by Charles Sizemore | December 13, 2011 12:02 pm
The European sovereign debt crisis is over. Italy and Spain have been stabilized, and all major players — including German Chancellor Angela Merkel and European Central Bank President Mario Draghi — know what needs to be done. We can all breathe a sigh of relief.
And if you believe that, to borrow a line from country singer George Strait, I’ve got some oceanfront property in Arizona I’d like to sell you.
The crisis is not over. It will be months or even years before this long saga finally plays out.
The good news is that the ECB’s offer of virtually unlimited credit to banks means the risk of a 2008 Lehman Brothers-like meltdown has receded. But the bad news is that it often takes years to recover from the hangover of a debt crisis.
For Latin America — a promising emerging region — the 1980s were a “lost decade” as Brazil, Argentina, Mexico and others struggled to pay back the gargantuan debts they accumulated in the 1970s. Have you ever noticed that Rio de Janeiro’s skyline looks like it was frozen in the 1970s? There’s a reason. Most of Brazil’s infrastructure was built during the credit bubble of that decade, and after the bust, the country was locked out of the international credit markets for most of the 1980s and 1990s.
And Japan? It seems like an eternity ago, but Japan once was the envy of the Western world. However, in the wake of its credit bubble and bust, Japan is entering its third lost decade with no end in sight.
Suffice it to say, Europe has a hard road in front of it. But for investors, the crisis has created some phenomenal opportunities. You see, because of the relatively small size of the domestic markets (and in some cases the historical ties of colonialism), European companies always have had a global emphasis. Think about Heineken (PINK:HINKY), whose beer many readers no doubt have in their refrigerators. If Heineken depended solely on its native Dutch population of 16 million people, it certainly couldn’t produce $16 billion in annual revenues.
Many of Europe’s finest companies are “European” only in the sense that their headquarters are located in Europe. Today, I’m going to share with you my five favorite European stocks. Because of the sense of fear pervading the European markets, all trade at valuations we might never see again in our lifetimes.
German engineering juggernaut Siemens AG (NYSE:SI) is one of the world’s premier producers of industrial and power generation machinery and equipment. The company makes everything from high-speed trains to medical equipment to wind turbines — with German precision.
Siemens did 74 billion euro in revenues in fiscal 2011 and has a healthy order backlog of 96 billion euros. And most importantly, a majority of Siemens revenues comes from outside crisis-plagued Europe, nearly a third comes from emerging markets, and roughly 12% comes from China and India alone.
Looking at the financials, Siemens trades for just nine times earnings and sports a 4% dividend — a payout that has a history of growing. The company also has virtually no debt (its $19 billion in cash and equivalents are roughly equal to its long-term debts), meaning it has the financial strength to survive whatever the financial crisis throws at it.
Crisis or no crisis, Siemens belongs in your portfolio.
Next on the list is another German company — Daimler AG (PINK:DDAIF), the maker of the iconic Mercedes-Benz, among other luxury brands.
Whenever I think of Daimler, I will always think of the “Indiana Jones of Finance,” Jim Rogers. In a road trip across six continents chronicled in his book Adventure Capitalist, Mercedes was Rogers’ vehicle of choice. Why? Because “every dictator and mafioso in the world drives a Mercedes … even in countries with no roads to speak of.”
Rogers wasn’t joking about that. Mercedes is the premier global luxury automobile. And it is a fantastic way to get “backdoor” exposure to emerging markets. China already is the world’s largest consumer of the high-end S-Class, and China accounted for 18% of all Mercedes cars sold this past quarter. In trucks, the numbers are even better. More than half of Daimler truck sales come from Asia and Latin America.
Investors fret that 45% of Daimler’s auto sales come from western Europe. This does not particularly worry me. Daimler’s high-income customers are less at risk of financial distress than the average European. But even if the atmosphere of austerity makes a dent in European sales, the stock price offers more than a sufficient margin of safety. DDAIF shares trade for less than seven times earnings and yield nearly 6%.
