11 'Granolas' Stocks Outperform Magnificent 7 With Lower Volatility, Higher Yields

While many of the world’s investors remain focused on "The Magnificent Seven" — a group of tech stocks that significantly outperformed in 2023 — a small group of European stocks has quietly outperformed most of the world.

Based on the first letters of their names, Goldman Sachs dubbed this group “Granolas,” and it accounted for 50% of gains of the Stoxx Europe 600 Index for the past year.

Who are the Granolas?

Granolas refers to a group of 11 European stocks operating in the healthcare and pharmaceutical sector, with an addition of luxury, consumer staples, industrial manufacturing and software technology. They include:

• GSK plc GSK: The pharmaceutical company, founded in 1715, operates through four segments: Pharmaceuticals, Pharmaceuticals R&D, Vaccines, and Consumer Healthcare. The company's arguably most famous product is pain reliever Advil. Its stock trades at 13.8x the earnings — below the industry's average. It pays a 3.5% dividend with a reasonable 48% payout ratio. One potential weakness is its high level of debt, which grew during the COVID-19 pandemic but has been improving over the last two years.

• Roche Holding AG RHHBY: The Swiss pharmaceutical giant touts over 100,000 employees and has a broad portfolio of products, including in vitro tests for various diseases such as cancer, diabetes, COVID-19 and others. It boasts a healthy 19% profit margin and a price-to-earnings ratio 16.1x, which is well below the industry average. The company, founded in 1896, pays a stable and growing 4.1% dividend with a reasonable 67% payout ratio. Its debt-to-equity ratio has doubled from 40% in 2019 to over 80% in the aftermath of the COVID-19 Pandemic.

• ASML Holding N.V. ASML: Dutch developer, producer and seller of advanced semiconductor equipment systems for chipmakers. It is a key company in the global semiconductor supply chain and the only company capable of supplying extreme ultraviolet lithography technology. This technology is crucial for producing the most advanced microchips with nodes as small as 7,5 or 3 nanometers. A single machine costs more than $200 million. Its stock trades at 43.4x its earnings. The company has a net profit margin of over 28% but pays a minuscule dividend of 0.7%. It has an excellent balance sheet, with cash exceeding the debt by almost 50% and a forecasted annual growth of 15.6%.

• Nestlé S.A. NSRGY: The food and beverage conglomerate has over 270,000 employees and operates household brands such as Nescafe, Nespresso, Maggi, Thomy and Hot Pockets. Its stock trades at 22.3x, above the European average for that industry, but expected given the company's status. Its net profit margin is hovering around 12%, and its sustainable 3.1% dividend has been stable. However, the company has doubled its debt over the last ten years and it currently amounts to almost $60 billion.

• Novo Nordisk NVO: Danish global pharmaceutical company specializing in diabetes and obesity care and rare diseases. The company's most famous product is Ozempic, a diabetes treatment that has gained popularity as a weight loss drug. Ozempic alone generated almost $14 billion in revenues in 2023, three times more than its second-best product, Wegovy. The stock trades around 45x its earnings, with a solid net profit margin of 36%. The company also pays a 1.1% dividend, which is below the industry average. However, its balance sheet is pristine, with comfortably more cash than debt and growth prospects of around 13%.

• Novartis NVS: In 2023, the company generated $45.5 billion in revenues, mainly from the U.S. ($18 billion) and Europe ($13 billion). Its products include Cosentyx, cardiovascular drug Entresto and Piqray, a cancer-treating drug. The stock trades at 24.8x its earnings, with a net profit margin of 18.3%. It pays a notable 3.6% dividend, but the payout ratio has been stretched to 95%. Novartis carries $24.6 billion of debt, but it is not a concerning sum, given the company’s size.

