London Calling

 | May 29, 2014 | 11:00 AM EDT
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Formerly dowdy London is today one of the world's great cities. With a metropolitan area population of roughly 8 to 10 million, depending on which outlying population centers one includes, it is Europe's largest city.

The U.K. has about 64 million people, which means London has 13% to 16% of the country's population. Yet, as an indication of how powerful an economic engine is London, the city accounts for about 22% of the U.K.'s GDP. Open immigration from European Union countries have made London a truly international city, which helps account for its economic vibrancy.

I am writing this column from London, and since arriving, I have been continually impressed by the city's vibrancy and sophistication. Food, which used to be an Achilles heel for London, is now often on par with New York and Paris. Restaurants where I have dined, including Bibendum and Berner's Tavern, and even a local pub in Belgravia, the Grenediere, serve superb food.

To not miss out on the economic potential of London, you would do well to include London-based companies in your portfolio. Oil giant BP (BP) is a good place to start.

To choose stocks, I use computerized strategies I created that model the way well-known investors choose stocks. My James P. O'Shaughnessy strategy is a fan of BP. It likes the company's huge market cap and sales ($157 billion and $377 billion, respectively), strong cash flow per share ($8.15) and large number of shares outstanding (3.1 billion).

Companies that pass these tests are then placed in competition with one another over their dividends. The strategy picks the top 50 based on dividend yield, and BP's 4.47% places it in this top 50 group.

Another London-based, oil-related company is Ensco (ESV), which does contract drilling for major, national and independent oil and gas companies around the world. It is the world's second largest offshore driller. My strategy based on the writings of Peter Lynch likes this stock.

The most important variable used by this strategy is the P/E/G ratio, which is price-to-earnings relative to growth, and is a measure of how much the investor is paying for growth. A P/E/G of up to 1.0 is acceptable and Ensco's yield-adjusted P/E/G of 0.74 is well within this parameter. Ensco is a well-performing company with a nicely-priced stock. 

Pharmaceutical giant GlaxoSmithKline (GSK) is another London-based company to consider. Like BP, this is an O'Shaughnessy strategy favorite. Its market cap is $134 billion, sales amount to $43 billion, cash flow per share comes to $4.49 and shares outstanding are 2.4 billion. Its dividend yield of 4.66% places it among the top 50 companies that pass all the previous tests.

You really need a touch of London in your portfolio, and any of these companies meet this need. Plus, if you are thinking of taking a vacation, London deserves to be on your short list of possibilities.

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