U.S. value buyers find gold in Europe's battered equities

Feb 26, 2012 @ 12:01 am

By Dan Jamieson

Like bargain-hunting American tourists in the early 1950s, many U.S. investors are flocking to battered European equities markets, lured by what bulls say are some of the best deals on the planet.

To be sure, the festering crisis in Greece and concern about sovereign risk, bank failures and the future of the euro make for awful headlines. And a strong rally in European stocks this year has made valuations less attractive than they were just a few months ago.

“But as the old adage goes, "You can have good news or cheap stocks, but you can't have both at the same time,'” said Alexander Walsh, co-lead portfolio manager for the Harding Loevner International Equity Portfolio (HLMNX).

In Europe, “we have cheap stocks and bad news,” he said.

Based on his long-term measures of price-earnings multiples, Mr. Walsh said European stocks are selling at the biggest discounts relative to U.S. stocks in the past 31 years.

“We see more values overseas, particularly in Europe,” said Sarah Ketterer, chief executive of Causeway Capital Management LLC, which advises the Causeway Funds. “Even after the rally, year-to-date, [European stocks] still look good.”

A defining moment for the markets came in December, when the European Central Bank began its stepped-up quantitative easing program, or long-term refinancing operation. European banks rushed to take $647 billion in low-cost three-year loans under the program.

Another tranche of LTRO lending is expected tomorrow.

The ECB's action signaled that it will stand as lender of last resort for European banks, ending immediate worries about funding, analysts said.


It also sparked a rally in European shares. The MSCI European Monetary Union Index, for example, has rallied more than 10% year-to-date.

Norm Boersma, portfolio manager of the Templeton Growth Fund (TEPLX), is feeling lucky after picking up shares in European financials and cyclicals last summer. These sectors have done particularly well in the rally.

“We were a little early, but we continued to buy into the panic,” said Mr. Boersma, who thought that the selling at the time was overdone.

His fund has gone from a weight of 13% to 14% in European financials last year to 22% to 23% now. Overall, the fund's European weighting is 50%.

“We're value guys. That's where the value is,” Mr. Boersma said.

He said that he still is looking to buy more European-based industrials and financials, but declined to comment on specific stocks.

Dean Tenerelli, portfolio manager for the T. Rowe Price European Stock Fund (PRESX), also did some buying in Europe last year, picking up shares in media companies and industrials.

“During the depth of the last liquidity freeze-up in October and November, things got really cheap,” he said.

The market is less cheap now, but Mr. Tenerelli expects European companies will begin beating earnings estimates next year, making for more opportunities.

Beaten-down cyclical and financial stocks have gained the most this year, which makes defensive stocks more attractive to some analysts.

Indeed, fund managers continue to favor many of the boring, European-based global businesses that should do well even if growth in Europe slows.

Among Mr. Tenerelli's favorites are the Reckitt Benckiser Group PLC (RBGPY), a U.K. household products company with brands including Air Wick, Calgon, Clearasil and Lysol.

Another U.K. firm he likes is The Restaurant Group PLC, which runs the chains Chiquito, Frankie & Benny's, Garfunkel's and others in shopping centers and airports where the eateries have a “captive audience,” Mr. Tenerelli said.

Ms. Ketterer has put money into the Swiss pharmaceutical firm Novartis AG (NVS), which has paid a dividend of more than 4% on top of a drop in share price of 3% this year.

“They've been completely left in the dust during this run-up,” she said.

U.K.-based supermarket chain Tesco PLC (TSCDY) is another pick of Ms. Ketterer's. An overenthusiastic cost-cutting drive has hurt the company, but she thinks that growth will get back on track.

The shares are off about 20% this year, and sport a 5% dividend.


David Samra, lead portfolio manager for the Artisan International Value Fund, also likes Tesco, which he notes owns valuable real estate in the form of its store locations.

A promising small-cap company Mr. Samra recommends is Icon PLC (ICLR), an Irish firm that performs research for drug companies. It recently signed a large deal with Pfizer Inc.

And for a banking play, Mr. Samra likes ING Groep NV (ING). The Dutch-based lender operates in the healthy part of Europe and he thinks its price could double.

“Because [these companies] happen to be located in Europe ... they're not getting the valuations they deserve,” Mr. Samra said.

Mr. Walsh mentioned Schneider Electric SA (SBGSY), a French maker of electric systems for commercial construction markets that does a big business outside Europe, and Nokian Tyres PLC (NKRKY) a Finnish company that sells snow tires in Canada, Russia and Scandinavia, and has been able to sustain growth.

In a different twist on the European situation, Tony Arnerich, chief executive of Arnerich Massena Inc., a firm with $15 billion in assets that works with high-net-worth individuals, has been working with Oakhill Advisors LP on a European bank-debt-restructuring fund.

Many smaller European firms don't have access to the debt markets, and they need to refinance bank debt, he said.

Oakhill is working to buy these bank loans at a discount and work with borrowers on restructuring part of the debt into equity.

“It's one of the more compelling opportunities evolving out of the European crisis,” Mr. Arnerich said.



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