One 'Rising Star' French Candidate and 3 Hidden Gem Stocks

 | Feb 08, 2017 | 8:00 AM EST
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The French people's best chance to prevent Marine Le Pen from becoming president, Francois Fillon, has intensified his efforts to clear his image after media reports that he paid his wife for work she had not done.

In a letter published by French newspaper Le Point, Fillon said: "Faced with intimidation attempts and pressure, I have decided not to give in. I have chosen to stand tall and face the judgment of the French people."

Fillon said the details of the work his wife had carried out had been made public, and her remuneration "doesn't correspond to the spectacular amounts that have been thrown in the public space."

"Everything is legal. The amounts have been declared and taxed. I have put everything in the open, I wanted to make everything verifiable," he said.

It is too early to say whether his detailed explanations will improve his chances. In an opinion poll published on Jan. 5, Fillon was slightly ahead of Le Pen, whereas a poll published this morning by the French media puts him behind both Le Pen and rising star candidate Emmanuel Macron.

The fact that 39-year-old Macron is gaining ground is an interesting development. The former economy minister (from 2014 to 2016) and investment banker has had a meteoric rise, which is highly unusual for French politics.

He is famous for introducing "the Macron law" in 2015, which cut into union restrictions on work hours and abolished the monopoly over transports of the state-owned national rail company, among other measures designed to make the French economy more open.

Macron last year created his "En Marche" (Let's Move) political movement, which aims to capture voters from both the center left and the center right. Two days ago, he publicly called on Americans working in research about climate change -- something President Donald Trump is not that keen on, to put it mildly -- to consider France their "new homeland."

Macron is married to his former school teacher who is more than 20 years his elder, and has been accused by the media of hiding a homosexual affair. He denied the accusations, saying they deeply hurt his wife.

So it seems the battle of who will face Le Pen in the second round is between Fillon and Macron. Opinion polls show that if Macron were to make it in the runoff, he would gather 66% of the votes.

Of course, investors learned the hard way last year via the Brexit vote that believing opinion polls can go horribly wrong. But as fears of a victory by Le Pen grow, so do opportunities for investors willing to take on risks. It looks like the imagination of some in the markets is running wild, with a breakup of the eurozone probably considered more likely than it actually is. This is weighing on the euro and making eurozone stocks cheap relative to U.S. issues.

Looking at French stocks, there are three companies that have American Depositary Rights listed on the New York Stock exchange that look like very good investments, as they are in good financial shape. U.S. investors seeking to take a bet on the French election should start their research with them. (All figures and ratios are from FactSet and have been calculated against the main Pairs listings, rather than the less liquid ADRs).

Cap Gemini (CGEMY) is a consultancy company specializing in technology, outsourcing and other professional services. Year to date, the stock price lost around 5%. It has business all over the globe and was hit by fears of a recession in the U.K. after the Brexit vote and of a crackdown on migration in the U.S., which would hurt its ability to bring in skilled workers.

The company's stock price was also hit by reports last November that a hacker had managed to infiltrate the site of a recruitment company, the system of which was administered by Cap Gemini, and stole names, passwords and email addresses.

Still, if it can stay clear of further negative news, this stock could be a recovery story. It has had strong sales growth, while its net income grew at a double-digit percentage pace from 2013 to 2015.

What's more, it has managed to achieve this growth without a lot of leverage: its total debt to total capital is just 35.6%. Looking at the company's price/earnings (PE) ratio, investors could have this one for a song: on a trailing 12-month basis, it trades at a P/E of 10.8 compared with its five-year average of 16.3. It is set to report results Feb. 16.

Plastic Omnium (PASTF) is a maker of components, body modules, fuel tanks and systems for automotive vehicles; it also has an environmental component that offers waste containers for local communities and companies.

It derives 92% of its revenues from the automotive business, and in this day and age of innovation in the auto sector its growth prospects generally look good. Financially, the company looks even better: it has managed double-digit net income growth every year since 2012 and its debt-to-capital ratio is 45.2%.

This one doesn't look that cheap, trading at a trailing 12-month P/E of 17.3 compared with its five-year average of 13.9. However, the stock has risen by more than 20% over the past year and has gained 5% so far this year.

Valeo (VLEEY)  operates in the auto industry as well. It designs and makes integrated systems and modules for things such as electrical transmissions, engine management, climate control and driving assistance.

With the advent of hybrid/electric vehicles and the self-driving car, this company, too, seems well-placed to benefit from technological changes. Its sales have grown every year since 2010, posting a healthy 14.3% advance last year, while net income growth on a percentage basis has been in the double digits since 2012.

It has achieved this growth with little leverage: debt to capital stands at 33.4%. Investors in Valeo have been richly rewarded over the past year, as the stock advanced by more than 57%. It is up 4.5% year to date, which means it is trading at a trailing 12-month P/E of 16.7, above its five-year average of 13.7.

Investors need to do their own research when it comes to allocating capital, but a blanket ban on French stocks because of election uncertainty would be a bad idea.

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