Europe Makes a Comeback

 | Sep 06, 2013 | 12:00 PM EDT
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After 18 months of contraction, the 17-nation euro zone economy is showing signs of life.

It left recession behind by growing 1.2% on an annualized rate in the second quarter, a bit better than the 0.8% growth forecast by economists. Germany's economy grew at a 2.8% annualized rate, while France's was up at a 2.0% rate.

Not all economies in the zone expanded. Spain's shrank by a 0.4% rate, but that was better than the 2.0% drop in the first quarter. Cyprus sported the worst showing, falling 5.6%. Portugal, one of the sicker of the euro zone members, had the best record, growing at a surprisingly strong 4.4% rate.

The European Union is certainly not out of the (economic) woods. Unemployment is just over 12% and there is plenty of government and bank debt to cause any number of problems. But after enduring its longest recession ever (six quarters), growth of any size has to be considered good news.

Where there is good economic news, there are good investment opportunities. Employing the guru strategies I rely on to find stocks, I can report on two European companies that present solid prospects for virtually any investor. My guru strategies are based on the writings of some of Wall Street's greatest thinkers, which I computerized. Using these, I can automatically screen any stock to see if it meets the highest standards of any of my strategies.

The strategy that currently favors European companies is based on the writings of James P. O'Shaughnessy. The 10th anniversary of my following most of these strategies occurred on July 15, so I can now report a full decade's worth of performance. The O'Shaughnessy-based strategy is a proven winner. During the past 10 years, as the S&P 500 produced a 5.3% annual return, the O'Shaughnessy strategy nearly doubled that benchmark with a 10.0% annual return.

The strategy runs four tests. Those companies that get over these hurdles are then subjected to one additional test, which is dividend yield. The strategy picks only the top 50 stocks among those that pass its four tests and have the highest dividend yield.

The four tests include having a market cap greater than $1 billion, cash flow greater than the market's mean, shares outstanding in excess of the market's average and trailing 12 months sales that are at least 1.5x greater than the market's mean. The stocks I am recommending meet all of these criteria. And they have strong yields.

One stock is France-based Sanofi (SNY). This company enjoys a position of real strength in the pharmaceutical industry, where it is one of the largest. It has a strong pipeline of products it is developing and a strong lineup of existing products. And its yield is 3.74%.

The second recommendation is Royal Philips (PHG), based in the Netherlands. This is a diversified technology and consumer products company whose product lineup includes light bulbs, kitchen gadgets, televisions and electric shavers, among others. This is a company with solid positions in many markets. Its yield is 3.00%.

Not all of Europe is on its economic knees, and not all European companies are struggling. These companies are well worth a close look.

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