The World Isn’t Ending for Portugal

As European movers and shakers bicker over how to fix the Greek credit crisis once and for all, analysts have started fretting over whether Portugal might stumble under its own cripplingly high borrowing rates. But there are great babies being thrown out with the bathwater.

Portugal currently pays 16% to 20% on its bonds maturing in 2014 and 2015. Only aggressive buying from the European Central Bank has kept 10-year Lisbon bond yields below 15% — and don’t forget that just a few months ago, everyone was worried that Italian bond yields pushing above 7% signaled the end of the world.

These interest rates are not sustainable. But whatever happens on the deep-debt end of the euro pool, civilization is not exactly going to end. If the Portuguese people stop heating their homes and talking on their cell phones, we all will have other things to worry about.

And based on the way some of Europe’s most stressed-out markets have been performing, it looks like global investors are coming around to that idea fast. Greek stocks have rebounded 17% year-to-date, Italy is up 5.2% and France is up 4.4%.

Compare those numbers to the Dow Industrials at 2.9%, and the situation does not look so bad in Europe after all. If anything, those with strong stomachs and nerves of steel might want to keep an eye on Portugal as the analysts kick it around.

We sent our screens to look for yield in areas of the Portuguese market that provide services or products that people just can’t do without.

The first name we found is EDP Energias de Portugal (PINK:EDPFY), a company that is both essential to modern life in Portugal and currently priced for the apocalypse.

EDPFY distributes power and gas throughout Portugal and Spain — and like a lot of Portuguese corporate heavyweights, is active in Brazil as well.

Down here at around $29, the stock is off 45% from its 52-week high of $41.45. U.S. turnover isn’t great, but this still is a $10 billion company back in Lisbon, paying well above 8% in annual dividends.

To put it mildly, EDPFY trades at a discount to other utilities. P/E is under 7, even though its net margins beat the industry at 13.65%.

And unlike Portugal itself, EDPFY is not quite swimming in debt with a debt-to-capital ratio of 60.8%. Liquid assets are plentiful enough to service current liabilities in the extremely unlikely event that operating earnings are unable to pay the way.

From a technical perspective, it is no surprise that EDPFY has been beaten up and spit out. But it looks like price wants to hold ground here at the bottom range of its recent channel. With support beneath it, this stock actually looks to be attempting to break above the innermost trend line.

Traders might consider taking a position on any bullish reversal sign and place protective stops below the 52-week low of $28.47. After all, EDPFY will pay traders 8% per year to wait for a recovery — not a bad built-in payday if the stock does nothing while the euro crisis grinds around.

Bonus Play: If you believe 10 million Portuguese are going to keep their phones turned on as well as their homes heated, apply the above logic to Portugal Telecom (NYSE:PT). PT is trading a breathtaking 60% below its 52-week high for a current yield of 7.6%. And if EDPFY’s relatively narrow U.S. float scares you, PT is much more liquid.

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