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How to Profit Amid the Pain in Spain

With tiny P/E ratio for the IBEX, it's time to go bargain hunting


spain stocks investingIt has been a rough summer for investors, but our heavy allocations to steady dividend-paying stocks and to defensive sectors such as utilities — represented by the Utilities SPDR ETF (NYSE:XLU) took less damage that the overall market averages.  During a panic-fueled rout — such as the one that followed Standard & Poor’s downgrade of the United States from AAA to AA+ — you win by not losing.

It’s always difficult to remain calm when you are surrounded by hysterical investors having what could only be described as a nervous breakdown, but it is much easier when you understand your portfolio holdings and are comfortable with the prices paid.  Investors need not be scared when they are holding quality, conservatively-finance companies at reasonable prices.  Volatility — even violent volatility like we saw in August — can be viewed as a buying opportunity.

The decline in stock prices that began in May could be finished — or not. Only time will tell. But the acute crisis phase following the debt ceiling and credit downgrade fiascos does appear to be over.

Time to Go on the Offensive

I initially moved my portfolio into its current defensive position — high concentrations in large, conservatively-financed, dividend-paying stocks — because the bull market that started in March of 2009 began maturing recently.  After hitting bottom over two years ago, virtually all risky assets rose in lockstep — all sizes and sectors of stocks, commodities and, in particular, gold.

It was a rally in everything, and the more speculative and junky the better.

I believed that this “snap back” rally from the panic lows of 2009 would be replaced by a mature bull market that favored higher quality issues, in light of the volatility of the past few months, it seems that this move towards defensive investments was the right thing to do.

But you’re probably asking yourself, “Yeah, but what do I do now?”

Well, today I believe the time is right to ditch some of the defensive positions and go on the offensive again.  And what better place to start than Spain, the current epicenter of the European sovereign debt crisis.

Why Spain is a Strong Buy

Spain’s benchmark IBEX 35 Index trades at a P/E ratio of just 7.4 and sports a dividend yield of 7.0%. It is the cheapest major developed market in the world — significantly cheaper than Italy, Ireland and — shockingly — Greece. Yes, even Greece, where the European sovereign debt crisis started, has a P/E ratio of over 10.

Part of Spain’s cheapness stems from one of its virtues. Spain has a more liquid stock market than many of its European rivals, and speculators find Spanish stocks easier to sell.  But more than this, Spanish stocks are cheap because investors fear that Spain is the next domino to fall in the European sovereign debt crisis.  At first glance it’s easy to understand why.  Spain’s economy was among the hardest hit in Europe during the 2008 global bust, and Spain’s unemployment rate is the highest in the world among developed countries.  Spain’s budget deficit is also alarmingly high, peaking at 11% of GDP at one point in the crisis.

Still, Spain’s position is not as bad as it might seem.  Over the past year, the country has quietly hacked its budget deficit in half in euro terms and is on track to reduce it to 6% of GDP by the end of the year.  Overall debt as a percentage of GDP is actually less than France, Britain, and even that model of fiscal rectitude Germany.

Spain’s issue of one of liquidity, not a solvency, and the European Central Bank has done a lot to alleviate this with its aggressive bond purchase program—the largest in the history of the bank.  And in any event, given the cheap prices on offer, investors are being more than adequately compensated for any unforeseen hiccups in the coming months.

Investors wanting to profit from Spain’s return from the abyss can buy shares of the iShares MSCI Spain ETF (NYSE:EXP). Or, they can buy one of the country’s world-class companies—including long-time Sizemore Investment Letter recommendation Telefónica (NYSE:TEF).

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 newest Special Report: “3 Safe Emerging Market Stocks for a Shaky Market.”

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