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Adrigo’s Latest Portfolio Addition

Report: Systematic Strategies

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Stockholm (HedgeNordic) – Staffan Östlin is running stock-picking hedge fund Adrigo Small & Midcap L/S, seeking long and short opportunities in the Nordic small- and mid-cap segment. Östlin’s portfolio is structured around three building blocks: Core Five, High Potential, and Dynamic. Although each building block serves different purposes and houses stocks with different characteristics, they share a common thread – change. One of Östlin’s most recent holdings that has been undergoing positive change is bearings manufacturer SKF.

Adrigo Small & Midcap L/S maintains a concentrated, high-conviction portfolio of 25 to 30 long positions distributed across three building blocks. SKF is the latest addition to Östlin’s portfolio. “The company has been in a transformation mode since CEO Mr. Richard Gustafson took charge during the spring of 2021. Our opinion is that this could result in higher and more stable margins with a subsequent increase in valuation multiples,” Östlin explains the rationale behind the new investment.

“Over the years, SKF has been viewed as the ugly duckling in the ‘great’ Swedish family of engineering companies.”

“Over the years, SKF has been viewed as the ugly duckling in the ‘great’ Swedish family of engineering companies,” says Östlin. Historically, SKF has reported lower margins, higher cyclicality and lower return on equity compared to peers such as Atlas Copco, Alfa Laval, and Sandvik. Despite negative organic growth, SKF managed to improve its operating margin from 8.5 percent to 11.5 percent year-over-year. “The third quarter is normally the weakest quarter for SKF, which makes the improvement even more impressive,” emphasizes Östlin. 

“We believe that Mr. Gustafson, with a fresh set of eyes, is challenging the organisation in a positive way,” argues Östlin. “The strategic overview of its business within the aero industry is an example of this. Another example is the fact that SKF has left certain contracts in the automotive industry as they did not meet the level of profitability needed,” he elaborates. SKF currently trades at an EV/EBIT multiple of 7 and a price-to-earnings ratio of 10 using forecasted earnings for 2024. “This is significantly below the ‘great’ companies mentioned above but also at a substantial discount to companies such as Trelleborg,” points out Östlin. “We see a good potential for a re-rating over the coming years.”

“We believe that Mr. Gustafson, with a fresh set of eyes, is challenging the organisation in a positive way.”

After facing a more challenging first half of 2023 with a decline of 9.6 percent, Adrigo Small & Midcap L/S has successfully turned the tide, entering positive territory for the year with a cumulative return of 11.6 over the past four months. Swedish small-cap stocks experienced a monthly loss of 3.2 percent in October following a drop of 3.9 percent in September, as indicated by the Carnegie Small Cap Return Index Sweden. In contrast, Adrigo Small & Midcap L/S showcased resilience, gaining 2.8 percent in October and 1.0 percent in September. “Active stock-picking pays off,” according to Östlin.

Since its launch in November 2017, the fund’s class A share class has delivered a cumulative return of 71.6 percent, corresponding to an annualized return of 9.4 percent. The Carnegie Small Cap Return Index Nordic, on the other hand, gained 52.6 percent over the same time span.

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Eugeniu Guzun
Eugeniu Guzun
Eugeniu Guzun serves as a data analyst responsible for maintaining and gatekeeping the Nordic Hedge Index, and as a journalist covering the Nordic hedge fund industry for HedgeNordic. Eugeniu completed his Master’s degree at the Stockholm School of Economics in 2018. Write to Eugeniu Guzun at eugene@hedgenordic.com

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