9/3/2013 9:30 PM ET|
4 reasons to invest in Europe -- really
A global advertising agency
WPP (WPPGY), a big advertising agency based in London, looks cheap because it trades at a discount to big ad agencies based in the United States, such as Omnicom (OMC) and Interpublic Group (IPG), says Vars, who helps manage the NorthRoad International Fund, which outperformed competing funds by 2.5 percentage points a year over the past three years, according to Morningstar.
WPP goes for about 13 times next year's earnings, while the two U.S. agencies trade at 14 and 14.7 times earnings, respectively. Yet WPP is posting good results. Billings were up 5% in the second quarter. Profit margins were strong. And the company has room to boost them more, says Vars. Plus, WPP may benefit because Omnicom is merging with the big Paris-based ad agency Publicis (PGPEF). WPP might pick up clients who decide to leave the new giant. For example, after the merger the new company will serve both PepsiCo (PEP) and Coca-Cola (KO). That might be too close for comfort, so one may choose to bolt, says Vars.
The French drug and vaccine company Sanofi (SNY) also looks cheap compared with similar U.S. companies, says Kee of South Texas Money Management. Sanofi has a P/E to growth ratio (PEG) of 2.3, compared with 4.7 for Merck (MRK) and 3.92 for Pfizer (PFE). The PEG ratio, popularized by investing great Peter Lynch, adjusts stock valuations for underlying growth rates to better compare valuations.
Sanofi seems to have a "domicile discount." It is based in Europe, but it does one-third of its business in the faster-growing emerging markets. That makes it a play on emerging middle-class consumers, a trend that will continue even as emerging market growth has slowed, says Kee. "That is still the story of our lifetimes," he says, and Sanofi is a good way to play it.
Novartis (NVS), based in Switzerland, is a pharmaceutical giant with a twist, in that it sells a lot of consumer health care products, such as contact lenses and fluids. This makes it a consumer staples company of sorts, says Vars. Yet it's a lot cheaper than most consumer staples companies. Novartis has a forward P/E of about 13.6, compared with P/E's in the 16 to 18 range for companies like Procter & Gamble (PG) and Colgate-Palmolive (CL). That discount makes Novartis attractive, says Vars.
U.S. bank stocks have had a great run over the past year, and now they don't look so cheap. But European banks still do look cheap. But they may be due for a similar bounce, as confidence in Europe returns and European interest rates rise, believes John Lekas of Leader Capital. Banks typically do better when rates go up, because they can make more on loans.
BNP Paribas will benefit, and it's worth considering as a buy because it is so well-run and well-capitalized, says Scott Carmack, a portfolio manager at Leader Capital. It also looks cheap, trading at around .71 of book value. U.S. banks, such as JPMorgan Chase (JPM) and PNC Financial Services Group (PNC), have already risen to trade at book value again. "We think that over the next couple of years, BNP Paribas will trade at book value," says Carmack. Meanwhile, BNP Paribas pays a 3.1% dividend yield.
Another cheap European bank that looks very attractive is Italy's Intesa Sanpaolo (ISNPY), says Chad Deakins, the portfolio manager of the RidgeWorth International Equity Fund (STITX), which outperformed competing funds by more than a percentage point over the past three to five years. Intesa Sanpaolo trades at .55 times book value on concerns about political and economic risk in Italy. "But it is in the healthy and industrialized northern part of Italy," says Deakins. As Italy eventually comes out of recession, that will improve the bank's earnings and reduce its discount, says Deakins. The bank pays a dividend yield of over 3%.
Basic materials: Energy and chemicals
Energy is one of the cheapest sectors, and Paris-based Total (TOT) is one of the cheapest of the cheap, trading for a forward P/E of just 8. Investors have been troubled by Total's lack of production growth and high costs, but it has been taking steps to fix both, says Vars of NorthRoad Capital Management. Total is starting to deliver production growth which should continue for several years, says Vars. He also thinks cost cutting will boost free cash flow, which should attract investors to the stock. Total pays a 4.8% yield.
Vars also likes Amsterdam-based Akzo Nobel (AKZOY), the largest paints and coatings company in the world and a big specialty chemicals producer. Akzo Nobel trades for just 12.3 times earnings, partly on concerns about Europe, even though it does business in 80 countries and it gets about 40% of revenue from emerging markets. That discount makes it a lot cheaper than similar U.S. companies such as Sherwin-Williams (SHW), which has a P/E of 18.7. Vars expects Akzo Nobel shares to rebound on improved profit margins and growth.
Like European banks, insurance companies on the continent look attractively cheap, says Carmack at Leader Capital. He thinks they will rebound as confidence returns regarding Europe and as interest rates go up, which will allow them to invest premiums at higher rates.
Carmack counts Amsterdam-based ING Groep (ING) among his favorite European insurance companies. Though it's based in Holland, it gets about 38% of its revenue from North America. The stock recently traded at $10.90 a share, almost double its April share price. But Carmack thinks it's still attractive, in part because it should repay a loan to the Dutch government next year. That will allow ING to restore its dividend.
Kee, at South Texas Money Management, agrees that ING is "extremely cheap" at .63 times book value, because it is not getting credit for restructuring that's improving margins and financial strength. "The market has not priced this in yet. It is just a great opportunity," says Kee.
Two other insurers that look attractive are Aegon (AEG), based in Holland, and AXA (AXAHY) based in France, says Deakins of the RidgeWorth International Equity Fund. Both have recently rallied, but they still trade well below book value. These stocks should trade up closer to book value as business continues to improve and investors get more confident on Europe, says Deakins.
Meanwhile, both insurers offer investors a bit of insurance, so to speak, by paying them to wait for their shares to rebound. Aegon offers a dividend yield of 3.5%, and AXA pays a yield of 4.2%.
At the time of publication, Michael Brush owned shares of Coca-Cola and he has suggested Coca-Cola in Brush Up on Stocks, his investment newsletter. Click here to find Brush's most recent articles and blog posts.
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