German stocks: where quality hides in the DAX

2026-10-06 · By Lubin Danilo, founder of Lubin Investment

Of sixteen large German stocks, the best quality scores go to Allianz, SAP and Rheinmetall, not to carmakers (Mercedes 3 out of 10, BMW 4). But two discounts are misleading: Allianz's because of insurance reserves, Rheinmetall's because free cash flow has turned negative.

When people think of German stocks, they think of cars, chemicals and machine tools: the country that built everything and sold it everywhere. I started from that picture, and ran sixteen of Germany's largest companies through my grid: ten financial criteria that judge a company's quality, scored out of ten, separately from the price.

The result surprised me. Mercedes-Benz drops to 3 out of 10. BMW, Adidas, Infineon and E.ON top out at 4. The highest scores, 8 out of 10, go neither to autos nor to chemicals: they go to an insurer (Allianz), a software company (SAP) and an arms maker (Rheinmetall). Right behind, at 7, come two reinsurers, Munich Re and Hannover Re.

So this study asks a simple question: where does German quality hide today, and is it still available at a reasonable price? I go through six stocks in order of my score, covering what separates them and what could break each story.

What do the numbers say about these six stocks?

Two reference points before the table. P/FCF is the share price divided by the free cash flow the company really generates after paying its bills: a P/FCF of 14 means you pay fourteen years of that cash, and the lower it is, the cheaper the stock. The reasonable buy price is the share price at which my model would return about 15% a year over five years, with cautious assumptions. A discount means the price is below that level, a premium means it is above.

Company	Quality score	P/FCF	Free cash flow margin	Gap to the buy price
Allianz	8/10	5.5×	22.5%	72.5% discount (to be taken with caution)
SAP	8/10	26.0×	22.9%	38.0% discount
Rheinmetall	8/10	31.8×	14.2%	55.5% discount (to be taken with caution)
Munich Re	7/10	14.0×	6.9%	23.8% discount
Hannover Re	7/10	5.4×	22.4%	36.5% premium
Deutsche Telekom	6/10	6.1×	18.1%	1.2% premium

Two of these discounts are too good to read literally, and I explain why below. The rest of the table already says one thing: price has almost no relation to the score. The stocks with the highest multiples (SAP, Rheinmetall) are growth stocks, and the cheapest ones (Allianz, Hannover Re) are insurers, a business where P/FCF reads differently.

Why do German insurers show so much cash?

Allianz converts 287% of its earnings into cash, Hannover Re 215%. For an industrial company that would be suspicious. For an insurer it is the normal mechanism: it collects premiums before paying claims. In between, that money is called the float, the reserve of premiums collected but not yet spent, and the insurer invests it in the markets while it waits.

This changes two readings. First, an insurer's free cash flow is inflated by those growing reserves: it cannot be compared with a machinery maker's. Second, the "debt" of these groups is not really debt, it is mostly money owed to policyholders one day. That is why I read Allianz's 72.5% discount with caution: the model assumes this cash repeats, while it swings with reserves. Same nuance on its P/FCF, which is 5.5 but sits at the 88th percentile of its own history: the stock is cheap in absolute terms, not compared with what it usually costs.

The substance is solid, though. In the second quarter of 2026, Allianz posted a record operating profit of 4.9 billion euros, up 10.6%, and kept its annual target of 17.4 billion, plus or minus one billion. Over five years the share count falls 1.9% a year and the dividend is about 4% of the price. The weak point shows in the grid: sales grow only 3% a year. Allianz is a cash machine that does not grow fast, and that is exactly what the price seems to accept already.

Munich Re or Hannover Re: two reinsurers, two very different prices

A reinsurer is the insurer of insurers: when a company fears a loss too big for itself (storm, earthquake, industrial fire), it passes part of it to Munich Re or Hannover Re in exchange for a premium. The business is cyclical: prices rise after disasters and fall when they are missing. Both are scored 7, with sales flat (-0.2% and -0.6% a year), which is normal for a business that arbitrates price rather than volume.

What separates them is how the market pays for them. Munich Re cuts its share count by 2.4% a year, grows cash per share 11.6% a year and sits at a 23.8% discount to the buy price. Its 2026 first half is a record, with 3.9 billion euros of net profit and an annual target of 6.3 billion kept, even though the group trimmed its reinsurance revenue target by 2 billion, to 38 billion. Hannover Re has a stable share count, cash per share growing only 2.7% a year, and its price is 36.5% above my buy price.

