Attention Value Shoppers: Deals in the Euro Aisle

There’s no question that the sovereign debt crisis in the euro zone remains a mess, and persistent economic sluggishness in the region has weighed heavily on stocks.

FEZ Chart

FEZ data by YCharts

But sharp (and patient) value investors should see that it has segued into being an intriguing mess. While we’re still waiting for a definitive step forward in resolving various sovereign debt pickles, the “by any means necessary” vow of the European Central Bank’s Mario Draghi in late July has shifted the conversation a bit from “will they or won’t they” bail out troubled economies, to “when will they?”

Though no one is predicting a sharp turnaround, the fact that the worst may be over can make for a compelling entry point for value investors.

That certainly seems to be the thinking at the value-conscious GMO investment management firm, which runs more than $100 billion. Ben Inker, chief of the asset allocation group at GMO recently shared this outlook for euro zone stocks.

“… current valuations of non-financial stocks in the eurozone broadly discount an ugly endgame for the region. If something less bad than that occurs, the stocks are at least mildly cheap. Believing this, after the market fall of April and May we bought a decent chunk of European stocks in our asset allocation portfolios.”

He added that the firm’s global asset allocation strategy now has a 5% overweight in euro zone equities.

Morningstar also reported that in July, net cash flows into ETFs that focus on European stocks totaled more than $700 million, representing more than one-third of total inflows into the group for all of 2012.

Taking a look at the portfolios of the $2.7 billion Vanguard MSCI Europe ETF (VGT) and the $740 million SPDR Euro Stoxx 50 ETF (FEZ) turns up a who’s who of Europe-based multinationals that in fact have plenty of business outside of the troubled euro zone. Nestle SA and Daimler AG (the parent of Mercedes Benz) also both have price/earnings ratios below 10. Same for Total (TOT) the French-based oil company that in fact operates in more than 100 countries. While earnings rebounded from the global recession, the p/e is still stuck in neutral as the price is down 40% over the past four five years.

TOT PE Ratio Chart

TOT PE Ratio data by YCharts

The GMO Foreign mutual fund currently has its 5 top holdings invested in euro-based firms: BP (BP), Eni SpA (E), Novartis (NVS), Royal Dutch Shell (RDSA), and Vodafone (VOD).

BP PE Ratio Chart

BP PE Ratio data by YCharts

The stocks have had a wild (that’s not a compliment) ride the past year.

E Chart

E data by YCharts

But for value-minded investors, the recent signals that Europe seems committed to a solution suggests that plenty of Euro-based stocks that have been beaten down to cheaper levels amid the turmoil, could be ripe pickings for patient investors.

Carla Fried is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.



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