About 150 years ago, the French industrialist and political theorist Jean-Baptiste Andre Godin (1817-88) wrote: "The quality of our expectations determines the quality of our action." He wasn't the first to prophesy on the subject -- about 2,400 years earlier, Buddha's Second Noble Truth touched on the subject by identifying desire as the root of all suffering.
In investing, expectation and desire can be one and the same and can move the market in a big way. In the wake of President Trump's surprising victory last November, for example, the stock market rallied on expectations that he would implement positive change by way of tax reform and a pro-business agenda. Today, as Emmanuel Macron advances to the second round of the French presidential election, stocks have seen a worldwide surge on expectations that the favored candidate will work toward keeping the European Union intact. One of the myriad insights shared in BlackRock's Global Investment Outlook for Q2 2017 reads: "Any shift of expectations toward a faster pace of Fed rate rises could spook markets. We see upside risk in Europe, where we do not expect elections to deliver the populist outcomes feared by markets."
A Washington Post article from last week quotes Luca Paolini, chief strategist at U.K.-based Pictet Asset Management, who sees a calming in the "forces of populism" that have been fueling some countries' attempts to pull out of the EU. "Maybe it's too early to celebrate," Paolini told WP, "but that's what the market is pricing in." He adds, "It's good news, and now investors have a reason to focus on the fundamentals in Europe, which are strong."
The good news, as Paolini suggests, doesn't necessarily mean a buying spree is in order. It can mean, however, that the European equity markets deserve a second look. And that look should consist of digging into fundamentals and choosing opportunities carefully. Making investment decisions based on expectations is a perfectly logical and prudent approach, as long as those expectations are built on a foundation of knowledge and concrete data. This is in stark contrast to an investor allowing emotions to dictate behavior when expectations shift, perhaps due to a news event or pundit opinion. Entering the market amid soaring expectations and/or selling during times of panic reflects an attempt at market timing, a losing proposition regardless of expectations.
So, while the "good news" coming out of Europe may be a good reason to participate in those markets, opportunities should be evaluated on a case-by-case basis rather than through indiscriminate buying.
Using stock screening models I created based on the strategies of some of the greatest investors of all time, I have identified the following five high-scoring international stocks:
Ternium SA ( (TX) ) is a producer of steel products and iron ore that scores well under our Peter Lynch-inspired investment strategy given the relationship between the price-earnings ratio and growth in earnings per share (the PEG ratio), which, at 0.37, is considered exceptional by this screen. Debt equity of 27.75% is also considered favorable. The company earns high marks from our Kenneth Fisher-based screening model due to its price-sales ratio of 0.71, which falls within the preferred range of between 0.40 and 0.80. Long-term growth in earnings per share of 16.33% exceeds the minimum requirement of 15%.
Daimler AG ( (DDAIF) ) is an automotive engineering company that earns a perfect score under our James O'Shaughnessy-based stock screening model due to its size (market cap of $79.65 billion) and cash flow per share of $16.41, which well exceeds the market mean of $1.66. The company's trailing 12-month sales of $170.68 billion are also well in excess of 1.5x the market mean, as required by this model. Dividend yield of 4.72% adds interest. Our David Dreman-inspired model favors the company's respective price-earnings and price-cash flow ratios of 9.80 and 4.52, both of which meet the requirement of falling among the bottom 20% of the market.
AXA SA ( (AXAHY) ) is a holding company engaged in the insurance business. The company earns a perfect score under our O'Shaughnessy-based investment methodology based on its size (market cap of $64.58 billion) and cash flow per share of $3.27 (versus the market mean of $1.66). Shares outstanding total 2.42 billion, well in excess of the market average (627 million) and indicative of a well-known and highly traded company. Dividend yield of 4.7% adds appeal. Our Lynch-based screening model likes the PEG ratio of 0.57 as well as earnings per share of $2.69. For financial intermediaries, this investment strategy looks at the equity-assets ratio as an indicator of financial health. At 8%, the company passes the 5% minimum requirement.
Eni SpA ( (E) ) is engaged in the exploration, development and production of hydrocarbons, the supply and marketing of gas, petroleum products and basic petrochemicals and plastics. The company is favored by our O'Shaughnessy-based stock screening model due to its cash flow per share of $3.76, which exceeds the market mean ($1.66), as required. Trailing 12-month sales of $60.62 billion are more than 1.5x the market mean, another plus under this screen, and dividend yield of 5.58% adds appeal. Shares outstanding total 1.8 billion versus the market average of 627 million shares, which also earns high marks from this model.
British American Tobacco PLC ( (BTI) ) is a tobacco and next-generation products company that gets a thumbs up from our Warren Buffett-based investment strategy due to its predictable earnings and long-term growth in earnings per share (10-year) of 18.6%. The company is able to pay off all debt with earnings in less than two years, a requirement under this model, and average return-on-equity over the past 10 years of 34.1% is more than twice the required minimum. Management's use of retained earnings reflects a return of 83.6%, a plus under this model.
