Europe's top speculation? Ireland

Here are 2 favorite ways to play an economic recovery in the country.

By TheStockAdvisors Mar 6, 2013 10:02AM
Europe Photodisc SuperStockBy Nicholas Vardy, The Alpha Investor Letter

Europe has gotten a lot of bad press lately. Only a year ago, the London Financial Times fretted that the euro had just a few weeks to live. I attended a seemingly compelling presentation at the Oxford Business Club that boldly predicted that it was virtually certain that Greece would be out of the euro by the end of 2012.

Fast forward 12 months, and the picture is very different. European stocks have trounced the S&P 500 in the U.S. All of this may leave you scratching your head. After all, isn't Europe just a museum stuck in a recession?

Here's a reality check. Once the world stopped fretting about Europe's imminent collapse, the prospects for European stock markets weren't as bad as investors thought.

It all comes down to good old-fashioned valuation. First, unlike just about everything else you can buy, European stocks are simply cheaper than those in the United States.

Cyclically adjusted price-to-earnings ratios are among the few relatively reliable predictors of long-term returns. These P/E ratios are at very reasonable single-digit or low double-digit percentage levels in Europe.

Second, European company margins are at a 20-year average. That compares with the United States, where margins are at an historic high. So, Europe has much more room for upside surprises on a company level, as well.

Finally, with the change in leadership at the European Central Bank, it is now much more open to U.S. Federal Reserve-style quantitative-easing programs.

For all of these reasons, I believe Europe is both "under-owned and under-loved" by U.S. investors -- and a better bet for 2013 than the United States.

With so many global markets bursting out of the starting gate in 2013, you may find it difficult to know where to put your money to work. Yet, if I had a single favorite market in the world at the moment, it would have to be tiny Ireland.

Ireland has suffered severe austerity for the past few years. But it has sucked it up, stuck to its low-tax principles, and its economy has grown over the past two years.

And, yes, there are grumblings that the medicine it took was too bitter, with the Irish taxpayer on the hook for European banks' bond losses.

In comparison, the noisy Greeks have gotten away with a massive write-down of their obligations. But unlike the Greek economy, the Irish economy has finally turned, and there is light at the end of the tunnel.

Here are two ways you can play the recovery in the Irish stock market.

First, you can buy the broad-based exchange traded fund -- the iShares MSCI Ireland Capped Investable Market Index Fund (EIRL). This ETF is up 26.42% over just the past six months.

An even better, albeit more volatile performer, has been Bank of Ireland (IRE), which has soared 47.34% over the last six months and 27.85% in 2013 alone.

With billionaire contrarians such as Wilbur Ross and several private equity firms buying into Bank of Ireland in July 2011, there is plenty of "smart money" betting on the economic recovery in Ireland.

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