But that doesn’t tell the full story about how cheap this company is. Daimler trades for just 0.33 times sales. The company also has $15.33 per share in cash; at the current stock price of $45, this means that a third of the company’s value is just its cash sitting in the bank.
Companies this cheap aren’t supposed to exist. At current prices, Daimler is simply too cheap to pass up.
Let’s now head south to the Mediterranean and crisis-wracked Spain. The land of bullfights and flamenco has one of the highest unemployment rates in the world and a property market that still has a lot further to fall. Of all the countries in Europe, I expect Spain to take the longest to recover.
Of course, this doesn’t particularly matter to Spanish telecom giant Telefonica (NYSE:TEF).
It’s not all that accurate to call Telefonica a “Spanish” telecom company. Spain only accounts for about a third of revenues. Fully 47% of revenues come from the fast-growing emerging markets of Latin America.
So, in essence, Telefonica is an emerging-markets growth dynamo masquerading as a slow-growth European blue chip.
The stock also happens to be insanely cheap. It trades for just five times earnings and yields an astonishing 12% in dividends. If the share price never moves a cent, you still can enjoy what are likely to be market-beating returns on the dividends alone. And all of this from a company that provides what has become an essential utility — mobile telecom service.
Continuing the theme of stable and boring (and profitable), let’s now take a look at Anglo-Dutch consumer products giant Unilever (NYSE:UL). Food and soap. That is pretty much the extent of Unilever’s business. The company sells popular food and dessert brands like Hellman’s, Wish-Bone, Ragu, Lipton and Ben & Jerry’s, as well as personal care brands Suave, Dove, Axe, and Vaseline, among others.
Why would I be interested in a company this boring? First, the obvious. Demand for its products is stable.
My real reason for liking Unilever is that more than half of its sales already come from emerging markets. Management expects emerging markets to make up 70% to 75% of sales by the end of this decade. Like Telefonica, Unilever is an emerging-markets growth story trapped in a boring blue-chip body.
Unilever trades at a respectable 16 times earnings and yields 3.7% in dividends. This is the closest thing you can find to a “buy-and-forget” investment.
My last recommendation might raise a few eyebrows — Turkcell Iletisim Hizmetleri A.S. (NYSE:TKC).
Turkcell is the largest mobile telecom provider in Turkey, with 54% of the domestic market. But it also is the third-largest GSM carrier in Europe and a major competitor in the Balkans and Eastern Europe.
Sure, it’s questionable whether Turkcell is a “European” or an “emerging market” stock. I would argue that it’s both. Turkey is both European and Asiatic, and depending on where in the country you go, it can feel as modern as Italy or as backward as Kazakhstan. And in Turkcell, you get a company with a large footprint in both Europe and the Middle East. You also get a management team that consistently gets ranked among the best in Europe. This is no small accomplishment for a company domiciled in an emerging market.
While I consider this geographic diversity a strength over the long term, it has been a very unfortunate coincidence in 2011. With the European crisis to its north and the Arab Spring erupting to its south, Turkey found itself wedged between the two headline-grabbing crisis zones of the year. An uptick in the inflation rate and a diplomatic spat with erstwhile ally Israel didn’t help investor confidence much either. As a result, Turkish stocks took a beating in 2011, and Turkcell was no exception.
Furthermore, the company skipped its dividend payment this year — not because of financial distress but because of a power struggle on the board of directors. This embarrassing little spat should be resolved soon, and when it does, Turkcell’s dividend should be reinstated at around 4% to 5% of the current price.
As a result of unfortunate geography and an investor relations nightmare, investors dumped Turkcell in 2011. This creates a fantastic opportunity for those of us with patience. Turkey is one of the most promising emerging-market economies and Turkcell one of its finest companies. Turkcell trades for just 10 times earnings, and I believe this could be one of the best performing stocks of 2012.
Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter, and the chief investment officer of investments firm Sizemore Capital Management. Sign up for a FREE copy of his new special report: “Top 5 Contrarian Stocks for 2012.” TEF, TKC, and UL are all recommendations of the Sizemore Investment Letter and are held in Sizemore Capital client accounts.
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