which, during growth cycles, can lead to the advancement of stocks disconnected from fundamentals. But on the contrary, when the cycle turns, A decline can then be very serious for a stock. It is sometimes a blessing in periods of stock market growth and a curse in periods of decline”, explained BFM Borse Frédéric Rosier, manager of Mirabaud last year. France.

“The risk when integrating into the CAC 40 is to enter stocks that are at their stock market peak or near this peak, with good news already behind us and valuations already tight. These are often industrial values, which return when their activity is at the peak of the economic cycle”, added the expert.

Certainly, some titles have done well. Hermès (+335.65%) continues to exceed expectations and even after solid growth, at the end of 2023, when the luxury sector experienced a fairly brutal normalization. STMicroelectronics and Dassault Systèmes, two technology stocks, have made good progress (+157.6% for STMicro, which entered September 2017 and +63% for Dassault, which entered a year later). Even though his stock market boom has sometimes experienced a downturn. Dassault Systèmes lost more than 10% after the release of its annual results in February, due to lower-than-expected sales of new licenses and disappointing growth in life sciences.

Thales is a unique case. If the group has experienced only one real setback in terms of execution, with a caveat on its sale in the fall of 2019, it is above the conflict that broke out in Ukraine in March 2022 and the renewed geopolitics that allowed the group. It has gained over 37.4% since its integration into the CAC 40 in June 2019. The war in Ukraine has in fact put conservation groups, which were previously shunned by the markets because they are considered to have few ESG qualities (environmental, social, governance , extra-financial criteria).

Descending into the hell of multiple values

But apart from these four examples, the reforms are serious. Atos has sunk almost 100% since March 2017, when the group entered the CAC 40 before exiting in September 2021. The IT services company had a series of disappointments, partly because the company underestimated the growth as well as the decline of its outsourcing activities. of the public cloud. But also because of chronic managerial instability (five general directors have succeeded one another since 2019). The group recently had to forego a capital increase and is currently in discussions with its creditors. Atos faces a wall of debt with 3.65 billion euros of loan refinancing between 2024 and 2025.

Worldline (-78.06% since its entry on the CAC 40 in March 2020) especially last fall, with a drop of 59% in one session. This led to its expulsion from the CAC 40 in December. The group published disappointing growth, slashed its forecast for 2023 and drew a line under its earlier 2024 targets. This forced its partner Credit Agricole to come to its rescue by taking a 7% stake in January. This with the aim of strengthening their links but also with the aim of fending off potential predators… The company disappointed again during the release of its annual results and Oddo BHF judged that “it will take time to convince investors about the group’s competitiveness”.

Alstom (-70.8% since September 2020), which will no longer be part of the CAC 40 on Monday, suffers from the integration of Canadian Bombardier Transport from January 2021. The takeover was painful to digest and reduced its cash generation. But the group fell more than 37% during a single session in September after it announced it had burned through more than 1 billion euros of cash in the first half of its stalled fiscal year. The company is currently considering several avenues to strengthen its financial balance sheet, including a possible capital increase. Its goal is to reduce its debt and thereby maintain its credit rating, which currently sits at the bottom of the non-speculative category. Moody’s gives this rating a negative outlook.

Entering the CAC 40 in June 2020, Teleperformance suffered particularly in 2023, losing 59.5% since its inclusion in the index. The downside lies in a large acquisition but poorly received market (Luxembourg’s Majorelle) and several quarters of disappointing growth, including the last three months of 2023. But investors also fear the impact of generative artificial intelligence on teleperformance activity. Two weeks ago, the stock fell more than 25% after Swedish fintech, Klarna, touted the prowess of an AI assistant that would have allowed it to replace 700 full-time counterparts by performing simple tasks. Customer relations. Although management emphasized that the tool is nothing exceptional and does not threaten teleperformance, the group will have to prove itself to investors in the coming quarters to maintain its position within the CAC 40.

As for Eurofins Scientific, the pharmaceutical and food analysis laboratory perfectly illustrates the typical case of entering the CAC 40 at a “bad time” in September 2021, when it was on its stock market. At the time the stock was near its all-time high.

Apart from this, Eurofins benefited from strong growth due to demand for a wide range of products and tests required for the management of Covid-19. With the end of the epidemic and the normalization of the state of health, this energetic wind apparently lost its power. Since then, the post-Covid turnaround, at least in the stock market, has not been easy to negotiate. When publishing its annual results, Eurofins was again heavily sanctioned due to cash flow and a significantly lower than expected dividend.

Julian Marion – ©2024 BFM Bourse