by Tim Melvin | March 7, 2014 8:30 am
Recent events in the Ukraine have once again reminded us just how much geopolitical surprises can roil the European markets. While it looks like a diplomatic rather than military solution will be reached (at least for now), the high levels of volatility should serve as a warning to investors: Europe has several potential hotspots that could flare up.
In recent years, in addition to the Ukrainian situation, we have seen civil unrest in places Greece and Spain turn the markets upside down for a period of time. Geopolitical risk are real and severe upset could stop the grinding recovery in its tracks.
Investing in European stocks has huge potential returns if the recovery continues unimpeded, but investors should be aware of political risk in the region and concentrate on stocks that are pretty much bulletproof in nature. I sat down this morning and ran a screen looking for European stocks that fit my definition of perfect stocks. These are companies that are profitable, pay a dividend, have strong balance sheets and trade below book value. So while these European stocks might see increased volatility if there is turmoil on the continent, there is little chance of a permanent loss of capital for long-term investors.
Noble Corp. (NE) is an oil and gas drilling contractor based in Switzerland. The company has been consistently profitable for the past decade and has grown book value by almost fourfold during that period of time. NE stock is trading at a slight discount to book value and P/E ratio of just 10 right now. The shares are yielding 4.8%, and the dividend has grown from just 4 cents per share quarterly five years ago to 37.5 cents today.
As the global recovery continues to gain traction, Noble Corp. will benefit from increased demand for oil and gas and should richly reward patient long-term investors.
Porsche SE Holdings (POAHY) basically is a holding company that owns a large stake in Volkswagen (VLKAY). The stock trades at just 80% of book value and yields 1.7%. Porsche SE Holdings’ earnings are primarily their share of Volkswagens profits each year. Volkswagen sells car globally under the Volkswagen, Audi, SEAT, KODA, Bentley, Bugatti, Lamborghini, Porsche and Ducati brands. The company has a strong presence in China and has been expanding its capacity in the fast growing economy. Porsche management has also discussed deploying some of the company’s excess cash into businesses that support the automobile supply chain.
Disruptions in European equity markets may cause the share price to drop at some point in the future, but I would be more inclined to treat this as an opportunity than a problem from a long-term perspective.
The secret of long-term investment success is to own shares of companies that have a sufficient margin of safety. That way, periods of economic or political turmoil aren’t events of capital destruction, but instead opportunities to add inventory at bargain prices.
As of this writing, Tim Melvin was long NE and POAHY.
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