• L’Oréal S.A. LRLCY: French manufacturer and seller of cosmetic products. Often considered the world's most valuable cosmetics brand, under its umbrella it operates brands such as Maybelline New York, Garnier, NYX Professional Makeup, CeraVe, and Redken. The stock trades at 38.9x its earnings with a net profit margin of 15%. Its 1.5% dividend is not notable but boasts a low payout ratio, stability and comfortable growth potential. The balance sheet is strong, with a debt-to-equity ratio of less than 10%, indicating conservative risk practices.

• LVMH Moët Hennessy – Louis Vuitton Société Européenne LVMHF: French-based, globally-operating luxury goods company owns iconic brands like Louis Vuitton, Tiffany & Co., Christian Dior, Fendi, Givenchy, Princess Yachts, TAG Heuer, Hublot, Dom Pérignon, Hennessy and many others. Its CEO, Bernard Arnault is the wealthiest person in the world per Forbes' 2024 list. The stock trades at 28x its earnings with a 17.61% net profit margin. The company pays a 1.5% dividend, which is the industry average, but owing to a low payout ratio there is plenty of room for growth. The balance sheet is very strong, with some debt in the aftermath of 2020, but it is not notable given the company's size.

• AstraZeneca PLC AZN: The UK-based biopharmaceutical company developed the Oxford- AstraZeneca COVID-19 vaccine, sold under brand names Vovishield and Vaxzevria. The stock trades at 33.8x its earnings with a net profit margin of 13%. A 2.2% dividend is below the industry average but has sustained steady growth over the last decade. In 2021, the company took on almost $10 billion of debt, which remains a burden on the balance sheet, although some of it has already been paid off.

• Sanofi SNY: French-based healthcare company focusing on neurology, immunology, rare diseases, oncology, rare blood disorders and cardiovascular diseases. Its most famous product is DUPIXENT (Dupilumab), a drug used for atopic dermatitis and asthma. The company trades at 20.6x its earnings with a net profit margin of 11.7%. A dividend is Sanofi's strong side, paying 4.2% with a track record of stability and growth. The balance sheet is strong, with debt decreasing, equity rising and comfortable levels of cash and short-term investments.

• SAP SE SAP: The German enterprise application software provider is a global leader in enterprise resource planning (ERP) software and the largest non-American software company by revenue. It trades at 53.9x its earnings, the highest valuation from the GRANOLAS list. The company has a 12% profit margin and pays an unimpressive 1.2% dividend. It boasts a strong balance sheet with more cash than total debt, indicating management's conservative approach to risk.

Granolas vs. The Magnificent Seven

There are three main advantages these stocks hold over The Magnificent Seven.

1. Low Volatility: These stocks are not as volatile as The Magnificent Seven, and they achieve similar results. Investors can compare these two groups by measuring the stock's average Beta, a measure of volatility compared to the underlying market index. Another popular metric to show the impact of such investments is the Sharpe ratio. It’s one of the most widely used metrics for measuring risk-adjusted return.
2. Lower Valuation Multiple: The lower valuation of European stocks is noteworthy. On average, their price-to-earnings ratio is around 30. For the Magnificent Seven, this is over 46x as of March 2024.
3. Higher Dividend Yield: The Magnificent Seven are not known for their yield. Only three stocks of the group pay a dividend, with the highest one (Apple) yielding a paltry 0.5%. On the other hand, every single GRANOLAS stock pays a dividend, averaging a 2.42% yield. Combined with lower volatility, this fact makes them particularly attractive to long-term yield-oriented investors.

Investing In Granolas Via ETFs

Although many of the Granola stocks trade on U.S. exchanges, domestic investors might consider the VanEck Pharmaceutical ETF PPH, which invests in the largest pharmaceutical companies.

Pacer Trendpilot European Index ETF PTEU is another option. It is biased toward large-cap Eurozone equities, with 3/5 top holdings in GRANOLAS.

European investors should opt for iShares Core EURO STOXX 50 ETF. It offers over 40% of portfolio exposure to Granolas, or SPDR MSCI Europe Health Care UCITS ETF, which focuses on European healthcare industry.

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