Three European Stocks to Ponder

 | Apr 29, 2013 | 10:00 AM EDT
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Europe is in the throes of a recession, yet European major stock markets show signs of perking up.

Last week, Germany's DAX was up 4.8%, France's CAC 40 rose 4.3%, and the Swiss Market Index advanced 3.1%. Some of the more volatile markets of southern Europe -- Spain, Italy, and Portugal, were up about 5%.

What does this mean? One possible explanation is that the markets are delivering a message. The eurozone will stay together and not split. The debt crisis involving the southern edge of Europe will devolve from a crisis into a problem, and end up half-solved with all parties muddling through. The economies of France and Germany will begin to recover late this year.

Those scenarios may sound optimistic, but markets are often good predictors of economic activity. If a recovery in Europe is a plausible, the next question for U.S. investors is whether they should add one or more European stocks to their portfolios. I've listed three European stocks that look promising, and which trade in the U.S. as American Depositary Receipts.

In Germany, the leading airline, Deutsche Lufthansa AG, is coming through the recession without losing too much altitude. Analysts think that revenue will be $30.8 billion this year, as against $30.1 billion last year. Earnings are expected to be $1.04 per ADR, up a nickel from last year -- and then to rise to $2.90 a share in 2014. The symbol is DLAKY. Lufthansa shares sell for about 7x earnings and 0.8x book value (corporate net worth per share). I think it's a good value. .

In France, I favor Total SA (TOT), the country's largest energy company. In addition to an active exploration and production program, Total operates about 25 refineries and has a large chemical operation. This stock is perhaps best known as a dividend play, with a yield of 6.3%. I own it for some of my income-oriented clients.

Total's stock price marched from about $22 (on the ADRs) at the end of 2002 to about $61 at the end of 2007. But it has never regained that level, and currently trades below $49. The valuation is 10x earnings and 0.5x revenue, which seems modest enough so that some capital appreciation is likely, in addition to the fat dividend. The symbol is TOT.

In Switzerland, Swiss Re Ltd  is the world's second largest reinsurance company. Its stock is unpopular, with the majority of analysts rating it a "hold" or "sell." Reinsurance is a complex and risky business but the company had a strong year in 2012 and is expected to show decent results this year. As a contrarian, I find the stock appealing at 6x trailing earnings and a little less than 10x estimated 2013 earnings.

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