Dow Jones Reprints: This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool at the bottom of any article or visit www.djreprints.com
Europe's continued woes are sending stock markets tumbling yet again. That could present opportunities for disciplined investors.
The key is to treat Europe not as one giant bloc but as a collection of nations and companies. The best strategy, experts say, is to avoid heavily indebted Southern European nations and invest in companies that make much of their money overseas and still are growing.
"Europe is a big area, and there are places you don't want to invest," says Sam Katzman, chief investment officer at Constellation Wealth Advisors, which manages $4.5 billion. "But there's a lot of opportunity."
The Euro Stoxx 50, an index of euro-area blue chips, has plunged more than 9% in the past three months on fears that Greece and Spain are sliding deeper into crisis and as the broader European economy flirts with recession.
The weakest nations have been the hardest hit. Spain's IBEX 35 stock index has dropped more than 20%, while Italy's FTSE MIB index is down 14% and Greece's FTSE/ATHEX 20 has plunged nearly 30%.
Investors should resist the urge to hunt for bargains in such places, says David Kotok, chief investment officer at financial adviser Cumberland Advisors, which oversees more than $2 billion. There still is too much that could go wrong, he says, from a deep recession to an implosion of Spain's banking system. "We want to avoid trouble wherever we can," Mr. Kotok says. "It's too soon to bottom-fish in Spain and Italy."
Instead, investors should look to the north. Germany's DAX index, for instance, has returned 11.3% this year, compared with the Standard & Poor's 500-stock index's 8.2%. The DAX trades at about 11 times forward earnings per share, according to investment researcher Morningstar (MORN), while the S&P 500 trades at about 13.7 times forward earnings.
Why is Germany so strong these days? Its export-oriented economy has done better relative to the others in the region, and its finances are in good shape, experts say -- and those trends should continue.
The iShares MSCI Germany Index (EWG) exchange-traded fund, which owns the 50 largest German companies, including industrial giant Siemens (SIE.XE), software maker SAP (SAP.XE) and pharmaceutical producer Bayer, (BAYN) has returned about 10% this year. Two other ETFs, iShares MSCI Germany Small Cap (EWGS) and Market Vectors Germany Small-Cap (GERJ), track smaller companies.
Strategists say France also might be worth a look. To be sure, France hasn't taken major steps to fundamentally change its economy, says Sebastian Raedler, a global equity strategist at Credit Suisse Group (CS) in London, and the election of Socialist presidential candidate Fran ois Hollande could make it difficult to rein in labor costs.
Yet Mr. Hollande will likely moderate his policies once France's legislative elections have passed and he must run a government rather than win office, Mr. Raedler says.
Meanwhile, French stocks are getting cheaper. After returning nearly 14% this year through mid-March, the benchmark CAC-40 index has plunged almost 13%, leaving its valuation at about 9.9 times forward earnings, according to Morningstar, among the lowest in Europe.
"There's a lot of negativity already priced into the French equity market," Mr. Raedler says. "It's not the moment to worry there's a lot of downside" relative to the broader European market.
The iShares MSCI France Index (EWQ) ETF, whose largest positions include oil-company Total (TOT), pharmaceutical company Sanofi (SAN) and luxury-goods producer LVMH Moet Hennessy Louis Vuitton (MC.PA), has gained 1.6% this year.
Because mutual funds and ETFs also hold shares of big European banks and other companies with exposure to Southern Europe, investors might prefer individual stocks.
Jonathan Stubbs, a European equity strategist at Citigroup (C) in London, recommends "core" Northern European companies that are forecast to have above-average annual earnings growth -- 8% or more -- during the next two years, and whose earnings dropped less than 20% during the recession of 2008 and 2009, when overall earnings dropped 50%.
Among those that fit the bill, according to Citigroup research: British American Tobacco (BTI), SAP, and spirits maker Diageo (DEO) .
Investors seeking more safety should favor companies with high dividends and those deemed a low risk for bankruptcy by the credit-default-swap market, a sign of financial strength, Mr. Stubbs says. He prefers companies with a "dividend yield," or annual payout as a percentage of share price, of 3.5% -- about twice the yield on the 10-year German government bond. He also likes companies for which the cost to protect $10,000 in company bonds is $90 or less, roughly equal to the cost of insuring a German government bond.
Companies that meet these criteria include food producer Unilever (UL), which has a trailing dividend yield of about 3.7% and a CDS cost of about $32 per $10,000 bond; pharmaceutical company Novartis (NVS), which has a dividend yield of 4.6% and a CDS cost of about $39; and Siemens, which has a dividend yield of 4.6% and a CDS cost of about $88.
"Europe is presenting opportunities for investors," Mr. Stubbs says. "But in a market where risks are still elevated, investors should use strategies that have some downside protection built in."
Subscriber Tool
Track your own buys and sells
Ask the right questions before you hand over your money
A balanced portfolio can have a bigger impact on long-term performance than individual stock picking
Investing for retirement is more complicated than opening an IRA or maxing out your 401(k)
When choosing a stock mutual fund, consider performance, manager track record and cost before investing.
Even in times of interest rate uncertainty, a certificate of deposit (CD) can still be part of your cash strategy.
Find solutions to this and many other problems using
Intraday Data provided by SIX Telekurs and subject to terms of use. Historical and current end-of-day data provided by SIX Telekurs. Fundamental Data provided by Factset. Mutual Fund and ETF Data provided by Lipper. Intraday data delayed per exchange requirements. Dow Jones Indexes (SM) from Dow Jones & Company, Inc. All quotes are in local exchange time. Real time last sale data provided by NASDAQ only. Comprehensive quotes and volume reflect trading in all markets and are delayed at least 15 minutes. Mutual Fund and ETF NAVs are as of previous day's close.
Copyright 2012 Dow Jones & Company, Inc. All Rights Reserved This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.
Read Full Article »