Buying into high-quality smaller companies can be one of the most powerful ways to capture long-term investment growth – especially if you have the resources and expertise to spot opportunity before the rest of the market. At JPMorgan European Discovery Trust (JEDT), we call such companies ‘hidden gems’. European small-caps have often been overlooked compared to other stocks simply because they don’t get the same analyst coverage as major multinationals or many US stocks. That provides compelling buying opportunities for observant investors – with the potential to see powerful share price uplift when other investors cotton on to these companies’ true worth. (116 wds)
The power of small
Four reasons why small cap outperforms/Six European stocks from hidden gems to global players
Buying into high-quality smaller companies can be one of the most powerful ways to capture long-term investment growth – especially if you have the resources and expertise to spot opportunity before the rest of the market
Many of us know about Apple Computer Inc being founded by Steve Jobs and Steve Wozniak in Jobs’ parents’ garage in 1976 and going public on the NASDAQ stock exchange barely four years later. Google, another garage start-up with three people in 1998, is one of the world’s largest five companies today with over 180,000 staff1 and a market valuation – as Alphabet Inc – of $3.5 trillion.2
Every company we see dominating the market started small in some form or another. The investment returns for investors who backed a promising company in its early days can be eye-watering. $10,000 invested in Apple’s IPO in 1980 is estimated to be worth $25 million now.3 The same amount invested in Nvidia (the graphics chip and AI giant that regularly rotates with Apple for the title of ‘world’s largest company’) at its 1999 IPO is estimated to now be worth somewhere north of $50 million4 (a series of stock splits make the exact maths complicated).
Of course, not all companies see these outsized returns. But investing in high-quality companies with compelling products and talented management when they are ‘small caps’ has been consistently shown to deliver some of the strongest long-term returns available anywhere in public markets.
What’s more, this growth potential is by no means limited to the US. Over the past 25 years, the Europe ex UK small-cap universe, for example, has returned a cumulative return of 1,000% – far outstripping both the S&P 500 and the Russell 2000 (the market indices for US large-caps and small-caps respectively) as well as other key market indices.5
There are many reasons for this. One is that European small-caps have often been undervalued or overlooked compared to other stocks simply because they don’t get the same analyst coverage as major multinationals or many US stocks. That provides compelling buying opportunities for observant investors – with the potential to see powerful share price uplift when other investors cotton on to these companies’ true worth.
At JPMorgan European Discovery Trust (JEDT), we call such companies ‘hidden gems’. Our team uses a disciplined, repeatable process to uncover high-quality small companies right across Europe. Investing solely in listed public companies, we aim to buy companies when we think their shares don’t yet reflect their true growth potential.
The returns achieved by individual portfolio companies through this approach can be compelling.
Germany’s Atoss Software has rapidly cornered the market in workforce management software, and is now used by 15,000 companies in 50 countries. Over 20 years, it has seen its value increase 177 times. Esker, the French accounting software company that’s harnessing AI to help CFOs improve financial efficiency, has seen global expansion drive up its market value 95 times over two decades. Reply, the Italian IT systems consulting firm, has seen its value rise 71 times in 20 years – likewise harnessing AI, cloud computing and big data to help companies develop smarter business models.
These phenomenal rates of growth are exceptional. Even so, it is often the case that smaller companies can see far greater rates of earnings growth (and, in turn, more rapid share price growth) than larger peers because they are at the start of their growth trajectory. For example, a small retail chain like Finnish homewares discounter Puuilo, which has 40 stores, only needs to open one new store every six to eight weeks in order to meet its aim to double its network within five years. US discount giant Walmart would have to open eight new stores every day to double in size.
Mergers and acquisitions are also a major growth driver for small caps. Just by making one or two small acquisitions a year, small-cap companies can boost growth in a way that large-caps can only do through billion-dollar deals.
So which small caps are destined to be the market giants of the future? Of course, no-one knows for sure. But there are structural trends that are providing a solid base for future growth. The unstoppable trend for digitalisation has seen CTS Eventim, the Germany-based online event ticketing platform, benefit from the rocketing demand post-pandemic for live entertainment, especially the rise in ‘mega tours’ by artists such as Taylor Swift. The move away from fossil fuels is driving demand for companies like SPIE, the French company that’s helping cities and companies decarbonise a variety of infrastructure and essential services.
A global population with increasingly complex health needs and demands is supporting healthcare innovators like Denmark’s Zealand Pharma. Its obesity drug is far less well-known than Ozempic and Wegovy made by pharma giant Novo Nordisk but has been shown to have fewer side effects.
These and other companies may have the potential to be the market leaders of the future. But with over 1,000 companies in the European small-cap universe alone, it takes extensive research and analytical resources to unearth the hidden gems with the greatest sparkle.
To that end, JEDT’s three-strong portfolio management team is supported by a further seven European and UK small-cap and mid-cap specialists, plus XXX sector specialists around the world to deepen understanding of individual industries. Together with J.P. Morgan Asset Management’s state-of-the-art quantitative analysis and risk management tools and an intensive company visiting programme, this allows us to identify, compare and track small-cap opportunity right across Europe in a way that less-resourced investors simply can’t.
Investing in companies at the early stage of their growth journey successfully requires major commitment. But as long-term results show, it can reap substantial rewards.
[1] Alphabet: number of employees 2024 | Statista
[2] Apple Inc. (AAPL) Valuation Measures & Financial Statistics
[3] If you invested in Apple’s IPO 44 years ago, here’s what your shares would be worth today
[5] Source: J.P. Morgan Asset Management, Bloomberg. All series are rebased to 100 as at 31 December 1999 to 23 February 2025. All indices in GBP and include reinvested dividends but not fees or operating expenses.