After my look at European holding companies Monday, I got curious about what else might be cheap in the Old World. Many stocks and markets in the region have rallied on the heel of low rates and stimulus policies, but Europe's recovery attempt has been in fits and starts, to say the least -- so there are still some cheap stocks to be found. Some of the northern countries, most notably the regional powerhouse Germany, are doing OK. However, there are still nations like Spain, Italy and Greece, where fiscal problems are still quite evident. It is going to be a slow and often ugly process for Europe to get back on track, and those are exactly the type of conditions that favor a patient value investor.
The first observation I'll make is that there are a lot of family-holding companies, and most of them are very cheap. Although they have enormous market capitalization and decent liquidity in their home markets, that's not the case in the U.S. Here, most of these names trade on the pink sheets and are very illiquid. For that reason, I won't name any more names, but I will say that they are cheap and worth the time you might spend finding and investigating them.
There are also a lot of smaller European companies that trade on the pink sheets and over-the-counter U.S. markets. They can be frustrating to buy, and you will not be trading any of these, but there are some tremendous bargains among them. I found cement companies, oil-and-gas concerns, smaller banks, property and hotel conglomerates, and real estate investment trusts that, at first glance, are worth further investigation by patient deep-value asset investors. Again, these stocks trade very thinly, so I won't make mention of names here -- but you should be digging into those pink sheets for European gems.
Away from that, the shippers are among the stocks that have sufficient liquidity as to make them a candidate for a leading group. I have told the story often enough that we should all know it by now: The over-capacity is being worked off, rates are improving and the stocks are incredibly cheap. Private equity and distressed investors are making a large commitment to the sector. Among my favorites right now are Tsakos Navigation (TNP), Stealth Gas (GASS) and Star Bulk Carriers (SBLK). It will be a bumpy ride, I am sure, but I expect to see enormous returns from these levels on the capital I am deploying in this sector.
Meanwhile, the big banks in Europe look a lot like American ones did in 2011. They have recovered somewhat, and failure is pretty much off the table, but they are still extraordinarily cheap at current prices. Deutsche Bank (DB) is the gorilla among the European banks, and it currently trades at just 80% of its tangible book value. The bank has a huge global presence in asset management and investment banking, and it should be a decent long-term holding for patient investors. Like the big banks in the U.S., this stock would probably be best bought on a down move.
My favorite European banks are a little shakier then Deustche Bank is, but they have much larger upside potential as well. Commerz Bank (CRZBY) is the second-largest German bank, and it has struggled with bad loans over the past few years. The firm's shotgun wedding with Dresdner Bank, which took place as the world economy headed south, has become somewhat problematic. They also have large exposure to the shipping industry, and that has not exactly been very good for the bank, either. Still, slowly but surely, things are getting better, and the shares are currently trading at just 50% of tangible book value.
Societe Generale (SCGLY) is slowly getting its act together, as well. The bank saw marked improvement in the most recent quarter: The report showed gains in revenue and profit, as well as continued credit improvement. The firm has been selling non-core operations and is currently seeing strong interest in its Asian Private Bank from several bidders. At less than 70% of book value, the shares should see strong gains over the next several years. I also continue to hold and like Royal Bank of Scotland (RBS).
As is true in the U.S. right now, European companies that dig stuff out of the ground are also cheap. Mining operations like Norsk Hydro (NHYDY), Angelo American (AAUKY) and steel giant ArcelorMittal (MT) all sell at substantial discounts to book value. This will improve as the global economy does, and long-term holders of these very cheap stocks should make a quite a bit of money by practicing patience.
So, yes, there are some bargains in Europe among the larger liquid stocks. Much as in the U.S. right now, the real bargains are in the smaller or less liquid names, and investors with patience and fortitude should be digging through these fantastic long-term asset-based buying opportunities.