Spotting the Best Swiss Stocks

 | Sep 01, 2011 | 9:55 AM EDT  | Comments
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Sometimes you don't have to be big to be noticed. At 16,000 square miles, Switzerland is about half the size of South Carolina. Its population of 7.6 million is about equal to that of the San Francisco Bay Area.

But in this landlocked country is plenty of economic activity. One of the wealthiest countries in the world, it is known for its banks, watches, chocolate, cheese, manufactured goods, pharmaceutical companies, skiing and more. While not immune to the world economy, it is capable of going its own way. As the U.S. and EU grapple with unemployment rates above 9%, Switzerland's is a rock-bottom 3%.

But not all economic forces are working in Switzerland's favor. The Swiss franc is up sharply against the dollar and euro, which could dampen growth.

But the Swiss are known for running a tight fiscal ship and the U.S. would be happy to face Switzerland's problems. The Swiss government budget deficit in 2010 was 1.3% of gross domestic product, with the comparable deficit in the U.S. close to 9%.

Looking as Swiss socks, Syngenta (SYT), based in Basel, is a global agribusiness that produces seeds as well as such crop protection products as herbicides, insecticides and fungicides. The strategy I modeled after Peter Lynch's investment approach gives the company high grades. This strategy stresses the P/E/G ratio, which is the price-to-earnings ratio relative to growth. The upper limit allowable for the P/E/G is 1.0, which means the investor is paying no more than $1 for every 1 percentage point of growth.

Syngenta's yield-adjusted P/E/G is an acceptable 0.95, based on the average of its three-, four- and five-year EPS growth rates. If the stock's price rises much more, the P/E/G will move above 1.0 and the Lynch strategy will no longer be recommending it. At the time of this writing, the stock trades for about $63. In addition to the company's acceptable P/E/G, inventory as a percentage of sales is falling and debt is moderate. Syngenta is a well-managed company and a leader in its field.

Another favorite of the Lynch strategy is Novartis (NVS). Also headquartered in Basel, this is one of the world's largest pharmaceutical companies. Both my Lynch- and James P. O'Shaughnessy-based strategies are feeling good about this drug company. Novartis' yield-adjusted P/E/G is a desirable 0.83, using the average of the three-, four- and five-year historical EPS growth rates. Inventories as a percentage of sales have declined and debt is at a reasonable level.

The O'Shaughnessy strategy wants the company to have a market cap in excess of $1 billion, while Novartis' is an enormous $156.6 billion. Its number of shares is also way in excess of the strategy's minimum, as are its trailing 12-month sales. Further, cash flow per share is positive. The last step for this strategy is to take all the companies that pass the aforementioned criteria and find the 50 with the highest yield. Novartis's 4.14% yield puts it that group.

Credit Suisse Group of Zurich (CS) also gets high marks from the O'Shaughnessy strategy. This is Switzerland's second largest bank (after UBS), though it is in better financial shape than its larger rival thanks to its conservative culture. According to this strategy, favorable aspects of Credit Suisse include its market cap ($33 billion), sizable cash flow per share ($6.11), large number of shares outstanding and trailing 12-month sales that are nearly $30 billion. Among those companies that jump over all of these hurdles, Credit Suisse is among the top 50 because of its dividend yield of 5.3%. Credit Suisse has weathered the financial storm of the last few years better than most, which is why you should consider it a Buy.

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