Financial markets are feeling a little sick these days, and the source of the recent ailment comes straight from across the pond. Since mid-January, European stocks are down sharply, with the SPDR Euro Stoxx 50 ETF (FEZ) sinking nearly 5% in just over two weeks. That decline has put pressure on stocks here at home, and around the globe.
Fueling the decline in European blue chips is a host of negatives, including fears of a contagious emerging-market currency meltdown capable of stymieing a recovery. Perhaps more importantly, there’s now fear of disinflation, and even downright deflation, coming from the EU.
On Friday, we received data out of Europe showing that EU inflation fell to 0.7% in January. That unexpectedly big decline is worrisome for European Central Bank officials because they’ve been attempting to stimulate inflation and stave off any signs of deflation (a contraction in credit and wages) with their current low-interest-rate policies.
Now, with all of the discomfort on the currency and inflation front tamping down Europe, why would you want to consider investing in European stocks right now? Well, if you think the recent wobble in global markets is a temporary circumstance (I do), and if you think the recent pullback in many European stocks also is a short-term adjustment (I do), then buying into some of the best Europe has to offer is a value play that could reap you big benefits.
Here are three European stocks to buy on the Old World’s market dip.
European Stocks to Buy: Diageo (DEO)
Call me partial, but I’m a big fan of Diageo (DEO) and its bevy of fine libations.
As a Johnnie Walker brand enthusiast, it pleases me that I can put this European stock on my list of winners to come from the current pullback. Diageo just reported preliminary financial results showing a 1.8% increase in sales over the past six months. Ironically, this London-based spirits maker saw its biggest boost (a 4.6% increase) from North American sales, which means Americans keep guzzling the company’s brands.
Like just about every company, if there is a big slowdown in emerging markets, it could negatively impact Diageo’s bottom line, as well as DEO stock. But like the recent region-wide pullback, I think the mild pullback in DEO stock here is a signal to drink up the shares now and feel the profits tingle later in the year.
European Stocks to Buy: Banco Santander (SAN)
While the trading mood in Europe might be a little rocky, Spain’s premier banking institution, Banco Santander (SAN) is rock steady. The Best Stocks for 2014 entrant just reported big profits in Q4, with a big improvement on in its distressed loans segment. For 2013, SAN saw a 90% jump in net profit, with a big decline in loan loss provisions, the lowest in nearly two years.
Much has been made of the recent fiscal flux in Spain, but the Spanish economy did manage to grow 0.3% during the fourth quarter, and that is a very positive sign that the troubled nation is back from the recession that slammed her in recent years. More importantly, SAN stock also is back, and despite the latest pullback on regional woes, SAN stock has performed mightily, rising more than 20% during the past six months.
Smart investors who take a trip to Spain via SAN stock today will, I suspect, be all smiles by summer vacation.
European Stocks to Buy: Volkswagen (VLKAY)
German car giant Volkswagen (VLKAY) is Europe’s biggest automaker. In fact, the company just surpassed General Motors (GM) as the world’s second-largest automaker and now is behind only Toyota (TM) in the race for the top spot on the global sales podium.
For Volkswagen and VLKAY stock, a recovery in Europe — along with global demand for its brands — has continued to keep the throttle open on the company’s top and bottom lines.
Now, to be certain, if there’s a major slowdown in Europe, China or even the U.S. auto market, VLKAY stock will come under pressure. In fact, over the past month, fears of this sort have caused the shares to slide nearly 10%. However, if you assume (as I do) that the European roads will smooth out going forward, then investors who buy VLKAY stock here will be driving all the way to the bank in a few short months.
As of this writing, Jim Woods was long DEO.