Company Focus
Recent articles:
• Cable companies are now cash machines, 7/20/2005
• 4 retail stocks still on a roll, 7/13/2005
• Follow the smart money to Wendy's, 7/6/2005
More...
| | Company Focus
Stocks that will ride Europe's next boom
Europe has been in a slump for some time, but some experts see big growth ahead. These stocks could lead the comeback.
By Michael Brush
Skip the European vacation. Send your investment dollars instead.
After years of being stuck in the doldrums, European economies are about to hit a growth spurt. Here are two reasons why: - European interest rates are at or near historic lows, so companies can borrow and invest, or refinance debt on the cheap.
- The European money supply -- a measure of currency and credit -- is up. This means more money is available for businesses and consumers to borrow and invest or spend.
Both conditions have been in place for around a year -- about the time it takes for them to start having an impact on the economy, says James Paulsen, the chief investment strategist at Wells Capital Management.
And add this third reason: The euro has weakened against many currencies since March. Even if that doesn't hold, for the time being it means Europe can export more goods because those goods look cheaper to foreign buyers.
Though few people have faith in European economies these days, Paulsen has a knack for big-picture predictions. In early April, for instance, he told readers to buy cyclical stocks in sectors like technology -- stocks that were getting hit hard at the time. Since then, the Nasdaq ($COMPX) is up 7.5%. In that April column, I detailed several other accurate Paulsen predictions.
The Continent's comeback
There already are signs that European economies are perking up. Factory orders and business confidence are rising in Germany, home to Europe's largest economy. A cross-continental purchasing managers index is up. And a June jobs report showed that European employment was strong two months in a row, suggesting the labor markets may have turned around, says Ian Stewart, a European economist at Merrill Lynch. "The implication is that growth is likely to pick up in the third quarter," says Stewart.
Related news and commentary on MSN Money
European stock markets may be at or near highs for the year, but thats actually a good sign because stock markets often rally ahead of economic recoveries, Paulsen says.
Is it too late to invest? He doesn't think so. "I dont think much of Europe believes they are going to grow much, says Paulsen. I dont think people in the U.S. believe the story much either, or they havent even heard the story yet."
European stocks still look cheap, says Jason Holzer, portfolio manager at AIM European Growth (AEDAX) and AIM European Small Company fund (ESMAX).
The MSCI Europe Index, a broad European stock index, is trading at about 13 times the next 12 months of earnings. Thats more than two points below the index's historical average, says Holzer. About 85% of the companies in the index pay dividend yields above the yields on 10-year bonds. Historically, that is a very effective trigger, says Holzer. You can find really high-quality growth companies without paying a premium.
Go east
If Western Europe comes back, that will help the thriving economies in Eastern Europe, which have been getting a big boost as the western companies shift production there to take advantage of lower wages and taxes, says Markus Brueck, portfolio manager at Metzler/Payden European Emerging Markets Fund (MPYMX). Better growth will also increase the numbers of acquisitions of Eastern European companies.
Underneath it all, theres a gap in gross domestic product per capita that makes Eastern Europe a decent long-term play, says Julian Mayo of the U.S. Global Investors Eastern Europe fund (EUROX). GDP per capita is about half that of the average European Union country, says Mayo. But that will change as Eastern European countries catch up. That is the convergence that we want to participate in, over the next 15 years.
It's sometimes harder for U.S. investors to buy Eastern European stocks, as few of companies from the region list their shares here. But most full-service brokers, such as Merrill Lynch, and some discount brokers, including Charles Schwab, will allow you to purchase shares directly from other markets. The brokers may charge higher commissions, though, and require larger minimum investments.
Fine refiners
The Italian energy company ENI (E, news, msgs) has a rich collection of oil and gas assets in places like Libya, Angola, Kazakhstan, Algeria and Iran. So it has been able to bring new fields online and keep operating costs stable while competitors' costs rise.
"They really have the best production growth profile of any of the major oil companies, says AIMs Holzer. ENI also has a lot of refining capacity -- another advantage since tight production capacity has driven up refining margins, says Bernie Horn, of the Polaris Global Value Fund (PGVFX). The company pays a 4% dividend yield and has been buying back stock.
One risk for ENI shareholders: The Italian government has sold and may again sell part of its stake in the company, says Armando Iobbi, an analyst with an Italian brokerage called Centrosim. The good news is this would make ENI more susceptible to takeover -- which would help shareholders.
Another play on higher refining margins is the Hungarian energy company MOL. MOL has an advantage over Western European energy companies because it has the kind of refining capacity that can handle the heavier crude that comes out of Russia, says Metzler/Payden's Brueck. The company also operates gas stations in Eastern Europe.
Building Europe, literally
If growth is going to pick up in Europe, its a good idea to buy cyclical companies -- those that do better as economies improve. Two construction companies fit the bill.
CRH (CRHCY, news, msgs), based in Dublin, Ireland, supplies many of the basic building blocks of construction, like cement, asphalt, glass, stone and gravel. The company has low-cost sources for raw materials, says Horn, noting that the company also has a knack for growing through acquisition. CRH has a strong enough balance sheet to keep on buying.
Aim's Holzer likes Grupo Ferrovial, a Spanish construction company that gets a big piece of its revenue from operating and maintaining airports, seaports, motorways and subway systems, including parts of the London Underground. Grupo Ferrovial is positioned to grow in Eastern Europe because in 2000 it bought a controlling interest in the largest construction company in Poland, called Budimex.
Banking growth is in the cards
As Eastern European economies play catch up with the West and a stronger consumer class develops, that will help the region's banks. Currently, consumers in Eastern Europe don't often use banks for services like mortgages and credit cards. But that should change as the economies develop.
A great way to play this trend: a large Hungarian bank called OTP Bank, another company whose stock isn't traded in U.S. markets. OTP has an unassailable market position in Hungary, which is one of the biggest markets in Eastern Europe, says Holzer. It also has a big presence in other Eastern European countries, such as Bulgaria. Despite its potential -- and a healthy return on equity of more than 30% -- the stock looks inexpensive at just 10 times 2006 earnings.
Stock picks
With this column, I'll add ENI and CRH to my Company Focus stock-pick portfolio for tracking, and we'll see how they do from here.
|
