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2 Stocks to Play the Recovery in Europe

The process will be slow, but the gains could be huge


Europe might actually be starting to exit the long grinding recession that has held the continent in its grip.

The European Commission now expects the old world to exit the recession in the fourth quarter of this year and actually experience modest levels of growth next year. Confidence among business people is rising across the continent even in some of the more troubled nations like Italy.

Interest rates are falling across the European economic zone, and while it may not be a growth leader after a long period of contraction, Europe’s conditions could actually get better going forward.

If that happens, the stock markets in the region may actually outperform the United Sates equity markets for a period of time. The obvious beneficiaries swill be the banks and financial institutions, but I want to cover those another day. I spent some time looking around Europe for non-financial companies that will benefit from a recovery yet are still attractively priced.

The first stock that makes my list of European recovery plays is Xyratex (XRTX), the data storage company based in the United Kingdom. Xyratex makes data storage products as well as capital equipment for the hard disk drive manufacturing industry.

The data storage business has been undergoing change, and the company is making the moves it needs to make in order to stay competitive in areas like cloud computing and data storage.

The weakness across the industry has kept a cap on the share price, and the stock currently trades at 90% of book value. Activist investor Baker Street Capital holds a significant position in shares of the company and is pushing for management to unlock shareholder value.

Italian furniture company Natuzzi SA (NTZ) has struggled along with the global and local economies. Demand for high-end furniture has been soft for several years, but it could begin to pick up again as the continent enters a long recovery. The company is trying to work with the local unions and Italian government to establish a plan that allows them to reorganize and reduce labor costs.

The stock is trading at 30% of book value and at a discount to the net current asset value of the company. If they are successful at cutting costs and the economy does improves a little, this stock has tremendous potential upside.

A recovery in Europe will be a slow process, similar to what we are seeing in the US. Investing in European value stocks is going to take patience but should pay off with outsized returns over the next five years or so.

As of this writing, Tim Melvin was long XRTX and NTZ.

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