Same reinsurance mechanics, two stock market treatments: the market has already sorted them in a way the score alone does not show. For a US comparison, I detailed the logic in my reinsurers ranking. The shared risk stays the same: a run of catastrophes in a single year hits earnings all at once.

SAP and Rheinmetall: growth costs money, but not in the same way

SAP is the more classic of the two. The business software maker grows 8.1% a year, with cash per share up 16.1% a year, a return on invested capital of 51% and no net debt. In the second quarter, its current cloud backlog jumped 27% to 22.9 billion euros, and cloud revenue rose 22%. A P/FCF of 26 is high, but it sits at the 35th percentile of its own history: the stock is cheaper than in about two thirds of past cases. The market fears AI will eat into business software, which explains the fall in price. My view: the fear is plausible, not proven. The quarter is detailed in my analysis of SAP's results.

Rheinmetall is a much tenser case. Its sales grow 15.1% a year, and in the first half of 2026 they jumped 39% to 5.2 billion euros, with an order backlog of 80.5 billion. But the half-year operating free cash flow is negative by 1.6 billion: the group is building inventory, investing, and facing a shift in customer advance payments. A growing backlog is not cash in the bank. And the share count rises 2.5% a year, which dilutes shareholders.

My 55.5% discount for Rheinmetall must therefore be handled with care. The model relies on the last twelve months of cash, which captured its best period just before a negative half-year. The 101.8% yearly growth in cash per share also comes from a very low base: the group's free cash flow was negative from 2021 to 2023. I already detailed this tension in my article on Rheinmetall.

And Deutsche Telekom, the stock everyone knows?

Deutsche Telekom scores 6 with a P/FCF of 6.1, cash per share growing 21.4% a year and a dividend of about 3.7%. Its price is 1.2% above my buy price: practically fair value, neither a bargain nor a trap. What limits the score is debt: it equals 6.2 years of free cash flow, a high level. A telecom operator finances networks that are very expensive to build, and its debt is the price of that asset. The return on invested capital, 9.4%, stays modest. This is not a pure quality stock, it is a decent yield at a decent price.

What do I take away from Germany?

German quality is no longer where people look for it. The classic image of the carmakers does not survive the grid: their scores do not justify their reputation. The best scores in the country sit in insurance, software and defense, that is, in businesses where cash is recurring or where demand is carried by governments.

But quality is not price. Of these six stocks, three are truly at a discount according to my model (SAP, Munich Re, and Allianz with the reserves caveat above), one is near fair value (Deutsche Telekom), one is too expensive (Hannover Re) and one calls for caution (Rheinmetall). It is the same lesson as in my study of Europe: a good balance sheet says nothing about the price you pay. Each page, like Allianz's or SAP's, details the ten criteria, and my methodology explains how the score and the buy price are computed. It is the sorting I wanted to be able to do for any stock, so I built it.

FAQ

What are the best German quality stocks in 2026?

Of sixteen large German stocks run through my grid, three get 8 out of 10: Allianz, SAP and Rheinmetall. Munich Re and Hannover Re follow at 7. Carmakers are lower: Mercedes-Benz 3, BMW 4.

Are German stocks eligible for a French PEA?

Generally yes: Germany is in the European Economic Area, so shares of German companies listed in Germany, such as SAP, Allianz or Rheinmetall, can go in a PEA. Always check eligibility with your broker before buying.

Is Allianz undervalued?

My model shows a 72.5% discount, but I read it with caution. An insurer's cash is inflated by its reserves, which vary from year to year. The P/FCF of 5.5 is low in absolute terms and high against the stock's own history.

Why does Rheinmetall have negative free cash flow despite a record backlog?

In the first half of 2026, operating free cash flow is negative by 1.6 billion euros: inventory up, high investment and a shift in customer advances. An 80.5 billion backlog is not cash: it turns into cash as deliveries happen.

About the author

Written by Lubin Danilo, founder of Lubin Investment. A self-taught individual investor, I find fundamental analysis fascinating, and it has delivered excellent results. For three years now, my performance has beaten the S&P 500. But analyzing every stock took too much time: sites with incomplete data, calculation methods and criteria never aligned with mine. And spotting the best stocks was just as time-consuming, even with my own well-defined checklist. So I put my software development background to work to build this software, base my investment strategy on its results, and share it with people who share the same passion as me. It judges a company's quality and its price separately, using criteria drawn from the financial literature (Warren Buffett, Michael Mauboussin, Aswath Damodaran).