Betting on Europe for the Long Haul

 | Nov 01, 2011 | 10:30 AM EDT  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

si

,

e

The jury is still out on Europe's economic prospects. The recent agreement on Greece's debt, for which debt holders took a 50% haircut, was a big step forward.

But the road ahead is still filled with potential axel-breaking potholes, such as the heavy debt burden of Italy. The Wall Street Journal reports that the number of unemployed people in the 17-country eurozone hit a new record in September, and that HIS Global Insight is projecting eurozone countries "will flirt with recession in 2012 with projected growth slightly above zero."

While the Greek financial crisis may -- or may not -- be on its way to a resolution, there's not much to like about the European economy over the short term. That is why I believe that -- if you're a risk-taking investor with long-term horizon -- this could be a good time for to consider buying European stocks.

There is a lot to be said for taking a contrarian approach to investing. Buying smart when the news is bad is a good way to help assure you are buying when downside risk is minimal and upside potential maximal. The economies of Europe have quite solid prospects over the long term. Germany, France, Britain, Italy and others have sophisticated economies that are likely to remain economically competitive over the long haul. When things turn around, they should be in strong positions to bounce back, and those who bought when these economies were struggling, are likely to be amply rewarded.

Plus, large European companies -- just like their American and Asian counterparts -- do business around the globe. While their neighborhood customers struggle, not all of their customers face the same difficulties.

On my website, Validea.com, is a European model portfolio based on ratings produced by my guru strategies. These are computerized strategies that mirror descriptions provided in the writings of well-known Wall Street gurus, and I use them to find high-quality investments. Though Europe has struggled the past couple of years or so, this portfolio has performed well. In 2010, it rose 10.3% vs. 5.3% for the benchmark MSCI EAFE (Morgan Stanley Capital International Europe, Australasia and Far East) index. Year to date, my European portfolio is up 0.3% vs. a 5.1% decline for the MSCI EAFE. In the last month, my portfolio shot up 22.0% vs. 13.9% for the MSCI EAFE.

No doubt, buying Europe today is risky. But those willing to take a flyer on well-regarded European stocks could be amply rewarded over time. One such company is Siemens (SI), the German giant that manufactures products in four market segments: industrial, energy, infrastructure and cities, and health care. The company operates in 190 countries.

Two of my guru strategies, those based on the writings of Peter Lynch and James P. O'Shaughnessy, give Siemens very high grades. The James O'Shaughnessy screen likes the firm's large market capitalization ($101 billion), strong cash flow per share ($14.33), large number of shares outstanding (883 million) and huge annual sales ($105 billion). Among companies that pass all these tests, the strategy proceeds to select the 50 companies with the highest dividend yield -- and, with a distribution of 3.33%, Siemens makes the cut. The Peter Lynch-based strategy likes the company's P/E/G ratio, which is the price-to-earnings ratio to growth – essentially, a measure of how much the investor is paying for growth. This needs to be 1.0 or less, and Siemens just makes the grade with a yield-adjusted P/E/G of 0.98.

One other stock in my European portfolio I want to tell you about is Italian energy giant Eni (E), one of the world's major integrated energy companies. It explores for, produces and transports oil and gas and operates in 43 countries. As with Siemens, Eni is favored by the O'Shaughnessy strategy. The company's market cap is large ($93 billion), its cash flow positive ($11.18), its shares outstanding big (1.8 billion) and its sales huge ($153 billion). Plus, its 6.04% dividend yield puts it in the top 50 stocks as measured by this strategy.

Siemens and Eni are European companies that are global in their outlook. If you want to take on some risk, let Europe's current struggles work in your favor by investing in the continent now.

Columnist Conversations

Right now ICE is still considered to be within a larger downtrend unless the zones discussed in the article (t...
big X up 8%+ after hours. 30 last. nice short squeeze.
Market woke up a bit today to the fact that the tensions emanating out of Ukraine are not going anywhere as th...
In my article this morning, I speculated this could be the bottom for Twitter. I thought investors would shif...

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.