Looking Across the Pond

 | Oct 18, 2013 | 12:00 PM EDT  | Comments
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After watching the last few weeks of political dysfunction in our nation's capital, it is easy to see why investors and businesses lack much certainty right now. A month of politicians' preening, partisanship and petulance has left some investors looking for better investment environments in other regions in the world.

One area that looks ripe for additional investment is Europe. After six straight quarters of contraction, the continent actually just posted a positive quarterly GDP number. In addition, its sometimes challenging political structure looks cohesive compared to the acrimony the U.S. has experienced over the last month.

I think Europe provides a good vehicle to diversify one's investment portfolio and the overall market is selling at a discount to the current valuation in domestic equities. Economic and job growth in the U.S. in 2014 will likely continue to be tepid as the Affordable Care Act gets fully implemented and the Federal Reserve eventually starts to taper its quantitative easing program. Europe might offer better opportunities as it emerges from a long recession.

Here are two European equities that investors looking to allocate additional money across the pond may want to consider.

With a solid oncology franchise (Avastin, Herceptin and Rituxin), Roche (RHHBY.OB) is one of biggest pharmaceutical operations in Europe. The company is also a leader in the production of biologics, which are complex medicines derived from living organisms. These compounds tend to carry higher margins and are much harder to copy when patent protection lapses.

The company just announced it will spend about $900 million on four facilities and add staff to increase the production of these biologic products. considering that major drug makers including Merck (MRK) and Teva Pharmaceuticals (TEVA) are going through with significant layoffs, this is a substantial vote of confidence by management in the company's future.

Roche gets about one-third of its revenue from the U.S. where sales are growing at a pace of about 10%. Overall sales for the company are increasing at a 6% to 7% annual rate.  Novartis (NVS) owns one-third of the voting shares, and there have been longstanding rumors the firms will eventually merge. The shares do sell for around 19x earnings. However, long-term investors looking for world class pharmaceutical play with leading products in oncology should consider the shares. Roche also pays a 3% dividend.

AXA Group (AXAHY) is one of Europe's largest providers of insurance and asset management services. I like AXA for some of the same reasons that I like its fellow European insurance provider Aegon N.V. (AEG), which has been a consistent performer since I highlighted it in late July.

Like Aegon, AXA sells for less than book value and has an improving earnings picture. The company is tracking to post more than a 20% year-over-year gain this fiscal year and analysts believe at least another 10% increase is in store for fiscal 2014. In addition, consensus earnings estimates for fiscal 2014 have moved up nicely over the past three months.

As European financial markets continue to stabilize, banks and insurers stand to benefit -- much like our financial institutions did after we emerged from the financial crisis in 2009 and 2010. Plus, AXA is cheap,  trading below 9x forward earnings. It also pays a 3% dividend.

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