3 Ways to Buy Into a German Recovery

by Jeff Reeves | April 20, 2012 9:00 am

Germany 300x250 3 Ways to Buy Into a German RecoveryGerman Statesman Otto von Bismarck famously quipped, “There are never more lies told than after the hunt, before the wedding and before the election.”

Very true. And although Germans don’t head to the polls for a federal election until fall of 2013, the state and local elections this May will say a lot about how the country is transforming — and what kind of political posturing we can expect between now and next year.

The rise of the progressive “Pirate Party” has struck a chord across the youth of the eurozone as Europe’s unemployment rate among ages 15 to 24 has skyrocketed 50%[1]. Conservative leader Angela Merkel is coming under fire from right-leaning parties for backing policies they say are too liberal, including a recent pay raise for public-sector workers and a limited form of a minimum wage.

And all this is going on amid a sharpening the debate about the complicated balance between austerity to control soaring eurozone deficits and the need for expansionary policies to promote growth — an issue most clearly embodied by the fact that Ireland has slipped back in recession[2] despite being the poster child for slashing spending.

I’ll leave the electioneering to politicians and the austerity debate to eurozone economists. What I’d like to talk about today is the opportunity for investors to get into some of the very best blue chips Germany has to offer — multinational corporations that will be just fine no matter who claims victory in 2012, 2013 or beyond.

These stocks have obvious short-term risks. However, Germany is undoubtedly the engine of the eurozone — tracking 0.9% GDP growth this year[3] according to a recent upward revision by top economic institutes — and a well-calculated investment has a good chance of paying off over the longer term, even if the immediate future is murky.

Here are three German investments that get my vote this May:

First is Siemens (NYSE:SI[4]). Siemens is a global engineering powerhouse that does more than $70 billion in annual revenue. Unfortunately, that revenue still is below pre-crisis levels — $73.5 billion in fiscal 2011, compared with $77.3 billion in fiscal 2008.

But don’t let the sales slide scare you off. Earnings have skyrocketed — from EPS of $1.90 in 2008 to a staggering $10.78 in fiscal 2011! It’s no wonder that from the bear-market bottom in 2009 through early 2011, SI stock tripled from less than $50 per share to almost $150.

But then the Greek debt debacle reached a fever pitch last spring and summer, and the eurozone melted down. SI stock flopped to under $100 per share and has languished there ever since.

This, despite dramatic sales growth and even revenue growth in three out of the last four quarters on a year-over-year basis — including ending Q4 of 2011 on a high note, with $1.86 per share compared with a loss of 61 cents the year before.

Siemens trades for just 9 times earnings and sports a 3.1% dividend yield (though its payout admittedly is a once-yearly affair). The company has $12.6 billion in cash and short-term investments at the end of 2011, and another $18.3 billion in long-term investments.

These numbers are just too compelling to overlook. And when you throw in the fact that nearly a third of Siemens’ revenue comes from comes from emerging markets — with over 10% from China and India alone — it’s hard to understand why this stock deserves to be punished with the rest of the eurozone.

Next up is the German pharma giant Bayer (PINK:BAYRY[5]). Most investors avoid this pick because it’s a pink-sheet stock and not listed on a major exchange like the NYSE. That makes it illiquid — trading a meager 30,000 shares or so each day. But if you are careful with your investments and use a limit order to control your entry price, there’s no reason to treat this pick like those low-volume penny stock scams[6] that have been relegated to the OTC market.

If it’s the eurozone crisis that is scaring you off rather than the pink sheet listing, however, rest assured that Bayer is insulated from the crisis. It’s riding eight straight quarters of year-over-year revenue increases, and fiscal 2011 earnings are set to hit the highest mark since before the financial crisis of 2008.

And Bayer, like many health care stocks, has a recession-proof appeal. Its consumer health unit — represented by big brands like Bayer aspirin and Aleve — provides reliable revenue beyond its prescription drug and medical products portfolio.

But despite stability and a decent 2.3% yield, investors have overlooked Bayer. That’s a shame — especially considering that up until the market declines of mid-2011, it had been handily outperforming drug majors like Pfizer (NYSE:PFE[7]) and Merck (NYSE:MRK[8]).

Looking forward, growth potential from new treatments like blood clot preventer Xarelto could add some pop to shares. Business conditions across Bayer’s non-pharmaceutical divisions remain strong, and long-term investors looking for a low-risk way to tap into Germany’s rebound should consider this health care company.

Last but not least is perhaps the purest — and also the most diversified — way to play Germany: the iShares MSCI Germany Index ETF (NYSE:EWG[9]). Top holdings are Siemens and Bayer, as well as chemical giant BASF (PINK:BASFY[10]) and tech firm SAP AG (NYSE:SAP[11]).

Here is where you have to have a little more confidence in Germany’s domestic economy. But it shouldn’t be too tough of a sell. In April, leading economic forecasters increased their GDP estimates for Germany[12]. That’s because a weaker euro is helping exports, particularly German automobiles and machinery being sent to China.

Also a plus is Germany’s close proximity to cheaper labor markets in Eastern Europe, and smart labor laws that allowed government funds to help retain skilled workers at top German firms during the worst of the economic downturn. Pure capitalists would argue that layoffs can be a form of “creative destruction,” but the plus side of greater retention is that it preserves institutional knowledge and reduces the need for training of new employees when a company re-enters growth mode.

EWG actually has come roaring back almost 15% year-to-date, so there’s already signs of life in this fund. If all it manages to do is reattain the 52-week high set around this time last year, the iShares Germany ETF will deliver investors a nice 33% gain — at a reasonable 0.51% expense ratio with a roughly 3% dividend based on last summer’s distributions.

Jeff Reeves is the editor of InvestorPlace.com, and the author of “The Frugal Investor’s Guide to Finding Great Stocks.”[13] Write him at editor@investorplace??.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff Reeves did not own a position in any of the investments named here.

Endnotes:
  1. skyrocketed 50%: http://www.guardian.co.uk/business/2012/apr/16/european-youth-unemployment-soars?newsfeed=true
  2. Ireland has slipped back in recession: http://www.guardian.co.uk/business/2012/mar/22/ireland-recession-global-slowdown-exports
  3. tracking 0.9% GDP growth this year: http://news.yahoo.com/institutes-raise-german-2012-gdp-forecast-091548210--finance.html
  4. SI: http://studio-5.financialcontent.com/investplace/quote?Symbol=SI
  5. BAYRY: http://studio-5.financialcontent.com/investplace/quote?Symbol=BAYRY
  6. low-volume penny stock scams: http://investorplace.com/2012/04/penny-stocks-low-volume-trumps-balance-sheets/
  7. PFE: http://studio-5.financialcontent.com/investplace/quote?Symbol=PFE
  8. MRK: http://studio-5.financialcontent.com/investplace/quote?Symbol=MRK
  9. EWG: http://studio-5.financialcontent.com/investplace/quote?Symbol=EWG
  10. BASFY: http://studio-5.financialcontent.com/investplace/quote?Symbol=BASFY
  11. SAP: http://studio-5.financialcontent.com/investplace/quote?Symbol=SAP
  12. increased their GDP estimates for Germany: http://news.yahoo.com/institutes-raise-german-2012-gdp-forecast-091548210--finance.html
  13. “The Frugal Investor’s Guide to Finding Great Stocks.”: http://www.amazon.com/Frugal-Investors-Finding-Stocks-ebook/dp/B007KB9CSI/ref=sr_1_1?ie=UTF8&qid=1331819172&sr=8-1

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