A lot of noted investors have suggested that Europe is the place to shop for stocks in 2014. After all, when it comes to deleveraging and fiscal-stimulus programs, the European economy appears to be running about two years behind that of the U.S.
Among those noted investors, big players such as Wilbur Ross and Seth Klarman have been involved in deals concerning a diverse range of opportunities, including in Spanish real estate, Greek banks and shipping companies. Joshua Harris of Apollo Global Management recently suggested that the deleveraging of European financial-services companies could create some compelling opportunities. Meanwhile, David Herro of Oakmark International Fund has suggested that European stocks are relative bargains compared with their U.S. counterparts.
I sat down this morning and ran some screens to see if I could find any super cheap European stocks that might be worth consideration for long-term, value-oriented portfolios. I scanned the Old World for stocks that sell at substantial discount to book value, and which might do well if the European markets do, in fact, continue moving higher over the next year or so.
The banks remain the cheapest sector in Europe, and Royal Bank of Scotland (RBS) remains one of the cheapest bank stocks on the continent. The U.K. government still holds 79% ownership in the bank, and probably will be for the foreseeable future.
In any case, RBS continues to downsize and shrink its operation, and recently filed for an initial public offering for its U.S. banking operation, Citizens Bank. That IPO could eventually add as much as $3 billion to the Royal Bank coffers, although the original filing was for just $100 million. RBS currently trades at less than 80% of book value, and the returns over the next five years could be very attractive for long-term, patient shareholders.
Barclays (BCS) is still fairly cheap as well. The shares currently trade at just 88% of book value, and the bank's just-announced reorganization plan could help unlock shareholder value over the next few years. Specifically, the company is laying off 19,000 people and exiting businesses they consider to be noncore. It will also be placing some assets in a bad bank structure and just letting them run off the books over the next several years.
Barclays intends to downsize the investment bank and, in the future, it plans to focus more on its retail-banking operations. The strategy calls for the investment-bank segment to fall to 30% of the core business by 2016, down from the current level of 50%. That investment-banking division has not done well of late, so this move could help get the share price higher over the next couple of years.
Outside of the banking sector, one of my favorite European stock is still Fly Leasing (FLY). The Ireland-based company is in the aircraft-leasing business, and has a fleet of 117 aircraft. All of them are currently being leased to 63 different airlines in 33 nations around the globe. The average lease still has 4.2 years until maturity. Fly Leasing is planning to grow its fleet by 15% by the end of 2014, and has already purchased seven new aircraft year to date.
This aside, Fly has paid 26 consecutive quarterly dividends since it came public back in 2007, and the shares currently yield at 7.1%. The stock is cheap enough to buy at the current level of 77% of tangible book value. I have owned this stock for several years now, and I hope to hold on to it for many more. The dividend provides a nice return while I wait for a sustained economic recovery to lift the share price to a multiple of where it trades today.
Again, a lot of smart, patient money is looking at Europe for long-term investment opportunities. Although the markets have done pretty well the past few years, there are still some bargains worth the attention of long-term investors. I am not a macro guy but I suspect that, if the European Central Bank does indeed add additional stimulus programs in the months ahead, we could see something transpire there that's similar to what has happened in the U.S. markets over the past few years.
Here's my one caveat: I recommend scaling into any new Europe positions. The geopolitical risk, particularly as it pertains to the Ukraine mess, could create some fairly large pockets of volatility. So I recommend staying small and moving slowly as you built a position in cheap eurozone stocks.